Ferrexpo pellet production falls 8% in 3Q16, 14% in September

Pellet production at Ukraine’s largest ore pellet exporter Ferrexpo (FXPOLN, FXPO LN) reached 2.60 mmt  (-8% qoq, -9% yoy) in 3Q16, the company reported on Oct. 5. The company continued to radically reduce output of low-grade (62% Fe) pellets (-38% qoq to 0.15 mmt) and completely halted pellet production from purchased iron ore in 3Q16.

In 9M16, Ferrexpo’s total pellet production decreased 4% yoy to 8.33 mmt, driven by a 94% decrease in pellet output from purchased ore to 0.02 mmt. Pellet output from own iron ore was flat yoy in 9M16. The portion of premium  grade (65% Fe) pellets in total output volumes grew to 94% in 9M16 from 86% in 9M15.

Andriy Perederiy: Ferrexpo’s quarterly report implies poor operating results in September during which 805 kt of pellets were produced, which is -14% m/m and -21% yoy. The company attributed the decline to ongoing maintenance work. Based on the results, we see that the company won’t meet our 2016 forecast for flat yoy pellet output, which also puts at risk our forecast of USD 335 mln in Ferrexpo’s 2016 EBITDA. We continue to believe that the downside risk for FXPOLN bonds – which currently trade near their par value – is higher than their upside potential.