Ferrexpo battles on despite Ukraine war challenges

Ukrainian iron ore miner Ferrexpo’s (FXPO) 2022 results are not like those of most other companies listed in the UK. The standout figure, far more than Ebitda or the final dividend, is the 20 workers killed while defending Ukraine from the Russian invasion. That the company has been operating at all is a significant result. 

Since the war started in February, its export capabilities have been severely constrained, while the inconsistent power supply has also cut the company's ability to turn the high-grade iron ore it mines into pellets. 

“Operationally, our assets have produced in line with accessible markets, with the closure of Ukraine’s access to the Black Sea placing a significant impediment in our ability to access seaborne markets,” said company chair Lucio Genovese. 

Exports to European customers continued, and the company kept sales above $1bn (£820mn), on pellet production of 6mn tonnes, a 46 per cent drop on 2021. Sales to Europe only fell 23 per cent, however, as supply lines were more accessible. 

There have been some positive updates recently – Ferrexpo reported last month that it had restarted another pelletiser line, meaning it is running at half capacity. 

Ben Davis, an analyst at house broker Liberum, said he was optimistic about an agreement over iron ore exports being made with Russia, like the grain corridor deal. And failing that the “success of Ukraine’s expected counter offensive in the summer will ultimately lead to a withdrawal of Russia’s navy from the Black Sea”. Perhaps a forecast to be taken with a pinch of salt, however, given Liberum’s experience is in equities research rather than conflict strategy. 

Amid the difficult operating conditions (to put it mildly), there was a positive surprise for shareholders in these results – Ferrexpo managed to top consensus estimates for cash profits of $730mn, with its $765mn final figure. Liberum forecasts a significant decline this year, however, to $323mn. Alongside the war, global trading conditions knocked earnings as the iron ore price came down by around a quarter. Ferrexpo also brings in a ‘pellet premium’ on top of the 65 per cent Fe market price, and this climbed to $72 a tonne from $60 a tonne in 2021. 

The company has had corporate governance issues in the year – 49.5 per cent shareholder Kostyantin Zhevago sells the company spare parts, insurance, advertising and other services, racking up $23mn in related-party transactions in the year. He quit the board in December after being arrested in France on Ukrainian charges. 

We have previously recommended selling Ferrexpo off the back of its ownership structure. Now the war is the determining factor in its performance, and we are neutral given the uncertainty there. Hold. 

Last IC View: Sell, 143p, 3 Aug 2022