US Edition Ferrexpo
316.2p+2.9
Questor says BUY
Steel makers all over the world have been squirming as the price of iron ore, one of the main ingredients in steel, has jumped in price over the past year. However, this has been a time to make hay for some of the world’s largest exporters – BHP Billiton, Rio Tinto and Vale.
One smaller producer that has also seen the benefit is Swiss-headquartered Ukrainian group Ferrexpo.
The company has a world-class resource and it also benefits from being close to European steel mills. It also owns a port on the Black Sea, providing a logistical advantage.
At the end of September the group renewed its credit facilities – part of its plan to substantially increase production. The company was trying to refinance $300m (£189m) of debt, but this was oversubscribed and the loan facility was increased to $350m.
The cost of the debt was reduced and the company plans to increase its output using debt facilities and by off-take agreements with customers. It does not expect to issue equity and dilute shareholders.
The company’s founder, Kostyantin Zhevago, has a stake of 75pc in the group, but the shares are still relatively liquid. The usual trading volume on the London Stock Exchange is between 500,000 and 1m shares a day. Last week the average number of shares traded was 916,000.
The company’s mine expansion is expected to add 1.2m tonnes of iron pellets to production in 2013. In the first half of the current year, Ferrexpo produced about 4.9m tonnes of iron ore pellets – an 18pc year-on-year increase.
Its key Yeristovo growth product could eventually more than double pellet production – with the expansion plan voted on by the board by the end of this year. This should provide some clarity to the market as these plans were put on hold amid the financial crisis in 2008. Questor expects that, once the expansion plans are clarified, the market will start pricing in this growth.
Costs have been increasing by about 8pc or so, but in the second quarter iron ore prices rose by 90pc to 120pc and the group is committed to driving down costs, so this is not a great cause for concern at present. The company is already a relatively low-cost producer.
At its first-half results, management would not give any indication of price rises in the second half of the year, as the pricing mechanism for the mineral is still in a period of flux.
The major players have been forcing a move to quarterly pricing, to take advantage of increasing demand. There is even talk of movement to a monthly pricing mechanism – as well as speculation that the quarterly mechanism will not survive.
Prices are expected to temper in the fourth quarter, but the outlook remains decidedly bullish.
In yesterday’s production update it was announced that Simon Wandke, Ferrexpo’s chief marketing officer, was leaving the group at the end of the year. Although disappointing, the company said it was “well advanced” in finding a replacement.
The group also said yesterday that its daily pellet output has risen by 19pc in September on a month-on-month basis.
In the first six months of the year, revenues rose 74pc to $526m and pre-tax profits jumped 340pc to $166m as the market recovered form last year’s softness.
The shares are trading on a December 2010 earnings multiple of 7.1, falling to 6.2 next year and yielding 1.2pc.
Ferrexpo is a pure play in the iron ore market and, with its aggressive expansion plans and the positive outlook for the market, the shares are a buy.