Ferrexpo EBITDA rises 17% in 2019

Ukraine’s largest iron ore pellet exporter Ferrexpo
(FXPO LN) reported its 2019 financial results on Mar. 18. Revenue increased
18.3% yoy to USD 1,507 mln, while EBITDA rose 16.5% yoy to USD 586 mlnand net
income grew 20.3% yoy to USD 403 mln. Operating cash flow before working
capital gained 25.5% yoy to USD 623 mln, while net cash from operating
activities jumped 62.3% yoy to USD 473 mln. CapEx surged 83.2% yoy to USD 247
mln. Dividends paid during 2019 amounted to USD 155 mln, 60% more yoy.

 

Ferrexpo’s net debt dropped 17.0% yoy to USD 281 mln
at the end of 2019. The net debt-to-EBITDA ratio slid to 0.48x at the end of
2019, down from 0.67x at the end of 2018. Gross debt inched up 2.6% yoy to USD
412 mln at the end of 2019.

 

Ferrexpo’s C1 cash production cost rose 10.5%, or USD
4.5/t yoy to USD 47.8/t. The company disclosed that the hryvnia’s 14% yoy
appreciation and domestic cost inflation contributed USD 2.5/t to the C1
production cost increase in 2019, and that USD 2.0/t of the increase was due to
maintenance cost increases.

 

The company expects its royalty payments to rise
approximately USD 1/t in 2020 due to Ukraine’s plans to hike the royalty
rate for iron ore extraction. Ferrexpo said that the
legislation that stipulates the royalty rate hike is expected to be adopted in
March.

 

Ferrexpo’s board has deferred its decision on the
final and special 2019 dividends until the effects of the coronavirus and the market
situation becomes clearer. Nevertheless, the company mentioned that its board
plans to declare at least some dividend.

 

The company disclosed that its board has started
enquiries into the appropriateness of a loan provided by its related party, football
club (FC) Vorskla, to another related party, Collaton Limited, the latter
controlled by Ferrexpo’s majority owner and former CEO, Kostyantyn Zhevago. In
2018 and 2019, Ferrexpo purchased USD 10.7 mln and USD 10.8 mln of services
(advertising, marketing and PR) from FC Vorskla. At the end of 2019, FC
Vorskla’s loan to Collaton Limited amounted to USD 17 mln, rising from USD 10.8
mln at the end of 2018 and USD 4.0 mln at the end of 2017. Ferrexpo said that
possibly the loan was made in relation to the construction and renovation of FC
Vorskla’s facilities. However, if it turns out that FC Vorskla has
misappropriated some funds, Ferrexpo might accrue liabilities, including fines
and penalties.

 

Ferrexpo also reported that on Apr.2, a the court will
hear its appeal of the recent decision by an investigative judge of the
Pechersk District Court in Kyiv to restrict a 50.3% stake in
Ferrexpo’s main asset, Ferrexpo Poltava Mining (FPM) held
by Ferrexpo AG, a Swiss wholly owned subsidiary of Ferrexpo plc. Ferrexpo said
it thinks the appeal will be successful, and provided no plans for the case it
loses the appeal.

 

During a call with the investors the same day, company
CFO Roman Palyvoda said the recent plunge of oil prices, and the Ukrainian
hryvnia’s devaluation, might push Ferrexpo’s C1 cash cost to the low-40s per
ton in 2020. Regarding its plans, Ferrexpo expects to boost its production
volume 9.3% yoy to 11.5 mmt in 2020 and further 4.3% yoy to 12.0 mmt in 2021.
The company said that the capital cost of expanding output beyond 12 mmt per
year is USD 150-200 per ton of capacity.

 

Ferrexpo remains committed to paying dividends, and
intends to continue deleveraging, repaying USD 33 mln of principal per quarter.
For 2020, Ferrexpo plans capital expenditures of USD 150 mln, which might be
reduced by up to USD 30 mln if needed, with the company’s spending on
capitalized stripping being flexible. Ferrexpo’s CEO Chris Mawe mentioned USD
80 mln per year as the average mid-term maintenance capex (excluding
capitalized stripping) required by its current facilities.

 

Dmytro Khoroshun: Ferrexpo’s
2019 EBITDA turned out slightly below the USD 590-610 mln range we expected.
The results reflect a very successful year for the company, which, however, was
clouded by several scandals related to Zhevago, the FC Vorskla loan being the
latest unpleasant development.

Iron ore prices have been very resilient to the coronavirus
situation, while Ferrexpo’s costs should shrink because of the weaker hryvnia
and cheaper energy costs. Therefore, Ferrexpo should remain very strong
financially in 2020, giving the company and its majority owner, Zhevago, the
time to resolve their legal matters.