Ferrexpo EBITDA falls 9% yoy in 1H16, FCF surges

Ukraine’s largest iron ore pellet exporter Ferrexpo (FXPOLN, FXPO LN) reported EBITDA of USD 160 mln in 1H16, a 9% yoy drop, according to interim results published on August 3. This came in 7% higher than consensus estimates provided by the company but 9% lower than what Concorde Capital projected for 1H16. Average C1 pellet cash production costs at USD 25.7/t (-23% yoy), being somewhat higher than we projected, were among the main reasons for the negative surprise. The financial report implies that the average selling pellet price on a FOB/DAF basis was flat at USD 66/t compared to 2H15, and 17% lower from 1H15 following the market downtrend.

Ferrexpo also reported strong net operating cash flow of USD 142 mln in 1H16 (+62% yoy), which is 11% higher on an annualized basis than our full-year projection for 2016. Inflows from VAT reimbursement and lower interest costs were behind such an improvement. Free cash flow surged 1.9x yoy to USD 118 mln, which covered USD 120 mln in debt repayments during 1H16. Its net debt-to-EBITDA ratio was 2.5x in June 2016, a decline from 2.8x in December 2015 but higher than 1.9x in June 2015.

The company might not be able to service its payments on a USD 350 mln PXF loan – with the first installment of USD 44 mln due in November – or a semi-annual coupon on the Eurobonds of USD 18 mln due in October if iron ore prices decline from current levels (USD 62/t in China port, CFR), Ferrexpo reported. At the same time, it said this risk has diminished to some extent recently. Ferrexpo’s board has not declared an interim dividend for 1H16, but it may review this decision later this year, being subject to the company’s financial position and market conditions, the company said.

Roman Topolyuk: In its 1H16 report, Ferrexpo reiterated its cautious message to investors regarding its iron ore market outlook, having given similar warnings with its 2015 results in its March 2016 report. Meanwhile, the company has done a superb job on focusing on debt repayment, which in turn has freed some free cash flow due to lower interest costs (savings have reached USD 11 mln, if annualized). We think Ferrexpo will continue to focus on repayment and we don’t expect a dividend distribution by the end of 2016, at minimum. Once iron ore spot prices dip in 2H16, we believe Ferrexpo could approach its creditors for some maturity extension (up to two years). This exercise is doable for Ferrexpo, we anticipate.

Ferrexpo’s 2019 Eurobonds, having YTM of 15.7% and a 600 bps spread to the sovereign, might be interesting to investors speculating that iron ore prices have already bottomed out. Our view on the name remains neutral.