Ferrexpo pellet output increases 9% m/m in August

Ukraine’s largest iron ore pellet exporter Ferrexpo (FXPO LN, FXPOLN) increased pellet production 9% m/m to 0.939 mmt in August (-1.8% yoy), Interfax-Ukraine reported on Sept. 13. In 8M16, its pellet output fell 1.8% yoy to 7.522 mmt.

Roman Topolyuk: Ferrexpo’s output finally started to catch up in August after production was impacted earlier in the year by maintenance work. The results come in line with our projection of 11.5 mmt pellets (-1% yoy) will be produced in 2016, while pellet sales might be higher yoy (at 11.7 mmt, +3% yoy) due to sales of inventory. In general, Ferrexpo is demonstrating stable operating performance.

As for Ferrexpo’s Eurobonds, they are still trading at an enticing YTM of 11.9% and a rich spread to sovereign of 420 bps. But, as the bonds are priced as high as 95-97 cents per dollar, the downside risk is higher than upside potential, in our view. Should iron ore prices continue their current downward movement (-5% to USD 56/t since early September), bond prices would feel the pressure. We recommend reducing exposure to Ferrexpo’s Eurobonds.