Ferrexpo EBITDA drops 37% yoy in 2015, continues to service debt

Ukraine’s largest iron pellet producer Ferrexpo (FXPO LN, FXPOLN) generated EBITDA of USD 313 mln in 2015, which was a 37% yoy decline yet a 15% positive surprise to the Bloomberg consensus estimate, according to its results published on March 10. Its net operating cash flow for the period dwinded 56% yoy to USD 128 mln. Its 2015 CapEx was limited to USD 65 mln, compared to USD 235 mln last year, as Ferrexpo finalized key expansion programs. The company remained positive at the FCF level for the second year running at USD 63 mln (-2% yoy).

 

The strong financial performance and a positive surprise to consensus expectation was the result of Ferrexpo’s solid pellet premium to the price of iron ore: the company reported that its selling price of pellets outperformed the 42% yoy decline in the average price of iron ore in China by 11 percentage points. C1 production costs decreased 30% yoy to USD 32/t. So far this year, Ferrexpo has experienced further improvement in C1 costs, which have declined from an average of USD 26.4/t in December to USD 24.3/t in February. Pellet sales volumes inched up 1.5% yoy to 11.3 mmt in 2015.

 

Ferrexpo’s total debt decreased 20% to USD 904 mln as of December 2015 compared to June, after the company prepaid its Eurobonds by USD 100 mln as part of their maturity extension and repaid monthly installments on its USD 420 mln PXF facility. By end-February, the company repaid another USD 39 mln in debt, having USD 36 mln of cash remaining. The current amount outstanding of the USD 420 mln facility was USD 88 mln as of end-February 2016, due to be paid in five monthly installments by July 2016. Another PXF facility – with a USD 350 mln amount outstanding – is to be repaid in eight equal quarterly installments, starting in November 2016.

 

Regarding Finances & Credit bank, where the company deposited USD 175 mln and which was declared insolvent by the NBU in September, Ferrexpo reported it submitted its claims in January 2016, in accordance with applicable procedures. In addition, the company has submitted the court claim for USD 10 mln of funds deposited with F&C, which should have been released according to legislation. The court of first instance ruled that the cash should have been returned to Ferrexpo. This decision has been appealed and the next court hearing is scheduled to take place in April 2016. Ferrexpo has recorded an allowance of USD 175 mln for the frozen cash in F&C bank.

 

Ferrexpo reported its board is not recommending annual dividends due to the uncertain iron ore pricing outlook and current level of leverage. For 1H15, the company has paid out USD 19 mln as interim dividends.

 

Roman Topolyuk: Ferrexpo’s financial result was much stronger than we expected (EBITDA of USD 28/t vs. our expectation of USD 19/t), primarily owing to its selling price, which proved to be more resilient compared to what market benchmarks in China ports have implied. The company sold 60% of its pellets to the EU and 12% to northeast Asia, where pellet premiums tend to be USD 5-10/t higher.

 

The company’s strong cash cost position as of early February, our projections of a USD 48/t iron ore price in 2016 and an average pellet premium of USD 20/t that the company may certainly reach are all factors that indicate Ferrexpo will be able to earn around USD 24/t in 2016 (close to USD 280 mln in annual terms). Based on our estimates, with USD 36 mln in cash, this would cover the unrepaid but scheduled current debt of USD 165 mln in 2016.

 

We regard Ferrexpo’s abstention from paying dividends as a prudent step, taking into account the current tough liquidity constraints.

 

We wouldn’t count very much on the probability of USD 165 mln of previously deposited cash with F&C bank to be returned to the company, though once USD 10 mln is recovered, it will marginally positively contribute to Ferrexpo’s liquidity position in keeping USD 36 mln in cash, and having to repay around USD 17.5 mln monthly on its USD 420 mln PXF facility.