Ferrexpo sees revenue rise but earnings fall as it invests in capacity

Ferrexpo posted a 6.4% improvement in revenue to $1.27bn in its full-year results on Tuesday, as total pellet production rose 1.6% to 10,607 kilotonnes.

The FTSE 250 firm said sales volumes were down 2.3% in the year ended 31 December, however, to 10,227 kilotonnes, while the average cost and freight 62% iron ore fines price was 2.5% lower year-on-year at $69.50 per tonne.

Its net direct cash cost of production was also higher, rising 34.1% to $43.30 per tonne, leading to an 8.7% fall in underlying EBITDA to $503m.

Ferrexpo’s underlying EBITDA margin was down seven percentage points at 39%.

Its profit for the year was off 15% at $335m, with diluted earnings per share 15.2% lower at 23.1 cents.

The board declared a dividend 40% higher year-on-year, however, at 23.1 cents per share.

Net cash flow from operating activities was down 17.3% at $292m, while the company made total capital investment during the year of $135m, up 31.1%.

Net debt at year-end stood at $339m, down 14%, while total liquidity slid 14.1% to $268m, and its net debt-to-underlying EBITDA ratio was 8.2% lower at 0.67x.

On the health and safety front, Ferrexpo reported one work-related fatality in 2018, which was the same number as in 2017, while the group lost time injury frequency rate was 1.18x, compared to 1.17x a year earlier.

Looking at the market environment, the firm described it as a “strong” one for high grade pellets, with Ferrexpo achieving a new record pellet premium.

Its average realised free-on-board price increased 9% compared to 2017.

Operationally, Ferrexpo said its production reflected the planned pellet line refurbishment in the second quarter, and a general increase in maintenance levels.

Production of premium 65% iron pellets was in line with 2017 at 9.9 mt, with the board saying the sales volume fall reflected a 400 kt increase in stocks due to temporary logistics constraints.

Looking ahead, Ferrexpo said that to date in 2019, realised prices for its pellets had continued at “high” levels.

During the year, it said it would continue its repairs and maintenance programme, which would include a 75-day pellet line shutdown in the second half.

Overall, 2019 production volumes were expected to be in line with 2018 at approximately 10.6 million tonnes.

The cost of production was expected to increase as a result of higher commodity input prices and local inflation in Ukraine.

Year-to-date, the hryvnia had been “broadly stable” against the US dollar, appreciating by approximately 2%.

Capital expenditure in 2019 would be focused towards growth projects, and was expected to be in the range of $220m to $300m, subject to realised pricing and market conditions.

Of that, the board said sustaining capital expenditure was expected to be in line with 2018.

Investment of around $35m was planned for the Concentrator Expansion Programme 1 (CEP1), which was anticipated to increase pellet production to approximately 12 million tonnes per annum by 2021.

In addition, subject to market conditions and available cash flows, Ferrexpo said it would begin construction on a new press filtration plant and other pellet capacity upgrade projects, as well as purchase of additional rail cars.

“I am pleased to report a successful year for Ferrexpo,” said non-executive chairman Steve Lucas.

“We continued to benefit from the strong global demand for our high-grade iron ore pellets, which helped deliver strong cash flow despite a rise in costs.

“This enabled us to increase investment, reduce debt further and pay a record dividend.”

Lucas noted that the company’s balance sheet was now “strong”, giving Ferrexpo a platform to deliver the next stage in its planned expansion.

“This year we plan to increase investment once more to be able to hit our medium-term production target of 12 million tonnes per annum by 2021 and lay the foundations for our longer-term intention to move to annual output of 20 million tonnes per annum.”