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Iron ore price makes Ferrexpo a profit machine

Ukraine miner’s earnings soar as demand climbs for its iron ore pellets
August 4, 2021

 

  • Exports to North Asia stayed at the strong level seen last year
  • Cash costs and freight costs were up 14 per cent and 72 per cent

Ferrexpo (FXPO) shareholders will get a half-year payout triple that of HY 2020 as high iron ore prices sent its profits surging in the first six months of 2021. Its pellet products sell at a premium to the already-sky-high iron ore price, and the company saw its underlying cash profit climb from $352m a year ago to $868m in the first half.

Production was flat year on year, while cash costs and freight costs were up 14 per cent and 72 per cent, respectively, although the much higher prices were more than enough to cover these increases. 

The miner benefited in the first half from returning demand from European steelmakers, while exports to North Asia stayed at the strong level seen last year, reflecting broader economic themes. Ferrexpo took “full advantage” of the iron ore price highs, said chair Lucio Genovese. 

The iron ore price has come down in recent weeks as “China’s government directs its 1bn tonne a year steel industry to bring 2021’s total output back down to below 2020’s (record-high) level”, said Liberum analyst Tom Price. This impacts European miner Ferrexpo because prices are driven by demand from Chinese steelmakers. The company also said the consensus forecast was for the key iron ore price (62 per cent Fe) to fall $15 a tonne (t) in the second half, compared with the first half average of $184/t. 

At the same time as the generous investor payouts, Ferrexpo grew its net cash position to $213m, compared with $4m at the end of 2020, and put $93m of capital spending into upgrading its operations. 

Chief among the shareholders at Ferrexpo is majority owner Kostyantin Zhevago, who will get 50.3 per cent of the $233m being handed out for the half-year period. 

Zhevago stepped down as chief executive in 2019 “to focus on resolving certain matters in Ukraine relating to one of the businesses he owned until 2015”, and a Reuters report last month said there was an international arrest warrant out for the chief-executive-on-ice. The company said its Ukraine business “continues to operate uninterrupted” and it was “continually monitoring commentary”. 

The company also announced the appointment of Nikolay Kladiev as finance chief. He served since in the same job for Ferrexpo’s operating subsidiary in Ukraine since 2007. 

The consensus forecast for the company’s full-year earnings per share is 190¢, compared with 100¢ in 2020. However, analysts say this will fall back to 136¢ next year. 

Ferrexpo is a cash machine, but we can’t get past its ownership and the risks there for shareholders. Sell. 

Last IC View: Sell, 360p, 17 Mar 2021

FERREXPO (FXPO)   
ORD PRICE: 469pMARKET VALUE:$ 2.6bn
TOUCH:468.6-469.2p12-MONTH HIGH:513pLOW: 164p
DIVIDEND YIELD:6.1%PE RATIO:4
NET ASSET VALUE:330¢NET CASH$213m
Half-year to 30 JunTurnover ($bn)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20200.7829442.613.2
20211.3579711339.6
% change+73+171+164+200
Ex-div:12 Aug   
Payment:26 Aug   
£1 = $1.39. NB: Dividend yield does not take account of 52.8¢ in special dividends in 2020.