Interim Report Producing iron ore pellets for over 30 years

Transcription

1 Producing iron ore pellets for over 30 years

2 is a Swiss-headquartered resources company with assets in Ukraine. It is principally involved in the production of iron ore pellets which are used in the manufacture of steel. Ferrexpo listed on the main market of the LSE in June In this report overview 01 Highlights 02 Reserves and Resources 04 Operations and Distribution 06 Chairman s and Chief Executive Officer s Review business review 12 Review of Operations 18 Financial Review 22 Principal Risks 24 Going Concern 24 Directors Responsibility Statement financial statements 25 Independent Review Report 26 Interim Consolidated Income Statement 27 Interim Consolidated Statement of Comprehensive Income 28 Interim Consolidated Statement of Financial Position 29 Interim Consolidated Statement of Cash Flows 30 Interim Consolidated Statement of Changes in Equity 31 Notes to the Interim Condensed Consolidated Financial Statements 46 Glossary IBC Shareholder Information Online

3 Highlights six months 30 June 2012 Ferrexpo made a good start to 2012, in line with the Group s expectations against a backdrop of moderating iron ore prices. Operationally, the Group continues to perform well, with production from own ore 4% higher than 1H The Group continued its planned investment in its modernisation and expansion programme in the first half of 2012 and, with the expected additional output of ore from Ferrexpo Yeristovo Mining, is on target to increase annual production in Michael Abrahams CBE DL Chairman Ferrexpo plc 01 overview business review financial statements Production 4.6mt from own ore (First half 2011: 4.4mt) US$731m Revenue (First half 2011: US$855m) US$240m EBITDA 1 (First half 2011: US$401m) US$169m Profit before tax (First half 2011: US$352m) 3.3 Interim dividend in line with 2011 US cents per share US$70m Net cash flow from operating activities (First half 2011: US$324m) US$222m Capital investment (First half 2011: US$121m) 24.7 US cents per share Diluted EPS (First half 2011: 49.7 US cents per share) US$251m Net debt/(net funds position) (First half 2011: US$25m) 1 EBITDA the Group calculates EBITDA as profit from continuing operations before tax and finance plus depreciation and amortisation and non-recurring exceptional items included in other income and other expenses, and the net of gains and losses from disposal of investments, property, plant and equipment.

4 02 Ferrexpo at a Glance Reserves and Resources Ferrexpo produces iron ore pellets, which are a premium input used in steel production. Compared with iron ore fines and lump, pellets improve blast furnace productivity in the steel production process. 14.2bt GKZ Soviet Classified 6.8bt JORC Classified 4.0bt 2.8bt 1.5bt 0.3bt 1.2bt 3.6bt Brovarskoye Kharchenkovskoye Zarudenskoye Galeshchinskoye Yeristovskoye Gorishne-Plavninskoye and Lavrikovskoye 3.1bt Manuilovskoye 2.8bt Vasilievskoye 1.7bt Belanovskoye North South Future Expansion Current Production Gdantsev Succession quartzite, schist, fillite schist units Saksagan Succession BIF units Basement amphilobite granite, migmatite

5 Panoramic view of the Ferrexpo Poltava Mining pit and northern extension Ferrexpo plc 03 overview business review financial statements JORC Reserves and Resources as of 30 June 2012 Deposit Proved and probable (mt) Reserves Fe grade (total) % Measured and indicated (mt) Fe grade (total) % Resources Inferred (mt) Fe grade (total) % Gorishne-Plavninskoye and Lavrikovskoye , , Yeristovskoye Belanovskoye 3 1, Galeshchinskoye Total 1, , , Ferrexpo Poltava Mining ( FPM ). 2 Ferrexpo Yeristovo Mining ( FYM ). 3 Ferrexpo Belanovo Mining ( FBM ). 4 1,476mt of Reserves are included in the measured and indicated total. Strong Pipeline of Organic Growth Mining operations based in Komsomolsk, 20 kilometres from Kremenchug in central Ukraine, on the banks of the River Dnieper Total resources, including Soviet classified, more than 20 billion tonnes of 30% Fe average Deposits along same ore body with existing infrastructure Mining currently carried out at Gorishne-Plavninskoye and Lavrikovskoye deposits FPM operating for more than 30 years Funding in place for approved expansion First ore at FYM due late 2012 Low risk brownfield development offering superior returns Drilling works and site preparation under way at FBM

6 04 Ferrexpo at a Glance Operations and Distribution 1. Mining Ore 89 large haulage trucks 43 excavators 18 ore haulage trains Truck dump Truck dump Truck dump Truck dump 330m 330m 330m 330m Ore to crushing plant Ore to crushing plant Ore to crushing plant Open cut, hard rock iron ore mining, using truck and shovel. Average Fe content of 30%. 4. Beneficiation 50% 67%Fe 50% 63%Fe a. Grinding The ore is ground to produce fine particles of mm in size. b. Wet Magnetic Separation The fine ore particles are collected to produce 63% Fe concentrate, half of which goes to the pelletiser to produce 62% Fe iron ore pellets. c. Flotation Approximately 50% of the concentrate is upgraded to 67% Fe content, used to create 65% Fe iron ore pellets, with unwanted waste material removed to the tailings storage area. Transport and Logistics Rail links to European customers and to port on Black Sea Own river port at mine site for pellet transportation by barge Own rail wagons which transport two thirds of pellet production to border dispatch points Port on Black Sea (49% ownership, 100% of capacity) Ability to load Capesize vessels Own barges which transport pellets along the Danube/Rhine river corridor (capacity around 1.0mt) Netherlands Belgium Switzerland Germany LINZ Czech Republic Austria Poland Slovakia Hungary Serbia Belarus Ukraine Romania KIEV Moldova Russia FPM YUZHNY IZMAIL Bulgaria Turkey

7 hing plant Ore to crushing plant 2. Crushing The ore is crushed and screened to allow it to be upgraded through separation by two crushing plants. Input particle size: 0-1,200mm; output particle size: 0-20mm. 5. Pelletising 3. Dry Magnetic Separation Ferrexpo plc Dry magnetic separation separates waste material from the iron resulting in output particles of 0-20mm with a Fe content of 40%. 6. Distribution 05 overview business review financial statements Storage Storage Four kiln grate units which heat and form the materials into pellets of around 16mm. Temperature of pelletising kiln: 1,250ºC. Storage The iron ore pellets are transported by rail, barge and sea to customers around the world. Storage Well Located to Supply Regional and Seaborne Markets Closest major pellet producer to Europe 35 sailing days to China 16 sailing days to Middle East 53% 58% 5% 4% 42% 38% Half year sales volume by value Traditional markets Natural markets Growth markets Target markets Ferrexpo London office Marketing office Ferrexpo transportation routes Competitor routes

8 06 Chairman s and Chief Executive Officer s Review Left to right. Kostyantin Zhevago, Chief Executive Officer, Michael Abrahams, CBE DL, Chairman. Introduction Ferrexpo made a good start to 2012, in line with the Group s expectations against a backdrop of moderating iron ore prices. Operationally, the Group continues to perform well, with production from own ore 4% higher than 1H The Group continued its planned investment in its modernisation and expansion programme in the first half of 2012 and, with the expected additional output of ore from Ferrexpo Yeristovo Mining ( FYM ), is on target to increase annual production in FYM is in its fourth year of investment and has reached first ore in one area of the pit ahead of the start of commercial ore mining by the beginning of During 2013, the mine will ramp up output to five million tonnes of ore with an average Fe grade of around 32.2%. Initially, the crude ore will be used to substitute output from the Poltava mine in order to assess the ore s production characteristics and also potentially to enhance pellet production from the existing processing facilities. Results and Dividend Iron ore and other commodity prices have declined in 2012 in the face of global market conditions, which are being driven by adverse macro-economic factors. As a consequence, and against the background of a 20% fall in the market price for iron ore in 1H 2012, the average selling price achieved by Ferrexpo for its iron ore pellets decreased by 12%, owing partly to lower freight costs.

9 US$731m Revenues 1H 2012 US$240m EBITDA 1H 2012 In 1H 2012, Ferrexpo sold 4.5 million tonnes of pellets (1H 2011: 4.7 million tonnes), generating revenues of US$731 million. This is 14% lower than the record revenues of US$855 million achieved in 1H 2011 and reflects slightly lower 1H volumes and the lower market prices for iron ore. In 1H 2012, the Group s average C1 cash costs rose principally as a result of higher Ukraine energy tariffs, oil costs and domestic inflation. These increases continue to be driven by the high price of key inputs which, due to stock holdings, do not yet reflect the trend towards lower market prices. High Ukrainian producer price inflation contrasts with low local CPI figures, and the Ukrainian Hryvnia remained stable against a strengthening US Dollar in the first half of the year. These factors contributed to an increase in C1 cash costs to US$60.4 per tonne compared to US$48.2 per tonne for 1H 2011 and an average annual cost of US$50.7 per tonne for The recent fall in oil prices is expected to benefit the cost base in the second half of the year, as would any Ukrainian Hryvnia devaluation against the US Dollar. The combined factors of reduced selling prices and increased C1 cash costs led to lower EBITDA of US$240 million (1H 2011: US$401 million); Group profit after tax decreased by 50% to US$145.6 million (1H 2011: US$294 million). Operating cash flow after interest and tax was US$70 million (1H 2011: US$324 million). Capital expenditure amounted to US$222 million (1H 2011: US$121 million) (see Capital Investment on page 9). At the period end, Ferrexpo had gross debt and committed undrawn facilities of US$1,038 million, with an average maturity of 3.5 years and cash balances of US$716 million. The Group s policy is to pay a modest but consistent dividend throughout the economic cycle and return capital to shareholders when appropriate, while maintaining adequate liquidity to develop its significant project pipeline. The key projects, and increased working capital requirements resulting from an increase in the overdue VAT balances continue to absorb the cash from operations. The Directors recommend an interim dividend of 3.3 US cents per Ordinary Share for payment on 21 September 2012 to shareholders on the register at the close Ferrexpo plc 07 of business on 31 August The exdividend date will be 29 August The dividend will be paid in UK Pounds Sterling, with an election to receive US Dollars. Health and Safety The Group continues to improve its safety standards. In the first six months of the year, there were no fatalities and the lost-time injury rate fell to 0.55 per million man hours from 1.1 in 1H 2011 (FY 2011: 0.77). Principal Risks The principal risks facing Ferrexpo s business are discussed in the Risk section of this report. Given the structure of the business with operating assets in Ukraine, which is an emerging democracy, Ferrexpo considers that its interests may suffer if the domestic situation develops in ways that are unhelpful to business and discourage investment. This risk, however is one that is commonly faced by all mining companies in emerging markets and the Board believes that Ferrexpo has the expertise to manage it satisfactorily. The Group faces an ongoing legal claim over a shareholding in Ferrexpo Poltava Mining. The case has been running for more than six years in Ukraine, and the Directors believe it still has some way to run. The Board continues to receive legal advice that the case against Ferrexpo has little legal merit under Ukrainian law for legal, technical and practical reasons. Market Environment In 2011, iron ore prices reached near-record levels, driven by strong growth in steel production (especially in China, which saw an increase of 56 million tonnes of steel output) and by the continued delay in new iron ore projects bringing volume to the global market, before steel production fell back later in the year. The iron ore CFR China index price ranged from US$193 per tonne to US$117 per tonne in In 1H 2012, iron ore prices recovered from the October 2011 low point with the highest index price for China CFR fines in the first six months reported to be US$151 per tonne and the lowest price US$132 per tonne. Since 30 June 2012, the index price for iron ore has fallen further and was US$118 per tonne at the end of July due to continued negative economic sentiment in Europe and concerns around decelerating Chinese steel production. overview business review financial statements

10 08 Chairman s and Chief Executive Officer s Review continued US$222m Capital invested 1H 2012 US$1bn Long-term debt facilities There are a number of iron ore expansion projects, including Ferrexpo s own FYM, expected to deliver first ore over the next two to three years. It is Ferrexpo s view that additional lower-cost supply will compete with and gradually replace some of the high-cost Chinese iron ore production. As a low-cost producer of high-quality pellets, Ferrexpo is well positioned to meet this challenge. It has logistical advantages over most other international pellet producers and benefits from existing long-term relationships with its customers. So far this year, there has been a tempering of growth in global steel production, coupled with additional iron ore supply in the market. Even so, Ferrexpo has enjoyed solid demand for pellets at prices that are down only 12% as compared to a 20% fall in market prices in the same period. Although these dynamics will tend towards a moderation of iron ore prices for the remainder of the year, the Group s opinion is that continued growth in developing economies, delays in further new iron ore projects and the relatively high cost of production in China should underpin pricing. Customers Ferrexpo continues to develop its customer base to ensure that it has a portfolio of contracts with world-class customers. In 1H 2012 it made further progress towards achieving its primary marketing objectives, which are to: consolidate index-linked pricing to long-term customers, in line with the leading iron ore producers; capitalise on its geographic proximity to major steel markets by using its logistical advantages; and strengthen and diversify its customer base. In the first half, around 50% of Ferrexpo s products were delivered to customers by logistics systems under its own control, and the Group was able to mitigate the effect of the reduced market prices by achieving lower freight rates for seaborne markets and improving the performance of its own transport infrastructure. As a result it was able to enhance its realised prices compared to the movement in the international iron ore price index.

11 Removing overburden at Ferrexpo Yeristovo Mining using the new CAT 6060 shovel 09 overview business review financial statements Production In 1H 2012 Ferrexpo produced 4.7 million tonnes of pellets, (1H 2011: 4.8 million tonnes), of which 4.6 million tonnes were produced from own ore (1H 2011: 4.4 million tonnes). Of the output from own ore, 2.1 million tonnes of pellets were 65% Fe, in line with 1H The Group s objective is to produce 100% of its pellet output with a grade of 65% Fe by 2015, so as to maximise revenue and profitability. The growth projects designed to achieve this are progressing well and should be completed by the end of Costs The mining industry as a whole has faced rising costs as a result of increasing commodity prices, high demand for labour and other resources and strong local currencies, particularly those traditionally linked to commodities. As previously reported, in 1Q 2012 average C1 cash costs increased to US$59.4 per tonne which was 17% higher than the average C1 cash cost of production in This rate of increase moderated in the second quarter, as a result of which the average C1 cash cost of production for 1H 2012 was US$60.4 per tonne (1H 2011: US$48.2 per tonne). Of this increase, 44% can be attributed to energy costs. The Ukrainian Hryvnia has remained stable against the US Dollar during the period. The Group continues to manage its cost base through its Business Improvement Programme, which has been running for six years and has achieved cumulative cost savings of US$6.8 per tonne since implementation. Capital Investment The Kremenchug Magnetic Anomaly, across which Ferrexpo holds its exclusive licences, is one of the largest iron ore reserves in the world and comprises approximately 20 billion tonnes of resources with an average iron content of 30%. These are contained in a single 50 kilometre long strike divided into 10 deposits, of which three are currently being exploited: Gorishne- Plavninskoye and Lavrikovskoye ( FPM ) and Yeristovskoye ( FYM ). Ferrexpo continues to develop this large resource base to increase output so as to underpin future profit and earnings growth. Ferrexpo has four major growth projects under way, all of which are progressing well. These projects will expand production to 12 million tonnes per annum from early In 1H 2012 sustaining and modernisation capital expenditure at FPM was US$57 million which included US$7 million spent on the capacity upgrade project. A further US$19 million was invested in the quality upgrade and US$21 million in the mine life extension. At FYM US$65 million was spent on the development of the mine. In addition, during the period the Group invested a further US$33 million in logistics and infrastructure, mainly rail cars to reduce cost and improve reliability of delivery to customers, and US$27 million on developing other deposits. Each of the projects and other capital investments is reviewed in detail in the Review of Operations. Financial Management The Group has US$1,038 million of drawn and undrawn committed debt facilities, including a US$500 million Eurobond maturing in April 2016 and a five-year fully drawn US$420 million revolving debt facility expiring in August The Group has minimal debt repayments of around US$5 million for the remainder of 2012 and US$10 million for 2013.

12 10 Chairman s and Chief Executive Officer s Review continued 12mtpa Iron ore production in 2014 >9,000 People work for Ferrexpo The Group has also secured financing under various import and export credit guarantees, amounting to US$69 million, to fund the major expansion projects. Of these, US$64 million has been guaranteed by Export Import Bank of the United States and US$5 million by Hermes Kreditversicherungs-AG of Germany. There are currently projects under way which are expected to incorporate guarantees from other European and Asian credit agencies. Overall the Group is well funded and the new export credit guaranteed debt facilities have been obtained at favourable rates. At 30 June 2012, US$966 million had been drawn down and US$72 million remained undrawn. The Group held US$716 million in cash, compared with US$890 million at 31 December Of the Group s cash, US$614 million was placed with various international financial institutions with a minimum A credit rating, and US$102 million was held within Ukraine to fund immediate operational needs. Cash Flow The Group continues to manage its liquidity, applying cash generated from operations and from debt facilities to invest in projects to expand production. During 1H 2012, before working capital and expansionary capital expenditure, and after interest payments (net operating cash flow), the Group generated US$70 million of cash flow. Total investment in projects amounted to US$222 million. As at 30 June 2012, total Ukrainian VAT owed to the Group amounted to UAH1,850 million (US$231 million), including overdue VAT of US$103 million. Total Ukrainian VAT owed increased by US$60 million compared to December 2011; against which a provision of US$13 million has been made due to the late repayment and associated cost of finance incurred by the Group. Overall VAT contributed to an increase in net debt of US$171 million to US$251 million in the first half of The Group continues to work with the relevant authorities to resolve this position.

13 Ferrexpo has a fleet of 1,645 rail cars Ferrexpo plc 11 overview business review financial statements Strategy The Group s strategy is to continue to develop its large resource base to increase output and underpin future profit and earnings growth. In its 2011 Annual Report, the Group outlined its priorities for achieving sustained growth and long-term shareholder value and will continue to explore ways to enhance returns on investment. In the period under review Ferrexpo made good progress towards achieving this, through investment in the existing Poltava mine and in the Yeristovskoye deposit. The continuing fall in the accident rate reflects management s progress as it continues to improve safety across the Group. Work to increase the quality of production output at the existing operations continues. While external factors put costs under pressure, Ferrexpo is committed to being in the lowest quartile of the global pellet cost curve and to enhancing efficiency through its Business Improvement Programme. Customer service and reliability have been enhanced through the acquisition of 600 rail cars in 1H 2012 as well as further investment in the barge operations on the Danube. The port operation at Yuzhny on the Black Sea is working well and Ferrexpo will soon receive delivery of its own top-off vessel, which will reduce costs and expedite loading of Capesize vessels at Yuzhny. The Group is making good progress in developing its customer base, and in 1H 2012 shipped three trial deliveries to potential new customers in Natural and Growth markets. Ferrexpo s low balance sheet gearing and cash mean that it has sufficient resources to complete its growth projects, which will ensure long-term value generation for shareholders. Corporate Governance The Board is fully compliant with the UK Corporate Governance Code 2010 and remains committed to maintaining high standards of governance throughout the Group. People Ferrexpo employs over 9,000 people, the vast majority working at the Group s main operations in Ukraine. It also has logistics operations, marketing and administrative offices around the world, located close to its customer base. It is to the credit of Ferrexpo s employees that they have maintained Ferrexpo s position as a leading exporter of iron ore pellets through attention to operational excellence and dedication to the task at hand, during turbulent times. The Board would like to thank all of them for their personal contribution to Ferrexpo s success. Outlook The Group continues on track with its growth projects and is well placed to benefit from its significant investment over the past five years. While the market outlook has deteriorated recently and remains volatile, medium-term iron ore pricing should remain underpinned by growth in developing markets. In line with its stated strategy, Ferrexpo will continue to exploit its substantial reserves to create sustainable value for shareholders. Michael Abrahams CBE DL Chairman Kostyantin Zhevago Chief Executive Officer

14 12 Review of Operations 7bn Tonnes JORC classified resources 14.2bn Tonnes GKZ (FSU) classified resources Ferrexpo JORC resources: As of 30 June 2012 Proved & probable (mt) Reserves Resources 1 FE grade % Measured & indicated (mt) FE grade (total) % Inferred (mt) Gorishne-Plavninskoye & Lavrikovskoye , , Yeristovskoye Belanovskoye 1, Galeshchinskoye Total 1, , , Note: Five further deposits are estimated to contain resources of over 14.2bt according to the former Soviet Union ( FSU ) classification code. Ferrexpo is currently working together with international consultants to convert these resources to the universally accepted Australasian Joint Ore Reserves Committee ( JORC ) standards. These deposits are collectively known as the Northern Deposits and are classified under the names Manuilovskoye, Vasilievskoye, Kharchenkovskoye, Zarudenskoye and Brovarkovskoye. Total % 1 Resources include 1,476mt of reserves. Ferrexpo Poltava Mining ( FPM ) FPM (the Group s current operating asset) has been in operation for more than 30 years, producing around 9.2 million tonnes of iron ore pellets from own ore per annum, which is expected to grow to 12 million tonnes per annum once the Group s expansion plans are completed in The mining and processing division, consisting of crushing, concentrating and pelletising facilities, exploits the Gorishne- Plavninskoye and Lavrikovskoye ( GPL ) deposit. This is located immediately adjacent to Ferrexpo s rail and port facilities on the Dnieper River. The FPM mine is open cut. Following completion of the mine life extension project, the mine is expected to operate until around 2038.

15 CAT 793 trucks, the largest haul trucks working at Ferrexpo s mining operations Ferrexpo plc 13 overview business review financial statements The table below highlights FPM s production statistics. Production in tonnes 000 to to Change % Iron ore mined 14, , Concentrate produced ( WMS ) 5, , Pellets produced from own ore Higher grade average Fe content 65% 2, ,139.4 (0.3) Lower grade average Fe content 62% 2, , Total pellets 4, , Production/reprocessing from purchased raw materials Higher grade average Fe content 65% (81.5) Lower grade average Fe content 62% Total pellets (58.5) Higher grade average Fe content 65% 2, ,440.5 (10.3) Lower grade average Fe content 62% 2, , Total pellet production 4, ,784.9 (1.3) Pellet sales volume 4, ,739.0 (5.4) Gravel output 1, , Stripping volume 13, ,830.0 (1.3) FPM produced 4.6 million tonnes of pellets from own ore in the first half of the year (1H 2011: 4.4 million tonnes), an increase of 4%. Production of 65% Fe pellets from own ore remained constant at 2.1 million tonnes. The FPM mine is operating at full capacity, mining approximately 30 million tonnes of crude ore per annum. This is processed into around 9.2 million tonnes of iron ore pellets, depending on ore grade, with an average iron content of 63.5%. FPM s pelletising facility has an installed production capacity of around 12 million tonnes of pellets per annum. In order to use surplus pelletising capacity the Group will purchase, depending on availability and price, third party concentrate from which FPM produced 0.2 million tonnes of pellets in 1H 2012 (1H 2011: 0.4 million tonnes).

16 14 Review of Operations continued FPM produced 4.6 million tonnes of pellets from own ore in the first half of the year (1H 2011: 4.4 million tonnes), an increase of 3.8%. Production of 65% Fe pellets from own ore remained constant at 2.1 million tonnes. Other sustaining capital expenditure for 1H 2012 was US$50 million (1H 2011: US$56 million), which included new mining equipment and replacement plant. Development Capital Expenditure Quality Upgrade Project This project, which received Board approval at the end of 2010, will increase the iron content of all Ferrexpo s pellets to 65% Fe. The project involves the installation of vertical mills for further fine grinding of the ore (to increase the overall iron content in the Group s pellet output) as well as upgrades to the beneficiation plant, including the installation of new flotation cells thus recovering more iron ore and improving yield. The vertical mills have been ordered along with the flotation tanks and associated equipment. Eight out of the 10 vertical mills will be delivered in September 2012 with the final two to be delivered in FPM Business Improvement Programme ( BIP ) FPM is reducing costs through its BIP, which has created cumulative savings of US$6.8 per tonne in cash costs since 2005, principally by reducing the input of key raw materials and energy per unit of pellets produced, but also by reducing indirect costs. In 1H 2012, 38 projects were initiated, which will reduce costs by US$5.8 million on an annualised basis, in line with Ferrexpo s goal of 1% to 2% cost savings per annum. Projects in progress include: modernising the pit dewatering system, which will reduce power consumption; improving the truck maintenance programme, which will increase the availability of the fleet; modernising the explosives power-driven process which will reduce the consumption of explosives and improve the quality of blasting operations; and replacing the gas burner units in the rotary kilns, which will reduce power consumption and optimise the fuel burning process. FPM Capital Expenditure Sustaining Capital Expenditure Ferrexpo continues to invest in maintaining, modernising and upgrading FPM s mining and processing facilities to increase operating efficiency and reduce costs. In addition, there are a number of projects under way to upgrade FPM s facilities so as to establish a processing capability of 35 million tonnes of crude ore per annum. Following the completion of this programme, FPM will be able to process ore from the FYM mine to increase overall pellet output to a targeted 12 million tonnes in US$21 million has been spent to date on the upgrade of the processing facilities, including US$7 million so far this year (1H 2011: US$7 million). The engineering work started in 2010 has to date involved the modernisation of certain ore beneficiation sections to increase processing output, reduce energy consumption and significantly improve process control. This is a rolling programme which will be ext to cover the majority of the iron ore beneficiation sections by 2014 when it is planned that the increased capacity will be achieved. The project is on schedule for commissioning by the end of To date US$22 million has been spent on this project, including US$19 million in 1H 2012 (1H 2011: US$1 million). Total outstanding commitments at the half year end in respect of this project are US$51 million. Mine Life Extension The FPM open pit mine has been in operation since 1977 and contains ore beyond the original planned pit limits and depths. The mine life extension project involves new mining works to access additional iron-rich ore by 2014 and to extend the mine life to The project began in 2011 and is scheduled to be completed by the end of Expenditure to date is US$61 million, including US$21 million in 1H In 1H 2012 approximately 7 million cubic metres (1H 2011: 7 million cubic metres) of overburden were removed in line with budget.

17 The US Ambassador to Ukraine, John Tefft (third from left) visits Ferrexpo Yeristovo Mining 15 overview business review financial statements 4.6mt Own ore pellet production 1H mtpa Annual target following completion of expansion programme in 2014 Ferrexpo Yeristovo Mining ( FYM ) Development Capital Expenditure Phase 1 Crude Ore In 1H 2012, first ore at FYM was reached and 37 million cubic metres of overburden was removed, some 87% of the total. Commercial production is expected to start in Under the current plan, the mine will initially deliver primary crushed ore to the FPM processing facilities, enabling FPM to use its free processing capacity and increase production to 12 million tonnes per annum in New equipment due to arrive on site at FYM in 2012 include a CAT grader, a CAT 944 front end loader, the largest of its kind in Ukraine, and FYM s first large blast drill. In May 2012 a new CAT 6060 shovel and five more CAT 793 haul trucks went into operation. The shovel is the first and largest of its kind to be in operation at the Ferrexpo sites and can excavate 15 million tonnes of material per year. The works on the permanent mine infrastructure are progressing to plan, with the truck wash building complete and further buildings in the course of construction. Capital expenditure for the period was US$65 million (1H 2011: US$31 million). Phase 2 Concentrator Facility FYM s development plans involve building a new concentrator facility in order to process the additional crude ore from the FYM mine which, once fully operational, is expected to produce approximately 28 million tonnes of ore per annum. FYM is finalising detailed engineering design for the concentrator, following international best practice, in compliance with local design institute requirements. The Board will consider the plans later in the year. Phase 3 Pelletising Facility In line with Ferrexpo s strategy and depending on market conditions, the third phase of the project will be initiated to construct a 10 million tonne per annum pelletiser. This will be built in the most economically favourable location. Ferrexpo Belanovo Mining ( FBM ) The Belanovskoye deposit has total JORC resources of 1,702 million tonnes. Drilling works and site preparation activities continue. During the period the Group spent US$27 million (1H 2011: US$1 million) for access and infrastructure. A new CAT RH340 hydraulic face shovel and five CAT 793 haul trucks have been ordered and are scheduled for delivery in 2H 2012 in order to begin stripping works. This equipment is similar to that used at FPM and FYM.

18 16 Review of Operations continued Health and Safety The Board s Corporate Safety and Social Responsibility Committee monitors the management of the Group s health, safety, environmental and community programmes on a regular basis, in line with industry wide best practice for mining companies. Safety is fundamental to Ferrexpo s success and integral to its culture. Ferrexpo is pleased to report that the lost-time injury rate has declined by 50% compared to the first half of 2011, to 0.55 per million man hours worked. Marketing Iron Ore Pricing Following the trend of other mature traded commodities and asset classes, iron ore pricing is evolving as mechanisms are growing more sophisticated. The first iron ore trading platforms are now operational, backed by major Chinese steel makers and the major iron ore producers. In 1H 2012, Ferrexpo developed its markets, customer relationships and pricing mechanisms moving its contract pricing further towards index-linked and spot pricing. As a result of this, in 1H 2012 only 40% of its sales volumes were priced under the old quarterly negotiated fixed price contracts as compared to 74% in 1H The Group is working with its customers to move further towards indexlinked pricing in line with the international market, but in the interim, periodic negotiations continue with contracts that remain under the old pricing basis using international pricing trends as a guide. Market Segments Ferrexpo has identified three core market segments: Traditional 1, Natural 2 and Growth 3 markets. As its production capacity expands, the Group expects that sales to its Traditional markets will remain constant at around five million tonnes per annum. This is despite expectations of lower economic growth and subdued steel output in these markets. In anticipation of such limitations in Traditional markets, in , Ferrexpo increased its sales volumes to Growth markets and substantially reduced its exposure to the Serbian steel market. Volume sold on spot basis has risen during the transition to increase diversification and index pricing, however, this should return to target levels with the signing of new longterm contracts over the next 12 months. Ferrexpo s sales volumes to its Natural and Growth markets remain robust, and it has secured two new long-term contracts in China and Turkey. As production volumes increase, the Group expects to see further growth in these markets. As a result of this customer diversification, in 1H 2012, some 53% of sales volume (1H 2011: 61%) were to Traditional, 7% to Natural (1H 2011: 3%) and 40% to Growth (1H 2011: 36%) markets. Logistics Ferrexpo is located centrally in Ukraine on both rail and river networks and continues to build its logistics infrastructure, comprising rail cars, river barges and port facilities on the Black Sea. This will enable it to deliver its products reliably throughout the world. It is Ferrexpo s strategy to develop its logistics capabilities where appropriate either through ownership of assets or through longer-term contracts with reliable counterparties. A review of the main logistics activities for 1H 2012 is below: Rail Transportation Ferrexpo transports the vast majority of its products to the Ukrainian border by rail, and has in recent years ext its own fleet of rail cars with the aim of becoming self-sufficient at times of high demand. Ferrexpo currently owns 1,645 rail cars and has placed orders to bring its total fleet to 1,933 units. Following shareholder approval obtained at the 2012 Annual General Meeting, Ferrexpo has an option to purchase up to a further 500 rail cars from its historic supplier, an option which has not yet been exercised. In 1H 2012 Ferrexpo transported a total of 3,107 thousand tonnes of product to various destinations using own rail cars, including 126 thousand tonnes of third party concentrate and supplies for the production process. The number of rail cars ultimately needed to achieve self-sufficiency will depend on the level of peak monthly shipments, the mix of destinations and the amount of other materials transported (such as third party concentrate). Ferrexpo aims to balance these requirements as it increases its rail fleet in order to ensure an optimum balance between the size of the fleet and transport capability and capital employed. At present, a quarter of the Group s pellets are transported by rail to the western Ukrainian border for customers in Central and Western Europe. The remaining pellets are transported by rail or barge to the Group s port terminal in Yuzhny on the Black Sea, from where the product is shipped to overseas markets around the world. 1 Traditional markets: these lie within Central and Eastern Europe and include steel plants that were designed to use Ferrexpo pellets. Ferrexpo has been supplying some of these customers for more than 20 years. Ferrexpo has well-established logistics routes and infrastructure to these markets by both river barge and rail. These markets include Austria, Czech Republic, Hungary, Serbia and Slovakia. 2 Natural markets: these include Turkey, the Middle East and Western Europe and are those markets where Ferrexpo has a competitive advantage over more distant producers, but where market share remains relatively low. 3 Growth markets: these are predominantly in Asia and have the potential to deliver new and significant sales volumes to the Group.

19 1,645 Rail cars in operation 3.1mt Product transported by own rail operations River Barging Ferrexpo is able to deliver product to the port of Reni and Izmail by barge along the River Dnieper which is adjacent to the processing facility and in 1H 2012 shipped 150 thousand tonnes of product in this way to the Ukrainian border. Following transhipment these pellets can be transported via the Danube into Central and Western Europe using its whollyowned barging company. In 1H 2012 this subsidiary transported 477 thousand tonnes of pellets to customers along the Danube either directly from Ukrainian river ports or via Constanza in Romania. It operated profitably in the first half of the year. Logistics Capital Investment In 1H 2012, Ferrexpo invested US$33 million in its logistics infrastructure (1H 2011: US$12 million), of which US$25 million was invested in its rail car fleet and US$2 million in its barging operations. Port Activities Ferrexpo owns 49% of the TIS Ruda port at Yuzhny on the Black Sea and has a guaranteed capacity at this terminal of five million tonnes per annum. In 1H 2012, the Group loaded eight Capesize vessels compared to nine for the full year It is benefiting from the low freight rates achieved last year and expects to see further freight cost reductions in the second half of Ferrexpo plc 17 Ferrexpo has invested US$6.3 million in the first half of the year in a top-loading vessel, which is expected to come in to operation in the fourth quarter. This will enable Ferrexpo to load Capesize vessels using its own facilities further reducing shipping costs. In 1H 2012, the proportion of sales controlled by Ferrexpo along the supply chain, including sales on CFR or similar basis and pellets transported using its own barges on the Danube, was 50% of sales (50% in 1H 2011). overview business review financial statements

20 18 Financial Review Summary Financial Results US$ million unless otherwise stated to to Change Revenue (15%) EBITDA (40%) As % of revenue 33% 47% Profit before taxation (52%) Income tax (23.7) (58.1) (59%) Profit for the period (50%) Diluted earnings per share (US cents) (50%) Final dividend per share (US cents) The Group calculates EBITDA as profit from continuing operations before tax and finance plus depreciation and amortisation and non-recurring exceptional items included in other income and other expenses, and the net of gains and losses from disposal of investments, property, plant and equipment. The Group maintained sales levels to customers in its Growth markets, which accounted for 42% of sales volumes as compared to 38% for the same period in Revenue Total revenue decreased by 15% to US$731.3 million for 1H 2012 (1H 2011: US$854.9 million) as a result of lower prices and marginally lower sales volumes of 4.5 million tonnes compared to 4.7 million tonnes in 1H The average realised price achieved by the Group for its pellets fell by 12% during the period, reflecting the 20% decrease in international prices offset partly by lower freight rates to seaborne markets and improved performance of logistics infrastucture. Revenue from other sales amounted to US$45.7 million (1H 2011: US$43.5 million). This included revenue from third party services, such as bunker fuel sales, at the Group s barging operations (acquired in December 2010) as well as sales of gravel. Cost of Sales Total cost of sales for 1H 2012 including purchased third party concentrate increased 7% to US$323.3 million (1H 2011: US$302.1 million). Cost of sales includes the C1 cash cost of production from own ore which is analysed in the table on page 19.

21 One of FPM s four rotating kilns Ferrexpo plc 19 overview business review financial statements C1 Cash Costs to to US$ million unless otherwise stated US$m % of total US$m % of total Electricity Gas Fuel Grinding media Explosives Other materials Spare parts, maintenance and consumables Personnel costs Royalties and levies C1 cost of sales C1 cost per tonne C1 costs increased by 25% to US$60.4 per tonne compared to the same period in 2011, principally as a result of higher Ukraine energy tariffs and domestic inflation. In the first half of 2012, gas and electricity prices were 43% and 21% higher respectively than in 1H The cost of diesel fuel was 9% higher. Personnel, repair and maintenance, and costs of other materials were affected by local CPI inflation. These expenses are principally denominated in local currency. On average Ukrainian producer price inflation was approximately 7% in 1H Over half the C1 cash costs are denominated in Ukrainian Hryvnia, which remained broadly stable in the first half of 2012, compared to 1H 2011, at around UAH8.0 to the US Dollar. In 1Q 2012 average C1 cash costs increased to US$59.4 per tonne which was 17% higher than the average C1 cash cost of production in This rate of increase moderated in the second quarter and it is expected that the Group will benefit from the recent fall in oil prices in the second half of the year, as would any Ukrainian Hryvnia devaluation against the US Dollar. 1 Average of January to June 2012 compared with average January to June 2011.

22 20 Financial Review continued US$1.5bn Shareholders equity US$716m Cash and cash equivalents Non-C1 Cost of Sales Other cost of sales amounted to US$47.5 million for the period (1H 2011: US$90.3 million), the reduction resulting from lower tonnages of purchased concentrate. Gross Margin As a result of the factors discussed above, the Group s gross margin was 56% in 1H 2012, down from 65%. Selling and Distribution Expenses Selling and distribution expenses were US$155.0 million for the first half compared to US$146.2 million in 1H Selling and distribution costs to the Ukrainian border increased by US$8.3 million to US$73.9 million in the period (1H 2011: US$65.5 million), equating to US$16.5 per tonne (1H 2011: US$13.8 per tonne). These costs primarily include railway freight to the southern ports at Yuzhny and Izmail and to the western Ukrainian border as well as port charges. Tariffs for the provision of rail cars increased on average by 35% as compared to 1H 2011, this was partially offset by a discount for volumes transported using the Group s own rail cars which amounted to US$3.9 million. Beyond the Ukrainian border, international freight costs amounted to US$56.0 million (1H 2011: US$53.3 million). These costs relate to the shipping of pellets by ocean vessel to customers in Asia (on a CIF 1 or CFR 2 basis), and by barge to customers in Serbia (on a DAP 3 basis). During 1H 2012, Ferrexpo loaded eight Capesize vessels compared to nine for the full year 2011, benefiting from lower freight rates as compared to Panamax vessels. EBITDA EBITDA decreased by 40% to US$240.3 million for the year compared to US$400.7 million for 1H The decrease was mainly due to a reduction in the DAP/FOB sales price along with increased costs. The EBITDA margin was 33% (1H 2011: 47%). 1 CIF is defined as delivery including cost, insurance and freight. 2 CFR is defined as delivery including cost and freight. 3 DAP is defined as delivery at place. Finance Income and Expense Finance income was US$1.4 million (1H 2011: US$1.4 million). Income from interest earned was US$1.4 million (1H 2011: US$1.1 million). This was due to higher average cash balances in 2012 of US$803.0 million compared to US$632.3 million in 1H Finance expenses increased to US$46.1 million (1H 2011: US$35.1 million) due to a provision of US$13.2 million recorded against the outstanding Ukrainian VAT balance. This reflects the estimated time value of money on the outstanding balance, which may not be recovered within one year of the period end. The charges on the Group s finance facilities decreased by US$2.2 million. The average gross debt for the period was US$968.6 million (1H 2011: US$643.3 million). Foreign Exchange Gains and Losses During the period, the Ukrainian Hryvnia was broadly stable against the US Dollar, recording an average rate of UAH7.988 (1H 2011: UAH7.958). As a result, minimal operating foreign exchange losses US$0.5 million were recorded (1H 2011: loss of US$0.6 million). Non-operating foreign exchange gains for the period were US$0.3 million compared to a US$5.4 million gain in 1H Income Tax Expense Profit before tax was US$169.3 million for 1H 2012 compared with US$352.0 million for 1H The effective income tax rate for the period was 14% compared with 17% for the equivalent period in The decrease in the tax rate in 1H 2012 resulted from a change in the mix of profits arising in the various jurisdictions in which the Group operates. Group Liquidity and Debt The Group is securely financed, with gross debt and committed undrawn facilities of US$1,038.4 million, representing 68% of shareholders equity. Of this amount US$500 million is a five-year Eurobond maturing in 2016 and US$420 million is represented by a revolving pre-export finance facility, available for 60 months including a straight line amortisation over the final 24 months. The maturity date is 31 August 2016.

23 One of FPM s new Atlas Copco drilling rigs working in the GPL open pit Ferrexpo plc 21 overview business review financial statements Summary of Group Liquidity and Debt US$ million to to Cash and cash equivalents Gross debt (Net debt)/net funds position (250.5) 25.3 Total equity 1, ,133.7 Undrawn facilities Total liquidity (facilities plus cash) In 1H 2012 US$26.6 million was spent on the Belanovskoye and other deposits (1H 2011: US$1.2 million). This was for new mining equipment, drilling works and site preparation activities. Capital investment in logistics was US$31.0 million in 1H 2012 (1H 2011: US$8.1 million), which was primarily related to the acquisition of rail cars. Tied financing has become an increasingly important part of the funding structure of the Group, and Ferrexpo is working together with Export Credit Agencies around the world to fund its development projects. These facilities are typically at competitive rates and of long tenor. This allows the funding which is already in place to be preserved adding financial flexibility. As at 30 June 2012, a total of US$82.5 million had been raised under these government-backed schemes with more in progress. This has proved a successful way to raise finance while preserving Group headroom, and will continue to be used by the Group in future. As at 30 June 2012, gross facilities of US$1,038.4 million included US$966.4 million that had been drawn and cash in hand amounting to US$715.9 million. The net debt of the Group was US$250.5 million. Cash Flows Net cash flow from operating activities was US$69.7 million (1H 2011: US$324.2 million). Working capital increased by US$63.1 million, reflecting a higher VAT receivable balance in Ukraine. Total capital investment for 1H 2012 was US$222.0 million compared to US$120.6 million for 1H Sustaining and modernisation capital investment was US$59.6 million (1H 2011: US$59.9 million) for the Group, of which US$57.4 million was invested at FPM (1H 2011: US$56.6 million). The remaining US$2.1 million was invested in the Group s barge fleet. A further US$39.7 million (1H 2011: US$20.4 million) was invested in FPM s development projects and capital expenditure at FYM was US$65.1 million (1H 2011: US$31.0 million). VAT In 1H 2012, the amount of VAT, net of provision, owed to the Group increased by US$49.8 million mainly due to a delay in repayment by the Ukraine tax authorities of outstanding amounts from 2010, 2011 and As a result, although the majority of this VAT is immediately due, it is expected that a large proportion will only be recovered after a significant delay. Therefore, in accordance with accounting standards, a provision of US$13.2 million has been made to reflect the financing costs associated with recovery after one year. Costs associated with late recovery within the year have not been provided for. Overall, it is estimated that US$79.8 million of the Ukrainian VAT owed, net of this provision, will remain outstanding more than one year after the reporting date. Management expects the full gross balance in local currency to be recovered in due course. Full details on Ukrainian VAT receivable are disclosed in note 12 to the accounts.