Ferrexpo reports 10% yoy increase in 1Q14 pellet output

Mining firm Ferrexpo (FXPO LN) reported increased production of  iron ore pellets by 10.4% yoy to 2,816 kt in 1Q14. The growth was fueled by a 2.2x yoy growth in pellet output sourced from its new Yeristovo Mine (to 707 kt) and 55% yoy growth in pellet production from third party ore (to 102 kt). At the same time, pellet output from its flagship Poltava Mine decreased 6.9% yoy.

The company also reported a remarkable shift to production of 65%Fe pellets (as opposed to 62%Fe), as its proportion of output mix increased 7pp yoy to 48% in 1Q14. Output of higher-grade pellets increased 31% yoy owing partly to 9.4x yoy growth in its output of Yeristovo ore, and the fact that all third party ore was used for its production (while all the purchased ore went to production of 62%Fe pellets a year ago).

Alexander Paraschiy: The only surprise in the 1Q trading update is a 55% yoy and qoq increase in pellets produced from third party ore. Production of own ore changed little on a qoq basis (+0.6%) and repeated the trend of previous quarters: output at the new Yeristovo Mine increased (+6.6% qoq) at the expense of a slight decline in output at Ferrexpo’s flagship Poltava Mine (-1.4%).

Given that global iron ore prices declined about 19% yoy in 1Q14, we should not expect improved financials for Ferrexpo. At the same time, we expect that a radical shift to higher-grade ore output and an increased share of pellets produced from Yeristovo Mine ore (which is mined at smaller cost compared to Poltava’s ore) will smoothen the negative effect of the ore price decline on the company’s bottom line.