Ferrexpo reduces production due to power constraints in December

Iron ore miner and pellet producer Ferrexpo (FXPO LN) reported output of 10.2 mmt of pellets in 11M14 (+3% yoy), according to its Dec. 22 trading update. In November, the company produced 960 kt of pellets, which was flat m/m, in average daily terms.



At the same time, the company projects output to fall 140 kt m/m in the next month as a result of regular power cuts of its production facilities during peak hours caused by the recent deficit of anthracite coal in Ukraine. The company stated its monthly sales volumes won’t be affected in December as it has stored enough stockpiles for that.



Should the deficit with coal and power in Ukraine remain unchanged, the decreased monthly production volumes will persist throughout 1Q15, negatively affecting spot sales, Ferrexpo reported. In 2Q15, when coal consumption in Ukraine usually decreases, energy source availability and output may normalize.



As a separate point, the company disclosed that production costs in November came in at USD 44/t against the backdrop of a UAH 15/USD exchange rate. Costs will be even lower in December after the hryvnia weakened to UAH 15.8/USD, Ferrexpo said.



Roman Topolyuk: The adjusted company guidance for pellet production in 2014 will lead to total annual pellet production of 11.0 mmt in 2014, 4% lower than our projection of 11.5 mmt. It was negatively impacted by repair work at one of four pellet production lines, launched in 1H14, which prevented Ferrexpo from operating at full capacity. As the acuteness of a lack of power supply may subside in 2Q15, along with the weather getting warmer in Ukraine, we expect Ferrexpo to return to full capacity load in 2Q15 and 3Q15.



So far, 4Q15 seems to be another quarter under risk in terms of possible power supply constraints and lower pellet production. Thus, we forecast Ferrexpo will manufacture at least 11 mmt of pellets in 2015 (flat yoy).



Assuming the ForEx rate will average UAH 16/USD in 2015 and iron ore fines will sell at USD 70/t in China on average, we expect Ferrexpo will generate EBITDA of USD 290 mln (-40% yoy) next year, which implies that the stock trades at EV/EBITDA of 4.1x, or 21% lower than historical average since 2007 and 23% lower than that of peers.

Источник: Конкорд Капитал