S&P affirms Ferrexpo rating at CCC, outlook negative

18 October 2016

S&P projects that under their base case scenario of iron ore price index at USD 45/t on average during Y2017 Ferrexpo will have insufficient liquidity sources to meet loan maturities w/o refinancing. In total in Y2017 the company is to repay its creditors about USD 200M.

Agency acknowledges (like Moodys several days ago) the fact that during last time because of favorable market conditions performance of the company improved, but stresses high risks for the future activity. Basing on assumptions of average iron ore index of USD 45/t (during last months in range USD 55-60/t, expected to decline because of declining demand in China), pellets premium of USD 25/t (current is about USD 30/t) and C1 cash cost of USD 29/t (current USD 25/t), expected by S&P annual EBITDA of Ferrexpo is USD 170-180M.

On our opinion, if pellets prices will decline to predicted by S&P average levels, C1 cash cost of Ferrexpo will be lower than USD 29/t (current is USD 25/t, in case of decline in steel&ore prices, additional UAH devaluation can be expected, which will result in even lower cost). In addition we expect that under current favorable market fundamentals the company can provide for higher than expected by S&P (USD 60-70M) cash balance as of Q3 2016 end (as we estimate USD 100M EBITDA in Q3, cash balance as of 30.06.16 was at USD 45M) at not lower than USD 100M.

As a result, we expect that under stated assumptions (unless iron price index will drop below USD 40-45 per 1 ton) the company will be marginally able to fulfill its obligations in Y2017, risk is mainly for Y2018 (but, taking into account improved fundamentals, we see probability of successful obligations refinancing or maturity extension as rather high).

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Wheat CBOT
Iron Ore
Crude Oil

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