Ferrexpo Net Beats Estimates, Easing Ukraine Turmoil Concern

Ferrexpo Plc profit beat estimates, helping allay concerns that the crisis in Ukraine would hurt the iron-ore producer’s main business in the country and its plan to invest as much as $1.5 billion to double output.

Net income in 2013 gained 21 percent to $261.9 million from $217.3 million as prices and volumes grew, Ferrexpo said. The result beat the $248-million average of 11 analyst estimates compiled by Bloomberg. Sales rose 11 percent to $1.58 billion.

The company plans 11.5 million to 12 million metric tons of iron-ore pellet output this year, Chief Financial Officer Chris Mawe said in an interview. That compares with a 12 percent gain in 2013 to 10.8 million tons after ramping up Yeristovo mine.

Ferrexpo will make a final decision this year on proposals to expand production to 20 million tons, Mawe said by phone. The producer has the largest iron-ore deposit in Europe, with about 20 billion tons of resources, according to its website.

The company advanced 3.6 percent to 144.2 pence at the close in London. It’s still down 12 percent since Standard & Poor’s cut Ferrexpo’s credit rating Feb. 28 because of the risk of confrontation between Russia and Ukraine, where an uprising led to the ouster of pro-Moscow President Viktor Yanukovych.

“There have been no production disruptions so far and pellet demand remains strong,” Rob Clifford, an analyst at Deutsche Bank AG in London, wrote in a note to investors.

Refinancing Harder

While the situation made refinancing more difficult in the near-term, “Ferrexpo has a strong balance sheet with breathing room,” Mawe said. Its next debt repayment is on $500 million of bonds due April 2016. Instability in Ukraine doesn’t look set to worsen and isn’t deterring the expansion, he said.

“We are already making payments to do the ground works for the plant that’s required to move the 20 million tons and some work’s commencing” in the latest phase of expansion, Mawe said.

Ferrexpo plans to decide on whether to commission an iron-ore concentrator in Yeristovo in the second or third quarter, Chief Executive Officer Kostyantin Zhevago told analysts today. The decision mainly depends on a return to political stability, as well as iron ore markets and funding availability, he said.

The concentrator, with capacity to process 10 million tons of iron ore, will cost $850 million to build, he said. A first phase achieving a 5 million-ton capacity will cost $550 million, with $50 million to $75 million already spent, Zhevago said.

Reduced Spending

The company reduced spending by 35 percent to $278 million last year as it nears completion of the investment needed to expand its production to 12 million tons.

Ferrexpo expects to get the $318 million in tax repayments it’s owed by the government within a year as Ukraine finds a solution to refinancing the country’s own debt, Mawe said.

Zhevago, a lawmaker in Ukraine, is investing in new markets to reduce Ferrexpo’s reliance on the country. He was once part of the political bloc led by former Prime Minister Yulia Tymoshenko, who was freed from prison after Yanukovych’s ouster.

The Baar, Switzerland-based company has bought 14.4 percent of Brazilian iron-ore producer Ferrous Resources do Brasil.

Ferrexpo seeks to cut production costs to about $55 a ton this year from $59.8 a ton last year, Mawe said. A decline in the Ukraine currency will contribute to reduced expenses, while any resulting inflation may counter such benefits, he said.

The company’s ore body lies in a 50-kilometer (31-mile) strip of land about 200 miles from Kiev. It excavates about 30 million tons of crude ore a year in an open-pit operation at the Poltava mining pit. Iron ore for immediate delivery at China’s port of Tianjin, a global benchmark, averaged $135 a ton last year, up from $128 in 2012, according to The Steel Index Ltd.

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