Ferrexpo credit rating affirmed at BB- by Fitch

Fitch announced on Dec. 17 that it had affirmed the
long-term issuer default rating of iron ore miner and pellet maker Ferrexpo
(FXPO LN) at BB-/Stable.

 

The affirmation reflected Ferrexpo’s robust business
profile as a supplier of high-grade pellets, good operational performance and
strong cash flow generation in 2021, Fitch said. The rating also took into
consideration Ferrexpo’s conservative financial profile after the prepayment of
its pre-export finance facility in 1H21 and the absence of outstanding term
debt.

 

The company’s credit quality also reflects limitations
linked to company-specific corporate governance practices observed in recent
years and the operating environment in Ukraine, according to Fitch.

 

Fitch assumes the price for 62% fines delivered to
China to be USD 160/t for 2021, USD 90/t for 2022 and USD 85/t for 2023. The
rating agency’s assumptions for Ferrexpo’s realized FOB prices are at premiums
(to the 62% fines prices) of USD 38/t in 2021, USD 25/t in 2022, and USD 23/t
in 2023.

 

EBITDA at Ferrexpo will amount to around USD 1.4 bln
in 2021 before declining to a mid-cycle level of at or slightly below USD 500
mln per year, Fitch said.

 

Ferrexpo’s CapEx should amount to USD 370 mln in 2021,
USD 356 mln in 2022, and would drop below USD 300 mln by 2024, the rating agency
said. Fitch expects Ferrexpo to take on some external funding in the medium
term for its electrification and replacement of its truck fleet.

 

Fitch assumes Ferrexpo will distribute as dividends
all cash in excess of a buffer of around USD 130-150 mln.

 

Ferrexpo is currently rated by Fitch two notches above
Ukraine’s sovereign level. Fitch’s previous action on Ferrexpo was a Dec. 12, 2019 upgrade of its
credit rating to the current BB-/Stable from B+/Stable. Currently, Ferrexpo is
also rated at B-/Negative by S&P
(one notch below sovereign) and B2/Negative by Moody’s
(one notch above sovereign).

 

Dmytro Khoroshun: We agree
that Ferrexpo’s financial profile should remain conservative unless the company
boosts its green investments (such as in solar electricity plants) or speeds up
the expansion of its pelletizing capacity to 20 mmt per year from the current
12 mmt per year. Fitch’ assumptions on CapEx consider that the first of the
four expansion waves will be completed by 2025. Recall, in August Ferrexpo
presented its plans for Wave 1 of the capacity expansion project that foresee investing about USD 420 mln in total by 2024.

 

The recent changes to the iron ore
royalty regime in Ukraine will not impact the
credit profiles of either Ferrexpo or Metinvest (METINV), as we expected.
Indeed, these changes were not even mentioned by Fitch in its report.