Ferrexpo pellet production flat yoy in 1Q16

Ukraine’s biggest iron ore pellet exporter Ferrexpo (FXPO LN, FXPOLN) produced 2,887 kt of pellets in 1Q16, according to its April 5 trading update. Total quarterly output was flat yoy and 3.3% smaller qoq. In daily average terms, the 1Q16 output was 1.1% less yoy and 2.2% less qoq.

Pellet production from own iron ore increased 5.6% yoy to 2,875 kt, while production from third party concentrate was minimized to 12 kt (down 93% yoy) in 1Q16. Also minimized was production of lower-grade 62% Fe pellets, which slid 71% yoy to 124 kt. Output of 65% Fe pellets increased 12.7% yoy to 2,763 kt.

Roman Topolyuk: Ferrexpo is reaping the fruits of its intensive CapEx program that was finalized in 2015. The company is operating at almost full capacity, having minimized the processing of its third party iron ore, which has provided very low profit margin. Its high-grade 65% pellets comprise almost all of Ferrexpo’s product mix, or 96%, compared to around 50% previously.

The interim result supports our expectation of 11.9 mmt of pellets to be produced in 2016 (+2% yoy), which coupled with premium pricing and low cash costs, will enable Ferrexpo to generate enough free cash flow this year to cover repayment of its banking debt due by the year end, which we estimate at USD 164 mln. We remain bullish on FXPOLN Eurobonds.