Ferrexpo decides to pursue Yeristovo concentrator in stages

Iron ore miner and pellet producer Ferrexpo (FXPO LN) sold 2.8 mmt of iron ore pellets in 1Q14 (+10.8% yoy), according to its interim statement published on April 17. The company stated that its selling price fell 3% yoy during the quarter, compared to an 11% yoy decline of the global benchmark (62% grade iron ore, CFR Chinese ports). The less steep decline was the result of a higher pellet premium to ore concentrate. Ferrexpo’s C1 costs amounted to USD 50.3/t in 1Q14. They fell 21% yoy and 13% qoq following the hryvnia’s devaluation and company cost-cutting measures. The hryvnia’s devaluation will negatively impact Ferrexpo’s VAT receivables outstanding, which are denominated in hryvnias (UAH 2.47 bln as of end-1Q14). Due to ForEx movements, the company said it will have to write-off USD 84 mln in 1Q14.

Ferrexpo is pursuing the Yeristovo 10 mmt concentrator project in stages, instead of approving it as a whole, the company announced. It will spend USD 30 mln for detailed design work of the concentrator in addition to the already approved CapEx of USD 40 mln for infrastructure necessary for the project.

Roman Topolyuk: The company’s bottom line will benefit from its superior prices to the market benchmark and strong improvement in production costs, which are only partially explained by the hryvnia’s devaluation in 1Q14. Meanwhile, ForEx losses on VAT receivables will have a one-off negative effect for 1Q14. We expect Ferrexpo will decrease its C1 production costs of pellets to USD 44/t this year, from USD 60/t in 2013.

The company’s cautious approach towards fulfilling the 10 mmt concentrator project (at an estimated value of USD 600-700 mln) implies that management is not ready to spend much on CapEx in the short term. Whatever the reason for such cautiousness, it helps the company’s leverage to remain safely low: we estimate Ferrexpo’s net debt/EBITDA ratio to be around 1.0x as of end-2014, from 1.3x a year ago.