Ostensibly there was much to admire in Ferrexpo's (FXPO) recent third-quarter update. Rising pellet (Fe) production from its Ukrainian operations, together with cash costs ($58.20 a tonne) 4 per cent below the year-to-date average, certainly suggests that the miner is making headway from an operational perspective. But, despite this undoubted progress, we believe that Ferrexpo's share price could drop from the current levels due to a cyclical contraction in Chinese iron ore demand, coupled with the company's high operational sensitivity to selling prices and a share rating that looks toppy by historical standards.
- Sensitivity to bulk price movements
- Chinese steel over-capacity
- Trading above historic peer multiples
- 2014 seaborne surplus
- Ongoing Yeristova mine ramp-up
- Cash costs heading down
Admittedly, this prediction seems at odds with recent economic trends. After all, Ferrexpo's share price has rallied strongly since June's three-year nadir of 130p on the back of positive PMI data from the People's Republic. In fact, it's predicted that China's current re-stocking phase could be extended well into the fourth quarter.
Iron ore prices have already risen by around a quarter since they hit an eight-month low of $110 per tonne in May and it has effectively been a seller's market from July onwards, as users in China replenished inventories that had fallen to their lowest levels in over four years. However, China's steel mills are now struggling to turn a profit at current prices with the industry using only 72 per cent of available capacity, according to state newspaper 'China Daily'. Iron ore demand can be expected to feel a knock-on effect. Indeed, imports fell from a record high of 74.6m tonnes in September to 67.8m tonnes last month.
FERREXPO (FXPO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 187p | MARKET VALUE: | £1.1bn | |
| TOUCH: | 186-187p | 12-MONTH HIGH:: | 289p | LOW: 130p |
| DIVIDEND YIELD: | 2.3% | PE RATIO: | 12 | |
| NET ASSET VALUE: | 271¢ | NET DEBT: | 35% | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2010 | 1.30 | 498 | 72.3 | 6.6 |
| 2011 | 1.79 | 691 | 97.1 | 6.6 |
| 2012 | 1.42 | 262 | 36.6 | 6.6** |
| 2013* | 1.54 | 255 | 37.0 | 7.0 |
| 2014* | 1.55 | 164 | 24.0 | 7.0 |
| % change | +1 | -36 | -35 | - |
Normal market size: 10,000 Matched bargain trading Beta: 2.82 *JPMorgan Cazenove forecasts **Excludes special dividend of 6.6¢, paid in March 2013. £1 = $1.60 | ||||
Investment bank UBS AG has predicted that prices will average $106 per tonne through 2014 and $95 per tonne in 2015 from $123 this year. With output from the likes of Rio Tinto (RIO) and Vale expanding, UBS projects a global seaborne surplus of 154m tonnes in 2014 from 24m tonnes this year.
Average realised prices for Ferrexpo's pellets (Fe) dropped 4.5 per cent in the third quarter, which was largely due to the lag effect of forward contracts. But the global demand/supply balance doesn't auger well for prices during 2014. And as a 'pure' iron ore producer, Ferrexpo's share price is particularly sensitive to spot price movements. So, despite growing confidence in the global economy, and the ongoing ramp-up at Ferrexpo's Yeristova mine, we believe there are a number of factors that could undermine prices for iron ore, and by extension Ferrexpo's share price, as China's re-stocking phase peters out.
