The lone Russian miner

Dmitry Gavrilin is the Chief Executive Officer of Tigers Realm Coal. Now, this is an interesting business because it's, I think, the only Russian company listed on the ASX. Well, at least it's an Australian company whose asset, that is a coal mine, is in Russia and the business is actually based in Moscow but the mine is thousands and thousands of miles away on the far east, right across Siberia on the Bering Sea in a place called Chukotka. 

Now the reason for talking to Dmitry, apart from the fact that he happens to be in town at the moment for an AGM and therefore he's easy to talk to, is I think this looks a very cheap business. It was profitable last year. It's capitalised at $86 million, shares of 4.8 cents. They're looking at $25 million in EBITDA, that is to say cash profit, this year. And the way they're going, there seems no doubt, no reason to think they won't achieve that. 

It's an interesting operation because the sea is frozen for half the year so they can't ship the stuff out during that time but they stockpile it at the port. They work the mine all year, stockpile at the port, and then ship out a years’ worth of coal from the port when the port is open. But the point is that they're quite close to the Asian markets, Japan and Korea in particular and also China. 

So, they've got a good location, the quality of the coal is pretty good. They're at the lower end, if not the absolute bottom of the cost curve, globally. It seems to be quite a well-run business out of Moscow by Dmitry Gavrilin. It was actually pumped up, the whole thing got going by Owen Hegarty, formerly of OZ Minerals, and Bruce Grey, formerly of Sirtex Medical. An interesting pedigree from Australian industrialists I guess you'd say, getting hold of the business, finding the coal mine in Russia, raising $100 million to develop it, and now they're profitable and they've got another big deposit next door which they plan to develop as well. An interesting prospect. 

I recommend having a listen to Dmitry Gavrilin who is the CEO of Tigers Realm Coal. 

Dmitry, perhaps the best way to start before we get on to what your plans are for this year, just some of the background, recent background for Tigers Realm Coal, it was restarted by Owen Hegarty and some mates out of OZ Minerals, I think and also Bruce Grey, the former CEO of Sirtex.  How did that all come about?  When did it happen and how did they find the Russian coal deposit?  Can you just fill us in on some of that background?

Right.  The company, initially, was looking at several deposits, not only in coal.  The Tigers Realm was established in 2010 and then IPO'd in 2011 as a junior mining company and exploration company.  That's would look at least four assets located in Colombia, Indonesia, Spain and Russia.  Then, over some time, the company focused on that one asset, which is in Chukotka region in Russia.  Other projects have not proved to be economically viable or feasible in terms of geology and other factors and that's why the company is Australian listed and that's why we have a strong Australian shareholders base. 

Since 2012 the company was focusing on exploration activities regarding the Amaam and Amaam North deposits in Chukotka and in 2017, the company got into the production. 

How much money has been raised since 2012?

The number is in excess of $100 million USD in total, including the initial IPO.  As I mentioned, for several assets and then specific investment target to Amaam and then new round of investment was in 2014 and then additional right issue was completed in 2016.  So we're talking about around $200 million in total. 

Right.  And has that all gone into developing this coal mine in Eastern Russia?

Yes, it was spent, first of all, geological exploration and drilling.  It was spent on various consultants and feasibility studies and it was also spent on the infrastructure, which is our port that now is part of the project on the road that was built from pit to port.  It was also spent on some machinery and equipment, mining fleet.  So it's the overall investment that made it feasible for the company to get into production phase and start generating revenue and positive EBIDTA.

And or some of that money has come from a Baring Vostok private equity fund and they own about 30% of the business.  Can you tell us a bit about them?

Yes, Baring Vostok is an international private equity institution that was established in the early 90s and its, the shareholders and partners of the fund, have decided to focus on Russia and CIS countries and since 1994 they have been extremely active in Russian space, investing in over 80 companies.  Some of them extremely successful.  Since 1994 the fund has raised in total near four billion USD in funds and investments.  It has a very strong professional team with international experts and partners.  It sources their funds from various countries including the US, Middle East, Asia and again very successful in Russia.

Yep, and you run the company from Moscow?  Can you tell us about how you do that, what sort of team you have in Moscow, partly because you're about as far from the mine as you are from Australia, I think?

Right.  Our shareholders decided to put the headquarters in Moscow for various reasons.  I mean first of all we have to, as a company running an asset located in Russia and subject to of course Russian regulatory environment licencing and requirements in terms of engineering and project design and construction approvals, we of course have to do all that paperwork and Moscow is the most convenient location in terms of covering these type of issues.

Our Moscow office is relatively small it's around 25, 30 people located in Moscow.  Most of them cover engineering issues, financial issues, treasury relations, engineering and project design type of issues and general management of course.  Procurement is also part of our Moscow team.  In Beringovsky, so our site in Chukotka we have at the moment around 150 people in total including a management office in the township of Beringovsky around 20 people, and we have in our camp outside at the moment 120 people working in shifts they would come for three months work with us than leave for vacations and then come back.  So that's basically our business model.  We think it's appropriate and cost efficient and in the interest of the stakeholders.  Our sales and marketing guy is based in Brisbane and is very knowledgeable of the market, knows our customers and we are happy to have the split of responsibilities between Moscow, Beringovsky and Australia.  We think it works quite well.

Now you mentioned Russian regulatory issues what kind of sovereign risks issues are there, if any?

Well I guess if we talk about business environment in Russia it has in many ways improved since the last 10, 15 years and that’s also true about geological and licencing acquirements.  They have been designed as more flexible as opposed to old Soviet times.  At the same time, some of the regulatory framework has been tightened and developed for example with regard to environmental issues the legislation is much stricter these days, and we have to comply with quite high standards in that area.  In terms of sovereign risk, and risk of doing business in Russia in general I think they're not significantly higher as in other mature mining jurisdictions.  It's you know we have certain paperwork to do and certain requirements to comply with, but we don't see any immediate effects of sanctions or any, political or Russia specific risks that would affect our business.

And the mine is in something you call the Chukotka Autonomous Okrug what does that mean?  I presume that it has something to do with the indigenous people of that area?

Yes, the Chukotka Autonomous district or Okrug is a one of the Russian territories.  Russia as a Federal state has 85 territories that form the country and Chukotka is one of them.  It is a territorial entity with around 50 thousand people in population and it's a huge territory and the name and the specific title of the region is associated with indigenous Chukotkan population.  Indigenous people form around 30 per cent of the population of the region.

And do you have to deal with them in the sense of making them a part of the operation in some way?

Yes, we communicate and coordinate very closely with the association of Chukotkan indigenous people.  We have signed an agreement with them on working together in certain areas like social, educational, cultural heritage.  We see ourselves as a good corporate citizen, we think it is one of our tasks to be aware of the needs and interests of local and indigenous people.  We have invested and sponsored several social events, cultural events, we employ them and we think it's part of our environment and they're an important stakeholder and we want to be continuing to play an important role in the region and that's part of it.

Another part of the environment in the place where you've got the mine, is it gets very cold.  So I was just wondering are you able to mine all year round and what about the port?  Does that port get frozen over at times and does it therefore stop the operation in some way?

Right, yeah, indeed our weather conditions are sometimes quite challenging.  It's not only about the cold weather is not going down below 30 degrees Celsius.

Oh, that's all right then.

There is some colder places in let's say in Russia where steel mining companies can efficiently operate even with minus 45 or 50.  So it's not like extreme example of cold weather but it's also quite wet and windy in our specific location since we are close to the sea, and we have extremely windy situations during the winter.  It’s a combination of snow, wind and wet weather that makes us...  does create difficulties sometimes.  During the winter time and basically starting from November until April our sea is frozen so we have to deal with ice situation and our port is not operating during the winter time.  It starts the shipping season in the second half of May and we operate in the port until late November.  At the same time our mining operations are 24/7 so we mine every day, we track our coal to the stock piles during all 12 months of the year.

And, you ship the entire year's production during those months that it's open, when the sea is not frozen?

Right, absolutely yes five months of operations and we have to be very efficient and our capacity, our daily capacity of loading vessels has to be quite high in order to ship all the volumes during those five months.

And you own the port don't you?  I think you acquired the port as a part of, you just bought the port, I think didn't you, I mean what sort of shape is it in?

Yes, the port was acquired by the company and acquisition of the port was actually one of the key drivers of us getting into production phase.  The port in Beringovsky was built in the late 70s.  It was a relatively standard project for those times in Russia you could visit maybe at least five similar ports in the far eastern parts of the country.  It's operational it has equipment in place conveyor systems, loaders, it has several cranes and piers and it can serve not only coal terminal it also serves the general cargo discharge for the needs of local people.  We are delivering also consumption materials.  So the port needs an upgrade and we are continuing to invest in its reconstruction and getting new loaders new equipment, new barges in order for us to facilitate our fast growth.

Yeah so how much are you going to have to spend on the port do you think?

Well we have already spent $5 million USD so far, and I think an additional $10 million will probably needed to get to the volume of 2-2.5 million loading capacity on an annual basis. 

Yep.  Last year 2018, you produced a cash profit, can you give us a bit of a sense of how you did that, how much coal you produced, who you sold it to and what sort of pricing you were getting for the coal?

Right we managed to increase our volumes, and we were more efficient during last year, those two factors were main drivers for us to be able to get to those results in terms of positive EBIDTA and positive net profits.  So basically, we doubled our production compared to 2017.  We were able to produce more semisoft type of coal as appose to thermal coal so the ratio between those two types of coal was in favour of a more premium product, semisoft type of coal.  In terms of coal price it was quite favourable to us last year as well, and we had some effect of ruble devaluation during 2018.  Which all combined helped us to produce those results.

And where are you selling it to because you quite on the far east of Russia you quite close to the Asian markets.  Which Asian markets in particular are you selling into?

Yes, one of our advantages is really proximity to target markets, and our priority market is Japan.  We also sell coal to Korea, China, Taiwan, Vietnam and Cambodia.  During last year we were specifically pleased about getting our coal to major steel mills and steel manufacturers in Japan and Korea.  It's premium market and we are pleased to be part of it, and in terms of demand we see a clear interest in our products, and we are very happy that we can expand and to serve the needs of the Asian producers.

Tell us about your costs because I think you’re at the very low end of global cost curve in coal production.  How does that work if you in such inhospitable and difficult place?

Right.  I think what we really benefit from is our infrastructure and logistics chain and low cash cost on the mining side.  Basically, we have control over our production starting with the mining then haulage of the coal to the port, and then operations shipping and loading operations in the port.  Compared to other Russians coal producers we are much more flexible in let's say controlling our value chain, as opposed to some Russian producers who would need to bring their coal via railway to the far eastern ports and capacity of the place at ports are limited, and the capacity of the railway are also limited so basically that leaves them to have additional costs on logistics and transportation and that cost is quite considerable.  In our case owning the port and our road, we manage our cash costs and are able to keep it to the minimum.  Our FOB costs last year was around $33.5 USD and that makes us look quite favourable compared to other peers in the market not only Russian producers but also worldwide. 

And in terms of volume you said you doubled volume, and I think sales in 2018.  In 2019 according to your AGM presentation from this week, your guidance of production of 680 to 750 thousand tonnes in 2019, sales of 650 to 720, I mean that's almost double what you did last year.  Are you confident you're going to be able to do that?

Yes, we are quite confident since we have an extended investment program that includes new equipment, new mining fleet, new projects and engineering works that would allow us to continue expansion, in not only 2019 but also going beyond in 2020.  I think it's important for us and for our profile to continue growth but also at the same time manage the cost efficiency.  I believe those two drivers will help us to increase profitability and continue our expansion.

How much is that goes to the bottom line, if you would be able to increase your sales to 650 to 720 thousand tonnes in this year 2019, what does that do to your profitability and your cash flow?

Well in terms of our budget that revenue and EBIDTA we are looking for this year at numbers $75 million Australian dollars of revenue and around $25 million EBIDTA.  That's our target and of course factors like coal price and weather conditions and everything, but we are again on a steep learning curve, but we have already acquired quite some experience on operating in our port and our conditions and we are quite comfortable those numbers are achievable.

And what about beyond this year because you got, there's another deposit next door, haven't you?  You’ve got your mine in one place but isn't there a larger coal deposit nearby.  Would you be developing that as well?

Well in terms of our strategy we again would like to continue our growth story on Amaam North where we mine at the moment, we're planning to get to one million and plus number already next year 2020, and we are looking at Amaam deposit, which is just 40 kilometres away from Amaam North.  With a view to start mining there as soon as practical in terms of both mining projects.  All the regulatory works, geology, and funding, but we definitely see Amaam as a very valuable deposit, that we will address in the nearest future.

I suppose that means no chance of any dividends for a while because you'll be putting all the money in to developing that?

I'm afraid so but it is up to our shareholders to decide again, but I guess the unique product and unique coal that Amaam has is something that the market is waiting for.  The characteristics of that coal are quite in high demand and we think all shareholders will be benefiting from bringing that product to the market as soon as practicable.

Thank you very much Dmitry, it's been very good to talk to you.  Thank you.

Thank you very much Alan, it was a pleasure.  Thank you.

That was Dmitry Gavrilin the CEO of Tigers Realm Coal.