Ferrexpo faces a 46% yoy decrease in 1H15 EBITDA, above estimates

Ukraine’s largest iron ore pellets exporter Ferrexpo (FXPO LN, FXPOLN) reported EBITDA of USD 176 mln in 1H15, down 46% yoy, but 12% better than Bloomberg consensus. Net cash flow from operating activities decreased 36% yoy to USD 88 mln in 1H15. Diluted EPS plunged 44% yoy to 19.57 U.S. cents.

 

Such performance in earnings was negatively driven by a 35% yoy decrease in FOB/DAP pellet prices, which we estimate at USD 77/t in 1H15. This dynamics is comparable to a 36% yoy fall in pellet prices in China to USD 95/t (CFR). This favors pellets to iron ore fines, the prices of which plunged 46% yoy in China to USD 61/t. The negative effect of the price decreases was counterbalanced by the company’s 30% yoy improvement in C1 cash production costs to USD 33.4/t and by 3% yoy increase in pellet deliveries in 1H15 to 5,680 kt.

 

Ferrexpo slashed capital expenditures 81% yoy to USD 25 mln, having already implemented major investment projects. The company guided annual CapEx in the range of USD 50 mln to USD 100 mln is going forward, though the current weakness of the iron ore market environment persists. Ferrexpo increased expenses for support of local communities by 49% yoy to USD 16 mln in 1H15.

 

The company reported its cash position of USD 470 mln, USD 165.4 mln of which were deposited with the Ukrainian F&C Bank (FICBUA), which is related to Ferrexpo’s major shareholder Kostyantyn Zhevago. The total current debt, as of the end of June 2015, stood at USD 526 mln, including USD 284 mln in Eurobonds that were initially due in April 2016. Following a restructuring in July 2015, Ferrexpo redeemed USD 100 mln of 2016 Eurobonds and extended the maturity of the balance for up to three years.

 

The company reported a negative net debt of USD 653 mln as of the end of June 2015, returning a net debt to LTM EBITDA ratio of 1.9x, compared to USD 678 mln as of end-December 2014, when the net debt to LTM EBITDA was 1.4x.

 

Directors of the company recommended interim dividends of 3.3 U.S. cents per share, totaling USD 19 mln (implying a 3.7% dividend yield). Ferrexpo offered a cautious near-term outlook, taking into account the weak iron ore pricing environment in Ukraine.

 

Roman Topolyuk: Having implemented major CapEx projects, Ferrexpo is operating at full capacity, or in line with our expectations of 11.6 mmt pellets output in 2015. Without further substantial hryvnia depreciation and oil price declines, the company’s production costs are likely to remain at the current level. So, we expect that the volatile iron ore prices will remain the key driver for EBITDA, with further weakness persisting in 2H15 and 2016.

 

This means that further maturity extension of the short-term debt will be crucial for Ferrexpo to be able to maintain a stable liquidity position. Accounting for the cash in the Ukrainian bank, we estimate Ferrexpo’s adjusted cash position of USD 305 mln as of the end of June. With USD 100 mln prepaid to bondholders, Ferrexpo is likely to currently have around USD 205 mln in cash. This amount does not  cover the estimated short-term banking debt of USD 241 mln, and we would like to see Ferrexpo shifting most of this debt to a later date.

 

We believe the company would be able to obtain access to new refinancing facilities and we see the current YTM of FXPOLN 2019 bonds at around 16% is justified.