Ferrexpo discusses its conservative strategy at analyst meeting

Iron ore miner and pellet producer Ferrexpo (FXPO LN,
FXPOLN) met with Ukrainian financial analysts on June 5 in Kyiv in order to
provide both short-term guidance and a long-term outlook. In particular, the
company said that it is pursuing three strategic directions: a strong balance
sheet to mitigate price and Ukraine-related risks, returns to shareholders, and
incremental growth. In particular, the company reiterated its intentions to
limit expansion CapEx at USD 150 mln per year and to maintain the net debt
target (to be achieved by 2020) of USD 200 mln, approximately.

Regarding its market outlook, Ferrexpo now sees the long-term
pellet premium at around USD 40/t, up from its previous assumption of USD
30-35/t. For 2018, the pellet premium is expected to be between USD 50-60/t, up
from below USD 50/t in 2017. However, Ferrexpo’s realized price will not gain
as much because of the expected increase in the freight rates.

Ferrexpo’s customer strategy is to expand its base of
high-quality, long-term customers, particularly in Japan, South Korea and
Germany.

Regarding financing, Ferrexpo considers Eurobonds to be
an expensive form of debt with high refinancing risks because of the bullet
repayment. The company prefers amortizing, cheaper loans such as PXF, and might
borrow more using this instrument, building on its efforts to secure long-term,
high-quality customer contracts to be pledged with the banks.

Ferrexpo’s 2018 CapEx is likely to be USD 120-150 mln.
Pellet production volumes for 2018 will be higher than the 2017 value of 10.44
mmt, with subsequent increases to 11.0 mmt in 2019 and 11.5 mmt in 2020. After
2020, the volumes supposedly will approach 12.0 mmt per year following the
launch of concentrator section 9 at Ferrexpo Poltava Mining (FPM), which is the
major expansion project Ferrexpo is currently pursuing. In the future, Ferrexpo
will have the option to expand its pelletizing capacity from 12 to 20 mmt per
year, and currently sees necessary investments at USD 150 per ton of capacity.

Ferrexpo plans to continue storing about 12 mmt of
lean ore each year (on top of 49 mmt it had at the end of 2017) until the
completion of concentrator section 9 at FPM around 2020. Pre-strip works at
Ferrexpo Belanovo Mining, which began in 2017, will continue at a slow pace
because the company will not need new ore capacity for at least 5-7 years.

C1 costs are expected to rise to USD high-30s per ton
from USD 32.3/t in 2017 due to inflation (energy, salaries), similar to the 17%
yoy increase in 2017.

Dmytro Khoroshun: The meeting confirmed our view of Ferrexpo’s strategy being painstakingly balanced, aiming to adapt to industry, location and
financial market risks. We retain our neutral view on FXPOLN Eurobonds.