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Ferrexpo posts strongest 2009 results in Q4 as ore pellet production and higher grade output grows

Ferrexpo (LSE: FXPO) said the fourth quarter was its strongest in 2009 as pellet production and higher grade pellet output rose, while 2009 sales exceeded both 2009 production and 2008 sales.

The group said pellet production from own raw materials in Q4 increased 21.7% year on year to 2,237.8 tonnes as production continued at full capacity through the quarter, while higher grade 65% Fe (iron) output rose 5.9% over the quarter  to 1,183.2 tonnes, and to 4,304.1 tonnes in 2009, a 7.2% improvement over the full year 2008. Ferrexpo added that 2009 sales increased over the previous year and the business traded profitably throughout 2009.

About 86% of all sales were made to the existing portfolio of long term contract customers, while average achieved DAF/FOB prices in Q4 were in line with Vale pellet settlements after adjustments for freight and quality.

“Ferrexpo performed strongly in the fourth quarter, with high levels of production complemented by a return to contract-based sales and the associated higher margins and improved demand visibility. The slow but steady recovery in European steel markets and the quality of our customer relationships are highlighted by the fact that we have been able to switch our sales back to our portfolio of long term contract customers, which has enabled the Group to finish a challenging year on a high note,” said chief executive of Ferrexpo Kostyantin Zhevago.

Edison Investment Research issued a note on the group earlier this month, leaving its estimates for Ferrexpo’s full year revenues for 2009 virtually unchanged despite lower than expected pellet prices in the second half of the year, while calling its price to earnings ratio an “undemanding relative to its peers.”

The research house lowered its average price assumption for pellets sold by the group in the second half to US$68.1 per tonne from US$71.50/t, however, the revenue estimate was down marginally from US$602.3 million to US$600 million after Ferrexpo achieved a pellet production that was 4% higher than Edison’s forecast of 8.4 Mt (million tonnes) in December 2009, exceeding all other months except for March. Edison's earnings per share estimate for 2009 stayed at US$0.11.

Edison also noted that the group’s future was linked to the outlook for the steel industry, which has seen a significant recovery over the past year, though current production rates have slid from their all time records of the second half of the previous year as production in six of Ferrexpo’s key market rose 24% in the first 10 months of the year due to government stimulus spending and restocking.

Following the release of the company’s Q3 results, Cazenove raised its shipment forecast for Ferrexpo from 8.5 Mt (million tonnes) to 9 Mt, implying a 3% year on year increase in shipments. Cazenove said that the change to production translated into an EPS (earnings per share) upgrade of 7% and 6% for 2009/10 respectively, assuming the group produces at 2009 rates in 2010.

Ferrexpo has recently secured a new Pre-Export Financing (NYSEARCA:PXF) facility of up to US$230 million, which Edison said alleviated any liquidity concerns. The facility is being provided by a banking syndicate coordinated by Deutsche Bank (FWB: DBK) and also including several other major institutions such as JP Morgan (NYSE: JPM), UBS (NYSE: UBS), BNP Paribas and Fortis Bank (Euronext Paris: BNP).

At its principal operating assets in Ukraine, Ferrexpo is primarily involved in the production and export of iron ore pellets, used in producing steel. The deposits which the group is currently mining have approximately 955 Mt of proved and probable iron ore reserves, but it has 6.5 billion tonnes of JORC-classified resources across the portfolio.
The Yeristovskoye deposit alone has proved and probable reserves of 632 million tonnes.

Disclosure: The author holds no positions in the company