Ferrexpo increases output of higher-grade pellets 1.8x yoy in 1Q15

Ukraine’s leading iron ore pellets exporter Ferrexpo (FXPOLN, FXPO LN) produced 2.89 mmt of pellets in 1Q15 (+2.5% yoy, +4.4% qoq) according to its April 2 operating update. Its pellet production from own iron ore increased just 0.3% yoy to 2.72 mmt.

The company produced a record amount of higher-quality 65%-Fe pellets (as an alternative to 62%-Fe): their output jumped 81% yoy (and 43% qoq) to 2.45 mmt. The share of higher-grade pellets in Ferrexpo’s product mix increased to 85% in 1Q15, from 48% a year before and 62% a quarter before. This has become possible since the company completed its quality improvement project.

Roman Topolyuk: Having reported such superb operating results, Ferrexpo has stepped on track to reach almost full capacity load in 2015, which is in line with our projections of 11.9 mmt of pellets sales. Another positive development is an apparent switch to producing 65% grade pellets. Such a move will result in a stronger attachment of clients, which prefer a higher iron content of iron ore products in today’s market.

However, such strong production numbers should not distract one’s attention from the plunging iron ore prices that have decreased to a new low of USD 49.5/t as of beginning April, compared to USD 64.0/t in February. Pellet prices in China’s ports declined from USD 103/t to USD 90/t during the period, just a mere USD 3/t higher than the level which we estimate is safe for Ferrexpo in terms of being able to smoothly repay its debts. Once the threshold of USD 87/t is crossed, the Eurobond of the company maturing in 2016 wouldn’t be a safe bet.