Ferrexpo invests USD 28 mln in 1Q18

Iron ore miner and pellet producer Ferrexpo (FXPO LN,
FXPOLN) invested USD 27.8 mln in its Ukrainian assets during 1Q18, the Interfax-Ukraine
news agency reported on May 15, citing the company’s press release.

 

Capital expenditure at Ferrexpo Poltava Mining,
Ferrexpo’s main asset, amounted to USD 18.6 mln, of which USD 6.6 mln was spent
on sustaining projects, USD 4.4 mln went to large strategic projects, and USD
7.6 mln was expended on purchases of components.

 

The remaining USD 9.2 mln was spent at Ferrexpo’s two
other assets, Ferrexpo Yeristovo Mining and Ferrexpo Belanovo Mining.

 

Dmytro Khoroshun: Ferrexpo’s
capital allocation continues to be skewed decidedly toward sustaining, in the
longer term, its existing operations, while financing this sustaining CapEx
with the funds gained from the same existing operations. This focus comes at
the expense of the cost of this capital, as well as at the expense of taking on
short- and mid-term risks and, importantly, opportunities.

 

For example, as at the end of 2017, the company had
about USD 65 mln to spend on the project of expanding its concentrator capacity
by the equivalent of about 1.5 mmt per year of pellets, into which Ferrexpo had
already sunk about USD 55 mln. However, the company seems to be in no hurry to
complete this project ASAP to try and capture the very favorable current
conditions on the pellet market. Instead, in its 2017 full year financial
report, it shifted the expected completion date for this concentrator project
to 2020 from 2018-2019 previously. The 1Q18 CapEx data suggest Ferrexpo could
have spent as little as USD 4.4 mln, or even less, on this project during 1Q18
(only USD 7 mln in all of 2017), and at such a rate of spending it could take
the company well into 2020 or even beyond to increase its concentrator
capacity.

 

Although some of the USD 7.6 mln that was spent on the
purchase of components might be related to the concentrator project, some of
this amount is likely related to the pelletizing line refurbishment programme –
strategic overhauls of each of Ferrexpo’s four such lines that have to be
performed every 15-20 years. The company had refurbished two lines already (in
2015 and 2017), and plans to refurbish the third line in 2Q18, for which it
might need to purchase components in advance.

 

Ferrexpo has also avoided using its idling pelletizing
capacity (1.0-1.5 mmt in 2018) by producing pellets from purchased concentrate
(only 14.5 kt in 1Q18). We think that Ferrexpo might be able to purchase some
volume of pellet feed in Ukraine and profitably pelletize it (in its 1H17
presentation Ferrexpo underlined its low cost of the pelletizing stage).
However, instead of investing working capital into processing purchased
concentrate, Ferrexpo had, at the end of 2017, as much as USD 176 mln invested
into inventories of lean ore (USD 53 mln invested in 2017 alone), which it
plans to process starting not earlier than 2020.

 

To summarize, Ferrexpo’s 1Q18 CapEx data is in line
with what could be expected on the basis of the 2017 financial disclosure and
the related conference call. The 2018 total CapEx will be below USD 150 mln
(likely close to USD 120 mln), and most of it will be directed painstakingly,
and somewhat painfully to its equity investors, away from trying to capture the
short- and mid-term opportunities on the iron ore and pellet markets. And if
Ferrexpo maintains its net debt target guidance of USD 200 mln, there is little
chance of a speed up in Ferrexpo’s investing in expansion.

 

We retain our neutral view on FXPOLN Eurobonds.