FERREXPO plc ( Ferrexpo or the Group ) 2014 Interim Results

Transcription

1 6 August 2014 FERREXPO plc ( Ferrexpo or the Group ) 2014 Interim Results Ferrexpo, the FTSE 250 iron ore pellet producer, today announces its interim results for the six months ended 30 June Michael Abrahams, Non-Executive Chairman, said: The Board would like to express their deepest sympathy for those who have been affected by the conflict in the east of Ukraine. The Group s facilities are located in the Poltava region which is in the centre of the country, 313 kilometres south of Kyiv and 425 kilometres north of Donetsk. To date, Ferrexpo s operations have not been directly impacted by the unrest in the east and Ferrexpo s solid operational performance and strong export sales during the period were able to provide the country with much needed revenue and tax income. Operating costs were reduced during the period through production efficiencies as well as from the devaluation of the Hryvnia against the US dollar. The reduction in costs, however, could be offset in the future by inflation. The Hryvnia devaluation has also resulted in a significant write down of the outstanding US dollar balance of VAT and prepaid corporate profit tax. The Group remains on track to increase its pellet volume to 12 million tonnes and to upgrade the iron content of all of its pellet production to 65% Fe. Further growth in its production volumes and quality will depend on its ability to fund capital expenditure from its own cash flows. We are deeply grateful to all of our colleagues in Ukraine for their dedication and commitment to the Company during this difficult period. 1H 2014 Financial Highlights: US$ million (unless otherwise stated) Change Year ended Total pellet production (kt) 5,369 5,246 2% 10,813 Sales volumes (kt) 5,498 5,324 3% 10,689 Revenue (2%) 1,581 EBITDA % 506 Profit before tax % 305 Diluted EPS (US cents per share) % Dividend (US cents per share) Working capital (59) (67) 12% (103) Net cash flow from operating activities % 233 Capital investment (10%) 278 Net debt (694) (566) 23% (639) Net debt to EBITDA 1.2x 1.4x - 1.3x 1 This amount includes a special dividend of 6.6 US cents per share. 1

2 1H 2014 Summary: Most regrettably there was a contractor fatality during the period at the Group s operations. The health and safety of all personnel at the Group s operations is vital to the success of the business and a full investigation is being conducted to prevent future work related injuries and fatalities. 2% growth in production volumes whilst completing a major maintenance and upgrade programme. Strong customer demand, sales volumes increased by 3% to 5.5 million tonnes. Higher pellet premiums and an improved marketing performance partly offset a lower iron ore benchmark price. Ferrexpo s net realised FOB price declined by 9% compared to a 19% decline in the iron ore fines benchmark price. 23% decline in the cash cost of production to US$47.8/t due to: o Positive contribution from FYM ore and production efficiencies which reduced costs by US$6.80/t o An average 29% decline in UAH vs. US$ 1H 2014 vs. 1H 2013 reduced costs by US$7.2/t EBITDA increased by 32% to US$321 million (1H 2013: US$244 million) including a US$47 million non-cash benefit from the revaluation of US dollar denominated receivables at the Group s Ukrainian subsidiaries. The Group s VAT balance as of 30 June 2014 reduced to US$185 million reflecting a US$103 million loss due to the Hryvnia devaluation and a US$30 million anticipated discount to face value for VAT bonds (31 December 2013: US$261 million). VAT refunds during 1H 2014 were on time but required the prepayment of corporate profit tax (CPT). The balance of pre-paid CPT as of 30 June 2014 was US$89 million which was after a US$36 million cash loss was recorded due to the Hryvnia devaluation. After period end, Ferrexpo received VAT bonds worth US$115 million reflecting an approximate 22% discount to face value (exchange rate as of 2 July). Cash flow from operations increased by 66% reflecting higher volumes and lower costs. Group remains on track to achieve an annualised production rate of 12 million tonnes per annum in 2H 2014 Net debt to EBITDA ratio of 1.2x. There will be an analyst and investor meeting at (UK time) today at the offices of JP Morgan on 60 Victoria Embankment, London EC4Y 0JP. A live video webcast and slide presentation of this event will be available on It is recommended that participants register at The presentation will be hosted by Michael Abrahams (Chairman), Kostyantin Zhevago (CEO) and Chris Mawe (CFO). Webcast link: Webcast access on mobile devices: For access to the live and on demand webcast from any IOS Apple or Android mobile devices. 2

3 For further information contact: Ferrexpo: Ingrid McMahon Maitland: Peter Ogden Liz Morley Notes to Editors: Ferrexpo is a Swiss headquartered iron ore company with assets in Ukraine. It has been mining, processing and selling high quality iron ore pellets to the global steel industry for over 35 years. Ferrexpo s resource base is one of the largest iron ore deposits in the world. The Group is the 5 th largest supplier of pellets to the global steel industry and the largest exporter of pellets from the CIS. In 2013, it produced 10.8 million tonnes of pellets, a 12% increase compared to Ferrexpo has a diversified customer base supplying steel mills in Austria, Slovakia, the Czech Republic, Germany and other European states, as well as in China, India, Japan, Taiwan and South Korea. Ferrexpo is listed on the main market of the London Stock Exchange under the ticker FXPO. For further information, please visit 3

4 REVIEW OF 1H 2014 Ferrexpo has had a good operational start to 2014 achieving a 2% increase in pellet production to 5.4 million tonnes compared to 1H 2013, whilst continuing to complete a major refurbishment and upgrade programme of its production facilities. Its cost of production decreased by 23% compared to 1H 2013 due to improvements in efficiency and higher output as well as a devaluation in the Group s operating currency. The Group sold 5.5 million tonnes of pellets, an increase of 3% compared to 1H These factors, together with a US$47 million one-off non-cash currency gain, helped drive a 32% increase in EBITDA to US$321 million (1H 2013: US$244 million). Notably, this progress was achieved in a sharply lower iron ore price environment where the benchmark iron ore price index declined by 31% since the start of the year, while the Group s country of operation, Ukraine, witnessed historic political change. To date, Ferrexpo s operations have not been directly impacted by events in Ukraine. Ferrexpo believes that its resilient financial results in 1H 2014 are, in part, testimony to the Group s strategy to reduce risk where possible. The Group produces a high quality product, which trades at a premium to benchmark iron ore fines, at a competitive cost that is exported to a first class customer base located in Europe and Asia. It receives all its revenue in US dollars, it has an established and reliable logistics network, and its operations are well invested following many years of prudent investment. Lastly the Company maintains a strong balance sheet with sufficient liquidity bearing in mind that it operates in a volatile commodity market and that its mining operations are based in a single location. Market environment and Pricing The World Steel Association reported that global crude steel production grew 3% in 1H 2014 compared to 1H 2013 to 821 million tonnes. Of this, 412 million tonnes were produced in China representing 6% growth in Chinese steel production, while Japan and Germany, key growth markets for the Group, showed steel production increases of 1% and 4% respectively. During the same period, the Platts benchmark price for 62% Fe iron ore fines declined by 19% to US$111 per tonne compared to an average price of US$137 per tonne in 1H 2013 (FY 2013: US$135 per tonne), reflecting increased supply from the four largest producers without any significant weather related supply disruptions. Iron ore production from key Australia producers increased by 20% to 310 million tonnes while production from Vale, the world s largest iron ore producer, increased by 10% to 151 million tonnes in the first half of compared to the same period in The premium paid for iron ore pellets in the key markets of Western Europe and North East Asia increased significantly from US$28 per tonne in calendar year 2013 to US$38 per tonne in calendar year 2014 (pellet premiums in these markets are agreed on an annual basis). While on the Chinese spot market pellet premiums also increased from US$18 per tonne in 1H 2013 to US$29 per tonne in 1H 2014 which (2H 2013: US$24 per tonne). The increase generally reflects the structure of the pellet market and continued demand from steel mills for higher grade product. As a result, Ferrexpo s net realised FOB/DAP 3 pellet price for the period declined by 9% compared to 1H 2013 which outperformed the 19% decline in the benchmark 62% Fe fines price for the same period. Marketing In 1H 2014, Ferrexpo sold 5.5 million tonnes of iron ore pellets compared to 5.3 million tonnes in 1H 2013, a 3% increase. Demand from the Group s customers was strong throughout the period with long term contracts performing at or above base volume levels. 2 Source: Production data announced by BHP Billiton, Rio Tinto, Fortescue, Atlas Iron, Vale 3 Free on Board, i.e. pellets delivered to port for seaborne export. Delivered at point, i.e. pellets deliver to the Western boarder for export to Europe. 4

5 The table below shows the breakdown of sales by key market regions Eastern and Central Europe 50% 48% China 23% 29% North East Asia 10% 4% Western Europe 10% 4% Turkey 7% 15% Total sales volume (million tonnes) 5,498 5,324 The Group s fastest growing markets were Germany and Japan, where sales volumes increased by 123% and 133% respectively as the marketing team continued to execute its strategy of diversifying into premium markets. As a result, sales to China reduced by 19% reflecting increased sales to Western Europe and North East Asia. In 1H 2014, 93% of sales were priced on an index basis compared to 46% in 1H 2013, with all of the Group s contracts priced on a standard industry basis. Ferrexpo maintained its ocean freight costs to the Far East in line with the benchmark C3 (Tubarao/Qingdao) freight rate, enabling the Group to supply pellets on a globally competitive basis. The Group s long term contracts and spot sales are priced according to various reference periods. The table below shows the breakdown of sales by contract type Monthly index 81% 25% Spot fixed 7% 8% Current quarter index 6% 19% Lagging 3 month index 6% 2% Quarterly negotiated 0% 46% Total sales volume % index linked 93% 45% Production In 1H 2014, total pellet production increased 2% to 5.4 million tonnes compared to 1H Production of premium 65% Fe pellets increased 13% to 2.6 million tonnes. During the period, the total amount of mined ore sent to the crushing plant reduced by 4% to 14.7 million tonnes, while the final output of pellets produced, from own ore, increased by 3% to 5.2 million tonnes. The increase in efficiency and output was due to the replacement of FPM s leaner ore with higher grade FYM ore as well as productivity improvements from the ongoing modernisation of the beneficiation plants. Pellet output from FYM ore increased by 81% to 1.6 million tonnes (1H 2013: 0.9 million tonnes). To increase output and minimise overall cost, FPM has focused on processing the higher grade portion of its ore together with the ore from FYM. During 2Q 2014 FPM completed a major planned refurbishment of pellet line number 3. This was a significant achievement for the operations as it was the first time a maintenance programme of such scale had been undertaken and it was completed without disrupting production of the remaining three pellet lines. The Group intends to refurbish pellet line number 4 in

6 Following the successful completion of the refurbishment of pellet line number 3 in 1H 2014, the Group remains on track to achieve an annualised production rate of 12 million tonnes per annum in 2H The following table shows the pellet production statistics for the period: Production in tonnes % change Pellets from FPM ore 3, ,226.1 (13.4) 62% Fe 1, ,220.1 (10.2) 65% Fe 1, ,006.1 (17.0) Pellets from FYM ore 1, % Fe % Fe Total pellet production from own ore 5, , % Fe 2, ,855.7 (4.0) 65% Fe 2, , Pellet production from third party materials (3.2) 62% Fe (100.0) 65% Fe Total pellet production 5, , % Fe 2, ,921.4 (6.1) 65% Fe 2, , Production Costs The Group s average C1 cost reduced by 23% to US$47.8 per tonne in 1H 2014 compared to US$61.8 per tonne in 1H 2013 and by 20% when compared to US$59.8 per tonne for FY The decline was driven by increased volume output and efficiency improvements as well as a depreciation of the Hryvnia. In constant currency terms, the average C1 cost in 1H 2014 declined by 11% to US$55.0 per tonne compared to US$61.8 per tonne in 1H The decline of US$6.8 per tonne reflects the positive contribution from FYM ore, following the ramp up of mining activities in 1H 2013, as well as the better absorption of fixed costs due to higher volume output. The average exchange rate of the UAH to the US dollar in 1H 2014 was compared to 7.99 in 1H The higher rate in 1H 2014 reduced the C1 cost by US$7.2 per tonne as approximately 55% of the Group s cost to produce a pellet is in Hryvnia. Cost inflation for the period was principally driven by an 8% increase in electricity tariffs. On 31 July, the Ukrainian parliament adopted a series of measures aimed at boosting budget revenues. This included an 8% royalty on iron ore and 1.5% tax on salaries. These measures are expected to expire at the end of These factors may impact the C1 cost of production but the Group hopes to at least partially offset them through higher volumes and production efficiencies. Ferrexpo is currently seeking clarification from the Ukrainian tax office regarding the method of calculation. 6

7 Ferrexpo is a low cost pellet producer and is competitively placed on the global benchmark cost curve for 62% Fe iron ore fines after adjusting for different types of iron ore product, including premiums or discounts received relative to the benchmark price. This allows the Group to remain profitable even in times of low iron ore prices. Capital investments In 1H 2014 the Group invested a total of US$132 million (1H 2013: US$147 million) of which US$40 million was for sustaining capex (1H 2013: US$39 million) and US$92 million (1H 2013: US$108 million) related to development capex. The Group is nearing completion of its US$650 million investment programme to grow its pellet output to 12 million tonnes per annum and to increase the average quality of its pellets to 65% Fe. Capacity upgrade project (included as part of sustaining capex) The capacity upgrade project remains on schedule and budget to increase production during 2H 2014 to its target run rate of 12 million tonnes of pellets per annum. This involves the modernisation of plant equipment and the reduction of bottlenecks at FPM s production facilities. In 1H 2014 the Group spent US$40 million compared to US$39 million in 1H The project is expected to be completed by the end of Thereafter, maintenance and modernisation activities will be reported as part of sustaining capex. During the period, FPM modernised two sections of the beneficiation plant, installed a high-speed Eirich mixer and replaced a third of the kiln on pelletising line number 3. Planned activities in 2H 2014 include the upgrade of two further grinding sections and completion of the engineering design for a new grinding section. Quality upgrade project Ferrexpo remains on schedule and budget to achieve its target of increasing the iron content of its pellet product to 65% Fe for all pellet production by the end of Currently approximately half of the Group s pellet output has a Fe content of 65% with the remainder containing 62% Fe. In this respect, the Group spent US$27 million on upgrading its processing capability in 1H 2014 (1H 2013: US$14 million). Work completed during the period included the commissioning of flotation section 2. The Group now has two units in operation which allows for more concentrate to be floated thereby increasing the amount of 65% Fe pellets that can be produced. In the past, the limited flotation capacity has restricted FPM s ability to increase 65% Fe pellet production. Planned activities in 2H 2014 include commissioning of flotation section 3, upgrading of flotation section 1, completion of the engineering design for a new press filtration plant and commissioning of the slurry-pumping station number 3 and pipelines for tailings transportation to the storage facilities. The commissioning of flotation section 3 will allow FPM to process tailings from sections 1 and 2 thereby increasing total concentrate volumes. 65% Fe pellets are regarded as a premium pellet product in the industry as they contain lower levels of silica compared to a 62% Fe pellet. The lower the silica the less slag that is created in a blast furnace thereby increasing the steel mill s productivity. By increasing its supply of 65% Fe pellets the Group will be able to target new premium customers. 7

8 FYM capital project During the period, the FYM spent US$43 million (1H 2013: US$51 million) on capital projects. This included ongoing pit development as per the mine plan, completion of associated mine infrastructure as well as the commencement of foundation piling for the crushing area of the concentrator. In terms of developing FYM s capability to process its own ore, it is the Board's intention to continue to authorise expenditure for a 10 million tonne per annum concentrator in stages, in line with the Company s ability to finance the project. Previously, US$35 million had been approved for a detailed design study and preparatory ground and construction works. In addition, the Board has now authorised US$40 million for payment during 2H 2014 for long lead items including high-pressure grinding rollers. Financial management Ferrexpo s financial position reflects its strategy of maintaining prudent balance sheet metrics and ensuring sufficient liquidity given that it operates in a volatile commodity market and produces from a single location. Ferrexpo s net debt to EBITDA as of 30 June 2014 was 1.2x (31 December 2013: 1.3x; 1H 2013:1.4x) comfortably below its maintenance covenants of three times. At the period end, the Group had US$359 million of cash (31 December 2013: US$390 million; 1H 2013: US$446 million) and net debt of US$694 million (31 December 2013: US$639 million; 1H 2013: US$566 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 support the business and its growth plans. The Directors recommend an interim dividend of 3.3 US cents per Ordinary Share (1H 2013: 3.3 US cents) for payment on 19 September 2014 to shareholders on the register at the close of business on 15 August The ex-dividend date will be 13 August The dividend will be paid in UK Pounds Sterling, with an election to receive in US Dollars. Ukraine Ukraine is witnessing a period of historic change. On 22 February, the Ukrainian parliament voted to remove Viktor Yanukovych as president and on 25 May, Petro Poroshenko was elected as the new president with a clear majority. The Group s facilities are located in central Ukraine in the Poltava region 313 kilometres south of Kyiv and 425 kilometres north of Donetsk. Ferrexpo s operations have been able to operate normally throughout this period. Ferrexpo, however, is monitoring the situation closely. Following a protracted dispute with Russia regarding the pricing and payment of gas supplies, Russia stopped its supply of gas to the country on 15 June To date, Ferrexpo s operations remain unaffected. As part of the economic support for Ukraine, the IMF approved a US$17.1 billion bailout package on 1 May which is dependent on the country undertaking certain economic reforms. This money will be released by the IMF over two years. The country subsequently received US$3.2 billion as a first instalment. The new government has committed itself to economic reform and has already met some of the requirements of the loan including raising the price of gas to households and allowing the exchange rate to float. After the period end, Ukraine issued local currency VAT bonds to industry for outstanding amounts accrued since 2010, of which Ferrexpo received bonds with a face value of approximately US$115 million which have traded at an approximate 22% discount to face value (see VAT section below, financial review and note 12 to the accounts). The Group s priority continues to be to develop its production and logistics capabilities in order to supply its first class customer base with high quality premium iron ore product as it has done throughout its 40 year production history. 8

9 Hryvnia devaluation During the period, the Hryvnia devalued by 48% against the US dollar from a fixed rate of at the end of 2013 to as of 30 June The average exchange rate for 1H 2014 was compared to in 1H As a result, Ferrexpo s operating costs including the cost of production, internal logistics costs and general admin costs decreased by US$10.4 per tonne. The Group also reported a one-off gain of US$47 million in the income statement principally derived from the revaluation of US dollar denominated trade receivables at the local subsidiaries. The devaluation, however, reduced the carrying value of those assets held in Ukraine and denominated in local currency, and consequently the Group s net assets decreased by US$712 million. Please see the financial review and notes 7, 11, 12, and 15 of the accounts for further information. VAT The Group s VAT position has stabilised. During the period it received five repayments of VAT from the Ukrainian government in exchange for the prepayment of corporate profit tax. As such, the gross balance of VAT outstanding did not increase and in constant currency terms was in line with the balance as of 31 December 2013 at US$318 million (31 December 2013: US$321 million). The balance of prepaid corporate profit tax, however, increased to US$89 million. Due to the devaluation of the Hryvnia, however, the VAT balance expressed in US dollars decreased by US$103 million to US$215 million. Following the period end, on 2 July 2014, the Group received local currency VAT bonds as part repayment for outstanding balances. At the exchange rate as of 2 July 2014, the book value of the bonds was US$115 million. To date, the bonds have traded at an approximate 22% discount to face value resulting in a US$10.5 million net release of provisions and discounts which were recorded at the end of Further VAT bonds are expected to be received for the remaining balance of outstanding VAT, while current VAT incurred is expected to be received as a cash refund in the normal course of business. The VAT bonds have a five year tenure maturing on 2 July 2019 with a 9.5% coupon and amortisation of the principal payable semi-annually. Further details of the Ukrainian VAT receivable are disclosed in the financial review and in note 12 to the accounts. Corporate Social Responsibility Health and safety Most regrettably there was a contractor fatality during the period at the Group s operations. The prevention of fatalities and injuries to employees is the highest priority of the Board and management, who follow the principle that all accidents are avoidable. The lost-time injury frequency rate ( LTIFR ) at FPM was 0.3 per million man hours in 1H 2014 (1H 2013: 0.6 per million man hours). The LTIFR at FYM remains zero with no lost time injuries being recorded during the period. Overall, Ferrexpo s total LTIFR in Ukraine for 1H 2014 was 0.23 compared to 0.65 in 1H 2013 (FY 2013: 0.64). Community and Financial Support Expenditure on community support projects during the period was US$10 million (1H 2013: US$4 million) which was for the further development of Komsomolsk and the surrounding towns in the Poltava region. 9

10 People The Board would like to express its sincere appreciation to all of Ferrexpo s employees for their continued focus and dedication to achieving the Company s goals especially in what can be regarded as unprecedented times in Ukraine. Corporate governance The Board of Ferrexpo remains committed to maintaining high standards of governance throughout the Group. The UK Corporate Governance Code of 2012, highlights the need for progressive refreshing of the Board and recommends that the re-election of directors who have served more than six years be reviewed. The Board has appointed external recruitment consultants to search for suitable candidates who can provide diversity and balance in terms of knowledge, experience and gender. Ferrexpo is pleased to report that Bert Nacken has been appointed as an independent non-executive director, with effect from 1 August Mr Nacken has extensive experience of managing large mining operations including as Chief Operating Officer of BHP Billiton s Western Australian Iron Ore business. His expertise will be invaluable to Ferrexpo, and the Board looks forward to working with him. Lucio Genovese who was an independent non-executive director of Ferrexpo since the Group s IPO in 2007 has stepped down from the Board as of 1 August Mr Genovese will continue to serve as Ferrexpo s representative on the board of Ferrous Resources to which he was appointed in March The Board is very grateful for the significant contribution he has made as an independent director and as chairman of the Remuneration Committee. Update on Risks Since the publication of the 2013 annual results in March 2014, the Group assesses that the risks facing the business, as highlighted on pages 28 to 31 of the 2013 Annual Report and Accounts have not changed materially other than that set out below. An update is provided below on key risks following developments in 1H Exchange Rate Risk The Group receives all of its income in US dollars while approximately 55% of its cost base is denominated in Ukrainian Hryvnia. The Hryvnia depreciated by 48% against the US dollar in the first half of the year. This has had a significant positive effect on the costs of the Group and ensures that Ferrexpo is highly competitive at a time when iron ore prices are trading below US$100 per tonne. The devaluation has also resulted in adjustments to the carrying value of certain assets and liabilities of the Group, resulting in unrealized cash and non-cash net losses. Please see the financial review and notes 7, 11, 12, and 15 of the accounts for further information. VAT During 1H 2014, the Group received regular VAT refunds and as a result its VAT outstanding balance in Hryvnia as of 30 June 2014 was in line with the balance as of 31 December On 2 July 2014, the Group received VAT bonds worth approximately US$115 million at par (as of the UAH to US dollar exchange rate at 2 July 2014) as part repayment for outstanding VAT prior to The Group expects to receive the remainder of the outstanding VAT balance through the issuance of further VAT bonds or as a cash refund in the normal course of business. Please see the financial review and note 12 in the accounts for further details. Taxes 10

11 During the period under review, the amount of corporate profit tax (CPT) required by the Ukrainian tax authorities to be paid in order to receive regular VAT refunds declined from 50% as a proportion of the monthly VAT refund as of January 2014 to 25% by June As part of the IMF aid package, the Ukrainian government has committed to eliminating the requirement for CPT payments to be linked to the repayment of VAT. The requirement to pre-pay CPT reduces the cash flows of the Group and its ability to invest. Iron ore price During the period under review, the benchmark iron ore fines price declined by 19% to US$111 per tonne compared to an average of US$137 per tonne in 1H This has negatively impacted Group profitability for the period although the Group was able to partly offset this effect as it sells iron ore pellets which receive a price premium relative to the benchmark price. As 5 August 2014, the benchmark fines price has remained at around US$95 per tonne since the period end. Gas supply Following a protracted dispute with Russia regarding the pricing and payment of gas supplies, Russia stopped its supply of gas to the country on 15 June Ferrexpo s operations have not been impacted. It is likely, however, that additional measures may have to be taken later in the year if no new arrangements with Russia are concluded. Political and legal Please see page 8 for an update on events in Ukraine during the period under review. Going Concern An update of the Group s key business activities and risk factors likely to affect its future development, performance and position since 31 December 2013 are set out on pages 1 to 11 of this report. Full disclosure of the Group s business activities and risk factors are disclosed in the 2013 Annual Report and Accounts. The financial position of the Company as of 30 June 2014 including its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 12 to 17. Note 37 of the 2013 Annual Report and Accounts, on pages 133 to 141, sets of out the Group s objectives, policies and processes for managing its capital; its financial risk management objectives and details of its financial instruments; its exposures to credit risk, liquidity risk as well as currency risk and interest rate risk. The Group s forecasts and projections, taking into account possible changes in the iron ore market, the Group's current and expected competitive positioning on the global industry cost curve and the general economic environment, show that Ferrexpo has adequate financial resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis of accounting in preparing the financial statements of the Group. Outlook Ferrexpo is operating in a difficult environment which is undergoing political change, however, it is continuing to build on its reputation at home and abroad as a sustainable business benefitting all of its stakeholders. It is a competitive producer of high quality pellets, with a large reserve life, selling to premium customers and markets. The Group intends to deliver financial value to all stakeholders by remaining a globally competitive pellet producer and by utilising its cash flows to grow its output and improve the quality of its pellets. 11

12 FINANCIAL REVIEW US$ million (unless otherwise stated) Change Year ended Revenue (2.0%) 1,581.4 EBITDA % As % of revenue 42.3% 31.5% 10.8% 32.0% Profit before taxation % Income tax (39.6) (24.0) 65.0% (41.6) Profit for the period % Diluted earnings per share (US cents) % Ordinary dividend per share (US cents) Special dividend per share (US cents) The Group delivered financial results in the period, increasing the EBITDA margin by 10.8% to 42.3%. This was as a result of higher sales volumes, increased operating efficiencies and lower costs. Costs also benefitted from the devaluation of the operating currency which reduced the local cost base in US dollar terms as well as one-off gain of US$47.4 million principally resulting from the revaluation of local US dollar trade receivables. After this gain, profit for the period was 65.2% higher at US$208.0 million and diluted EPS increased by 61.7% to cents per share. Losses of US$103.1 million and US$35.7 million were incurred respectively on the VAT outstanding and prepaid corporate profit tax balances as a result of the devaluation of the local currency. These were recorded in reserves and were not reflected in the figures above. Revenue Group revenue was US$758.9 million in 1H 2014, 2.0% lower than 1H 2013 (US$774.7 million) reflecting a lower benchmark iron ore price which on average reduced by 18.7% compared to the same period in This was compensated for by increased sales volumes which were 3.3% higher at 5.5 million tonnes and a better marketing performance. The Group s net realised FOB/DAP price outperformed the benchmark price for iron ore over the comparable period by 9.3%, falling only 9.4%. The Group s price outperformance compared to the general industry was due to an increase in the premium paid for iron ore pellets compared to iron ore fines, improved sales mix and the move to full index pricing for all customers. The benchmark 62% fines price and typical pellet premiums are shown in the table below. US$ per tonne Change Year ended Average Platts 62% Fe iron ore fines (18.7%) Pellet premiums ex China % 28.0 Pellet premiums China % 21.1 Other revenue increased to US$43.0 million (1H 2013: US$33.9 million). This reflected higher freight services at the Group s logistics operations which provide services to third parties in Europe as well as the Group s own operations. 4 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, share-based payment expenses and the net of gains and losses from disposal of investments, property, plant and equipment. See note 3 in the accounts. 12

13 Cost of Sales Total cost of sales for the period ended 30 June 2014, reduced by 14.4% compared to 1H 2013 to US$333.1 million (1H 2013: US$389.3 million). This reflected higher sales volumes of 3.3% and lower C1 costs per tonne of pellets produced due to production efficiencies and the devaluation of the Ukrainian Hryvnia. The Hryvnia depreciated by 47.9% against the US dollar from per US dollar at the end of 2013 to per US dollar as of 30 June The average UAH exchange rate for 1H 2014 was per US dollar compared to per US dollar in 1H The Group s average C1 cost reduced by 22.7% to US$47.8 per tonne in 1H 2014 compared to US$61.8 per tonne in 1H Of the US$14.0 per tonne reduction in the C1 cost, US$6.8 per tonne reflects the positive contribution from FYM ore, following the ramp up of mining activities in 1H 2013, as well as the improvement in consumption norms due to higher volume output of 2.5%. The devaluation of the Hryvnia reduced the Group s average C1 cost by approximately US$7.2 per tonne in 1H 2014 compared to 1H 2013 as 55% of production costs are in Hryvnia. Cost inflation for the period was principally driven by an 8% increase in electricity tariffs. On 31 July, the Ukrainian parliament adopted a series of measures aimed at boosting budget revenues. This included an 8% royalty on iron ore and 1.5% tax on salaries. These measures are expected to expire at the end of These factors may impact the C1 cost of production but the Group hopes to at least partially offset them through higher volumes and production efficiencies. Ferrexpo is currently seeking clarification from the Ukrainian tax office regarding the method of calculation. Selling and Distribution Expenses Selling and distribution expenses increased by US$8.9 million in the period compared to 1H 2013 to US$164.8 million as a result of a higher proportion of sales made on a CFR basis, increased sales volume of 3.3% and higher market rates for cape size vessels. This was partly offset by lower rail costs due to the devaluation of the Hryvnia as well as tariff discounts from the Ukrainian rail authorities for the Group using its own rail wagons of 3% to 6%, depending on the route. As of 30 June 2014, the Group owned 2,200 rail cars and expects to receive delivery of a further 300 in 2H Distribution costs incurred in delivering product to the Ukrainian border decreased by 8.5% to US$68.0 million (1H 2013: US$74.3 million), equating to US$12.4 per tonne compared to US$14.0 per tonne in 1H These costs benefitted from the above mentioned rail tariff discounts as well as the devaluation of the Hryvnia. General and Administrative Expenses and Other Expenses General and administrative expenses were US$23.7 million or US$4.1 per tonne sold in 1H 2014 compared to $27.5 million or US$5.2 per tonne in 1H The improvement reflects local currency depreciation compared to the US dollar and cost savings. Other expenses were US$15.7 million in 1H 2014 compared to US$10.0 million in 1H 2013 principally as a result of increased levels of support for the local community during the recent events in Ukraine. Foreign Exchange At At Average Average 30 June January 2014 Change 1H H 2013 Change UAH vs. US dollar (47.9%) (28.6%) The ongoing operating and capital costs of the Group s subsidiaries in Ukraine were significantly reduced during the period due to the devaluation of the Hryvnia which moved from a rate of at the end of 2013 to as of 30 June

14 The major effects on the balance sheet and the income statement of the depreciation against the US dollar are shown in the table below: US$ million Revaluation of fixed assets (471.7) Revaluation of gross VAT receivable (103.1) Revaluation of VAT discount 19.0 Revaluation of prepaid corporate profit tax (35.7) Revaluation of other net assets (120.5) Total exchange losses on translating foreign operations (712.0) Operating foreign exchange gains 47.4 Non-operating foreign exchange losses (3.0 ) Total reflected in the income statement 44.4 C1 cost constant currency per tonne 55.0 C1 cost actual per tonne 47.8 Foreign exchange benefit per tonne 7.20 The net assets of the Group are denominated in local currency and retranslated at the rate prevailing at the end of the accounting period. The exchange rate movement reduced net assets by US$712.0 million which, in accordance with accounting standards, was taken to reserves. This included US$103.1 million reduction in the gross balance of VAT due, a US$19.0 million reduction in the provisions made against VAT recoverability and a US$35.7 million reduction in the value of the Group s prepaid CPT. Foreign exchange gains for the period taken to the income statement were US$47.4 million compared to US$0.3 million in 1H 2013 and included a one-off gain of US$47.4 million as a result of the revaluation of US dollar denominated trade receivables in Ukraine. Net non-operating foreign exchange losses amounted to US$3.0 million (1H 2013: gain of US$1.3 million) and related to the revaluation of third party foreign currency loans at the local subsidiaries offset by the translation of US dollar cash balances held in Ukraine. For further information see the VAT section of the financial review and notes 7, 11, 12, and 15 of the accounts. Net Finance Expense Net finance expense was US$15.6 million compared to US$47.4 million in 1H The decline is largely due to the reversal of a provision made in prior periods for the cost of financing overdue VAT receivables (as of 30 June 2013 an amount of US$18.0 million was recorded in finance expense). During the period the VAT situation improved and the gross outstanding UAH balances for 2013 and earlier are now expected to be received in full in the next twelve months through the issue of VAT bonds. Total losses on the VAT receivable, however, amount to US$133.6 million of which US$103.1 million related to the movement in exchange rate and has been taken to reserves and US$30.5 million related to the expected discount on the VAT bonds when they start to trade. Interest income was US$0.9 million compared to US$1.0 million in 1H 2013 which reflected lower cash balances during the period. Interest expense was in-line with 1H 2013 at US$26.9 million (1H 2013: US$27.3 million). 14

15 Corporate profit tax The income tax charge for 1H 2014 was US$39.6 million (1H 2013: US$24.0 million) based on an expected average weighted tax rate of 16.0% for the financial year 2014 (1H 2013: 16.0%). Total income tax paid in the period was US$45.0 million (1H 2013: US$63.4 million). At the end of June 2014, the prepaid corporate profit tax balance was US$88.6 million compared to US$87.5 million as of 31 December Due to the UAH devaluation against the US dollar this amount was reduced by US$35.7 million which was included in the translation reserve. Cash Flows The Group increased operating net cash flow by 65.5% to US$137.7 million (H US$83.2 million) as a result of regular VAT refunds, lower corporate profit tax prepayments compared to the prior year and improved EBITDA generation. Cash flow from operations was invested in the growth projects. Net debt increased modestly as a result of higher working capital mainly reflecting a US$33.1 million increase in inventories due to the stockpiling of lean FPM ore which is expected to be processed in 2015 following the completion of the quality upgrade project. VAT VAT refunds have been received regularly during 1H 2014 in exchange for the prepayment of corporate profit tax. On 2 July 2014, the Ukrainian government issued the first tranche of local currency VAT bonds as part repayment for outstanding obligations dating back to 2010 and Ferrexpo received bonds with a face value of UAH1,366 million. The bonds have a five year tenure maturing on 2 July 2019 with a 9.5% coupon and amortisation of the principal payable semiannually. Since issuance, the VAT bonds have traded at an approximate 22% discount to face value. Repayment of VAT through bonds is expected to result in a loss of US$30.5 million, US$10.5 million below the amount provided for at the end of The devaluation of the local currency, however, resulted in a one off loss of US$103.1 million which has been charged to reserves. The VAT amounts recorded are analysed below: Reconciliation of outstanding VAT US$ millions Gross VAT recoverable as of 31 December Devaluation impact (charged to reserves) (103.1) Anticipated discount on bonds (30.5) Net VAT recovered 1H 2014 (2.8) Net VAT recoverable as of 30 June The discounts and provisions recorded in the income statement for VAT are shown below: US$ millions Discount as of 31 December 2013 (60.1) Write down on VAT receivable (5.9) Release of discount 16.5 Exchange gains recognised in reserves 19.0 Closing balance as of 30 June 2014 (30.5) 15

16 In total, a net release of US$10.6 million was recorded in the income statement split between finance income (US$16.5 million) and write down on VAT receivable (US$5.9 million). As a result of the above, the net Group VAT as of 30 June 2014 was US$184.6 million (30 June 2013: US$269.9 million; 31 December 2013: US$260.9 million). For further information see the foreign exchange section of the financial review and note 12 of the accounts. Capital investment Capital investment continues to be focussed on the Group s growth projects whilst realising reductions in project costs through procurement savings as well as through a more favourable exchange rate for local content. In 1H 2014 the projects remained on budget. Capital commitments were US$113.2 million as of 30 June 2014 (31 December 2013: US$102.9 million; 1H 2013: US$121.0 million). The split of capital expenditure for the Group s operations is shown in the table below: Breakdown of capital investment US$ million FPM Sustaining FPM Capacity upgrade project FPM Mine life extension FPM Quality upgrade project FYM mine infrastructure FYM concentrator FBM Logistics Other Total Expenditure at FYM related to the further development of the mine and completion of the associated infrastructure for US$36.8 million as well as for the development of a 10 million tonne concentrator. To date, the Board has approved US$75.0 million for the development of the concentrator. In 1H 2014, US$6.4 million was spent on down payments for long lead time items, engineering design and preliminary site construction works with the balance expected to be spent over the next 12 months. Group liquidity and debt In 1H 2014, Ferrexpo maintained prudent financial metrics. As of 30 June 2014, net debt to EBITDA reduced to 1.2x compared to 1.4x at 30 June 2013 as a result of improved earnings. Summary of Group Liquidity and Debt US$ million As of As of Change As of Cash and equivalents (19.5%) Gross debt (1,052.9) (1,012.8) 4.0% (1,029.2) Net debt (693.5) (566.3) 22.5% (638.7) Undrawn facilities

17 Total liquidity (undrawn facilities plus cash) % The Group s borrowing facilities are US dollar denominated, committed and have an average life of 2.4 years with an average interest cost of 5.0% per annum. Of the gross debt of US$1.1 billion, US$212 million is repayable within one year. Overall 55% of the interest costs are at fixed rates. Financing was concluded for capital projects from export credit agencies during 1H 2014 amounting to US$40 million. These new facilities have an average maturity of 5.6 years at an average interest cost of 2.43% per annum. 17

18 Directors Responsibility Statement The Interim Report complies with the Disclosure and Transparency Rules ( DTR ) of the United Kingdom s Financial Conduct Authority in respect of the requirement to produce a half-yearly financial report. The Interim Report is the responsibility of, and has been approved by, the Directors. We confirm that to the best of our knowledge: the condensed set of financial statements has been prepared in accordance with IAS 34; the Interim Management Report includes a fair review of the important events during the first six months and description of the principal risks and uncertainties for the remaining six months of the year, as required by DTR4.2.7R; and the Interim Management Report includes a fair review of disclosure of related party transactions and changes therein, as required by DTR 4.2.8R. The Directors are also responsible for the maintenance and integrity of the Ferrexpo plc website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. For and on behalf of the Board Michael Abrahams CBE DL Chairman Chris Mawe Chief Financial Officer 18

19 Independent Review Report to Ferrexpo PLC Introduction We have been engaged by the Company to review the condensed set of financial statements in the interim report for the six months ended 30 June 2014 which comprises the Interim Consolidated Income Statement, Interim Consolidated Statement of Comprehensive Income, Interim Consolidated Statement of Financial Position, Interim Consolidated Statement of Cash Flows, Interim Consolidated Statement of Changes in Equity and related notes 1 to 20. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed. Directors responsibilities The interim report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim report in accordance with the Disclosure and Transparency Rules of the United Kingdom s Financial Conduct Authority. As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards ( IFRSs ) as adopted by the European Union. The condensed set of financial statements included in this interim report has been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as adopted by the European Union. Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim report based on our review. Scope of review We conducted our review in accordance with International Standard on Review Engagements 2410 (UK and Ireland), Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom s Financial Conduct Authority. Ernst & Young LLP London 5 August