Barclays double-upgrades Ferrexpo on rising iron pellet premiums

Ferrexpo got a boost on Thursday as Barclays double-upgraded the stock to 'overweight' from 'underweight' and hiked the price target to 300p from 140p on the back of rising iron pellet premiums.

The bank said pellet premiums are moving into uncharted territory. Spot prices are now at $78 per tonne FOB versus $58 per tonne contracted for 2018, with the recent push higher underpinned by expectations of the broader application of winter cuts starting in October.

Barclays said it expects further upward pressure on prices in the short term following news on Wednesday that the world number 2 pellet producer, LKAB, has shut down one of its mines for several months.

"Significant increases in spot pellet premiums drive upgrades to our forecasts and price target for Ferrexpo, and should lead to consensus 2019 earnings per share estimates rising substantially, in our view."

Barclays also highlighted the stock's "cheap" valuation, at 3.7x estimated 2018 EBITDA versus an average of 5x.

"Demand for high-quality iron ore is currently supported by supply-side reforms in China, strict environmental regulations to limit emission, ongoing steel mill profitability and increased capacity utilisation resulting in elevated pellet and Fe quality premiums," it said.

At 1300 BST, the shares were up 7.3% to 224.94p.