Ferrexpo EBITDA halves in 2012, pays extra dividends

Ferrexpo (FXPO LN) reported today a 20% yoy decrease in 2012 revenue to USD 1,424 mln on 2% yoy lower sales of pellets, which fell to 9.7 mmt. EBITDA halved yoy to USD 402 mln, while net income dwindled 2.7x yoy to USD 216 mln. The implied average FOB/DAF selling price for iron ore pellets decreased 13% yoy in 2012 to USD 136/t, we estimate. C1 cash costs grew 18% to USD 59.6/t.

Ferrexpo’s net debt reached USD 423 mln compared to USD 80 mln a year ago, increasing its net debt/EBITDA ratio to 1.05x. from 0.1x. The company increased its leverage to finance USD 429 mln in CapEx, as well as compensate its working capital outflow caused by a USD 130 mln yoy increase in VAT receivables (to USD 302 mln) in 2012.

The company reclassified 0.1 mmt of pellets, produced from purchased ore, as production from ore extracted at its Yeristovo Mine. This brings total own-ore pellet production to 9.4 mmt in 2012 (+4% yoy), up from the previously disclosed 9.3 mmt.

Ferrexpo announced a special dividend of USD 0.066/share – in addition to its semi-annual USD 0.033/share – following the successful launch of the Yeristovo Mine.

Roman Topolyuk: EBITDA came in 12% larger than our projections, owing to a higher average selling price. Aggravating net debt exceeded our pessimistic expectations by 5%, indicating that problems with delayed redemptions of VAT export taxes by the state (USD 130 mln in 2012 alone) will continue to cut into equity value.

Another positive surprise was the reclassification of 0.1 mmt pellets to own-ore-products, which are much more profitable compared to pellets from purchased ore. Hence, it is possible that a higher proportion of pellets from own ore was produced by Ferrexpo in 2M13 than previously (1.6 mmt, +7% yoy), and will be produced thereafter. Combined with the company’s expected switch to production mode at the Yeristovo Mine in 2H13, we are keeping our forecast of Ferrexpo’s 2012 pellet production from own ore at 10 mmt unchanged.

We expect a positive market reaction to Ferrexpo’s earnings announcement. However, we are keeping our SELL recommendation for the stock on the back of the weak iron ore market expected in 2H13, for as long as major iron ore producers will commission new capacities and global demand seems to lag on the supply side.