Ferrexpo pellet production slides 1.6% yoy in 1H16
5 July 2016
Ukraine’s largest iron pellet producer Ferrexpo (FXPO LN, FXPOLN) reported total pellet production of 5.723 mmt in 1H16, a 1.6% decline from a year ago, according to its trade update published on July 5. Pellet output from own ore grew 3.6% yoy to 5.70 mmt, while the company reduced low-profitable pellet production from third party iron ore to 23 kt (-93% yoy). 94% of total Ferrexpo’s pellets were of the premium 65% grade.
In 2Q16, total pellet production declined 1.7% qoq to 2.836 mmt.
Roman Topolyuk: The company’s operating performance came in somewhat softer than we projected, falling behind our annual forecast of 11.9 mmt of pellets in 2016 (+2% yoy). The yoy production decline is due to maintenance work, and Ferrexpo is set to recover its output in 2H16. On the top of that, the company held unsold inventories of 0.5 mmt of pellets in March, which can also support operating and financial results in 2016. At this stage, we are reducing our projection for 2016 pellet production to 11.7 mmt (flat yoy).
Most importantly, iron ore prices since the beginning of the year have been firmer than we projected for the full year (USD 52/t in 1H16, CFR, China ports vs. USD 49/t). Should prices find support above the level of USD 50/t, this will be beneficial for Ferrexpo’s solvency position and ability to cope with its scheduled debt amortizations.
Ferrexpo’s Eurobonds trade at 82-83 cents per dollar, which higher than our target of 80 cents. Having YTM of 18%, or a 1,000 bps premium over Ukraine’s sovereign, the notes may be attractive to investors betting that iron ore prices will stay above USD 50/t going forward. Our view on the name is neutral.
