3 August 2016
Results have been generally in line with our expectations in the beginning of current year, but worse than could be estimated taking into account market and operating fundamentals since March’16. On positive side is news about full repayment of PXF facility maturing in July’16 in full compliance with existing schedules.
In natural terms the company demonstrated growth of pellets realization. Despite slightly lower production, in 1H2016 total sales volume made 6.017M tons, which was by 5.9% higher vs. corresponding period of previous year. More than 90% of total realization made premium 65% Fe pellets - it allowed Ferrexpo to have selling price significantly higher vs. general iron ore benchmark price index.
In 1H2016 average value of Platts 62% Fe index made USD 52 per 1 ton vs. USD 61 in 1H 2015 and USD 56 for the whole Y2015. Index has been quite volatile during last reporting quarter – from about USD 40 per 1 ton in the beginning of year to USD 71 in April. As of reporting date index stays at close to USD 58 per 1 ton level. Premiums (for 65% pellets) dynamics also made significant impact on profitability of the company. According to information presented in report, on average in reporting period premiums decreased by USD 4 per 1 ton (decrease was more related to China and Far East, where Ferrexpo realizes up to 30% of its production, then to Europe, where premium decreased only slightly to USD 32 per 1 ton). So, as a result average realization price of the company in 1H2016 made USD 73 per 1 ton vs. USD 84 in 1H2015. Total revenues declined to USD 458M (-10.5%).
On the cost side, C1 cost of production in 1H2016 made USD 25.7 per 1 ton vs. USD 33.4 in 1H2015 (as before, 3 main reasons – improved operating efficiency, UAH devaluation and oil price decline), offsetting part of realization prices decline and its effect on operating profit. In addition, C3 freight cost reduced from USD 10.8 per 1 ton in 1H2015 to USD 7.1 in 1H2016. Along with it, we see general decrease of SG&A expenses (from USD 151.6M in 1H2015 to 136.9M in last reporting period, i.e. by 10% or 14% per 1 ton) as potentially not fully adequate to underlying fundamentals (UAH devaluation and oil price decrease), larger decrease was expected. In addition, in reporting period Ferrexpo demonstrated significantly lower operating FX gains vs. previous year (USD 2.1M vs. USD 14.9M in 1H2015).
As a result of all a/m developments, Ferrexpo’s EBITDA per 1 ton declined from USD 31 in 1H2015 to USD 27, total value of semi-annual EBITDA – from USD 176M to USD 160M. Our previous projections implied annual EBITDA of about USD 300M, so actual semi-annual result of the company was better than expected, but important fact is that projections have been made basing on Platts index value of USD 45 (and C1 cost of USD 25 per 1 ton), so that, as actual average index value has been by USD 7 higher than expected, factually Ferrexpo underperformed vs. our estimations adjusted on Platts index value (two reasons of underperformance – lower than projected premiums and less than expected decrease of SG&A expenses). Despite this underperformance with USD 25.7 C1 cash cost of production the company remains cost-leader among premium pellets producers and enjoys significantly less competition (vs. 62% iron ore producers) as one of main competitors – Samarco – is is still out of the market.
As for balance sheet structure, following USD 174M deposit in bankrupted related F&C Bank write-off in Y2015, main focus of the company was on debt repayment and general repairing of balance sheet. Taking into account, that we estimated Ferrexpo ability to fulfill its obligations related to debt repayment for Y2016 as marginal, news about full repayment of USD 420M PXF facility (repayments in January-July made USD 127M) are quite positive. In 2H 2016 the company is to repay USD 76M of its debt principal (USD 17M have been repaid in July), so we do not expect any problems with it unless sharp drop of iron ore price index (to less than USD 40-45 per 1 ton level from current USD 58 per 1 ton).