10 March 2016
On positive side is mainly ability of the company to maintain its operating profitability (EBITDA margin at above 30% level in both 2H and the whole Y2015) despite sharp fall in iron ore prices. Main negative event was disclosed far ahead of report – lost deposit in bankrupted F&C bank, so main point of concern at the moment is ability of the company to realize loans principal payments in line with existing schedules.
In natural terms the company demonstrated growth of pellets production and realization. In Y2015 sales volume made 11.330M tons, which was by 1.5% higher vs. previous year. On positive side is the fact that as a result of finished in the beginning of Y2015 investment program more than 85% of total realization made premium 65% Fe pellets (vs. about 50% in previous year). 65% pellets have steady premium over 62% iron ore fines - in 2015 average realization price of Ferrexpo outperformed the Platts 62% Fe iron ore fines price index by 11%.
Along with it as in Y2015 Platts 62% Fe index decreased vs. previous year by 42% (from USD 97 per 1 ton to USD 56; in the beginning of Y2016 index was already at close to USD 40 level), revenues of Ferrexpo in money terms in reporting period declined by 31% (from USD 1 388.3M in Y2014 to USD 961M; decline in 2H2015 on stand-alone made 29%). Rate of decline was lower vs. general index in a view of higher share of premium production realization in Y2015.
C1 cost of production in Y2015 made USD 32 per 1 ton vs. USD 46 in Y2014 (-30%; also important is further decline in C1 cash cost in Q1 2016 to about USD 25). Main factors of decline have been UAH devaluation (USD 8 per 1 ton), effect from lower oil prices (USD 2.7) and also from cost reduction initiatives of the company (USD 4.1). In addition, because of large fall in oil price, C3 freight cost reduced from USD 20.6 per 1 ton in Y2014 to USD 11.2 in Y2015. All these costs decrease partially offset decline in realization price (EBITDA margin was maintained at above 30%, EBITDA in absolute terms declined to USD 313M in Y2015 vs. USD 496M in Y2014 because of lower sales in money terms) and make Ferrexpo one of the most cost efficient pellets producing companies in the world.
As expected, bottom line of the company was negatively influenced with write-off of deposit in F&C bank in amount of USD 146M (after expected relief of tax) in a view of bank insolvency. Net Income of Ferrexpo in Y2015 made USD 31M.
Following mentioned deposit write-off, balance sheet quality and liquidity position of the company significantly worsened. As for BS structure, as of 31.12.15 debt of the company made close to USD 904M (on positive side – in Y2015 Ferrexpo repaid USD 394M of its debt, sources – operating cash flows and cash balance in the beginning of year), while Equity – only USD 244M. In Y2016 the company is to repay (basing on existing schedules) USD 196M of debt principal (importantly because of restructuring in 1H2015 maturity of bonds in amount of USD 346M was shifted from Y2016 to FYs2018-19 against early repayment of USD 154M). We see ability of Ferrexpo to realize this repayment as marginal, as basing on current fundamentals EBITDA in Y2016 can make approximately USD 300M, while interest expenses and maintenance investments are to make USD 100-110M. On positive side – in first two months of Y2016 the company already repaid USD 39M of its loans.