Ferrexpo – life on the frontline

Ferrexpo (FXPO), a Ukraine-focused miner and producer of high-grade iron ore pellets, saw half-year revenues drop by around a third year on year as pellet production declined by 14 per cent. Sales volumes also pulled back appreciably as the miner was forced to make do with European customers due to Russia's blockade of Ukraine's Black Sea ports.

If that wasn’t bad enough, profitability has been severely constrained by soaring prices for energy and logistics, while pellet prices fell by 22 per cent. Freight rates increased by 20 per cent per tonne and fuel prices remain at elevated levels. All this meant that cash profits declined by 44 per cent to $486mn (£402mn), while net operating cash was down by 65 per cent to $233mn. However, the company closed out the period with a still healthy cash buffer of $172mn.

Amid the gloom, Ferrexpo notes that “fundamentals for iron ore pellets remain strong, particularly in European markets”. The Platts Atlantic Pellet Premium rose by 36 per cent during the half, partly reflecting limited additional new pellet supply entering the market, but also because smelters are looking to reduce their carbon footprints. And while it may be a stretch to suggest that it’s ‘business as usual’, the miner has continued to invest in its newly completed crushing plant, along with development stripping activities at its third mine, Belanovo.

We have previously highlighted corporate governance concerns, even as the miner benefited from a soaring iron ore price in 2020/21. It has just released its latest Responsible Business Report for the benefit of shareholders, but the focus remains on events in Ukraine. The end-game there is unknowable and the potential total return on offer would only appeal to speculative buyers. Uncertainties predominate, so we reiterate our sell stance, even though it's cautionary rather than valuation-based. Sell.   

Last IC View: Sell, 475p, 4 Aug 2021