Ferrexpo Regulatory News (FXPO)

2 August 2018

Ferrexpo plc

("Ferrexpo", the "Group" or the "Company")

2018 Half Year Results

Ferrexpo plc today announces its financial results for the six months ended 30 June 2018.

Steve Lucas, Non-Executive Chairman, said:

"Our high quality product is in strong demand reflected in the record price premiums realised during the first half. This has helped offset a lower underlying iron ore price and higher costs driven primarily by rising commodity prices and local inflation. Despite these costs, which are expected to show a further modest increase in the second half of the year, our cash generation has allowed us to increase capex, pay down debt and retain very low leverage while dividends payments made in the first half of 2018 were US$74 million compared to US$39 million in 1H 2017.

We remain committed to increasing our output which in the near term is on track to increase by 1.5MT to 12MT by 2020. Thereafter, Ferrexpo is one of the few pellet producers globally which is able to increase output significantly on a low risk basis. This will ensure the Group's long-term future as one of the world's leading, premium pellet producers."

1H 2018 Financial Summary:

1Note: accrued interest has been re-classified from borrowings to accrued liabilities and re-presented for comparative periods. This has reduced net debt from $403M as of 31 December 2017 to $394M and from $481M as of 30 June 2017 to $472M.

Health and Safety

· No work related fatalities (1H 2017: one)

· Group Lost Time Injury Frequency Rate 0.97 per million man hours (1H 2017: 0.95)

· FYM Lost Time Injury free for 7 months

Market Environment

· Strong market environment for high grade iron ore products including pellets

· Increase in pellet premiums reflected strong demand for high grade product

· Average realised FOB price increased 5% compared to 1H 2017

· Strong customer demand from the Group's long term customers

Operational

· 1H 2018 pellet production 5.1MT (1H 2017: 5.2MT) reflects planned refurbishment of a pelletiser line

· Sales volumes 4.8 MT reflects 300kt increase in stocks

· Rail shipments below normal levels in May and June due to temporary capacity constraints. Stocks expected to reduce by year end.

· Industry cost inflation, local inflation, an appreciation of the Hryvnia against the Dollar during the period and higher repair and mining costs led to an increase in the C1 cash cost to US$41.60 per tonne (1H 2017: US$31.7 per tonne)

· Higher capex A of US$56 million (1H 2017: US$45 million) reflects modernisation of the processing facilities and near term organic growth opportunities to increase production by 1.5MT to 12MTPA

Financial

· Revenue up 4.4% to US$617 million (1H 2017: US$591 million) on higher pellet premiums offset by lower iron ore prices, higher freight and lower sales volumes

· Underlying EBITDA A of US$234 million (1H 2017: US$287 million) reflected a higher received price and higher costs

· Profit after tax of US$152 million (1H 2017: US$216 million) reflecting lower EBITDA

· Net cash flows from operating activities of US$156 million (1H 2017: US$194 million) reflecting higher stocks

· US$74 million of dividends paid out in 1H 2018 (1H 2017: US$39 million)

· Cash as of 30 June 2018 US$82 million (31 December 2017: US$98 million; 30 June 2017: US$93 million)

· Net debt A of US$369 million (31 December 2017: US$394 million; 30 June 2017: US$472 million)

· 2018 interim dividend of 3.3 US cents declared (1H 2017: 3.3 US cents)

Outlook

· Demand for high quality iron ore, especially pellet, is expected to remain strong through 2H 2018 and 2019.

· 2H 2018 EBITDA to reflect higher sales volumes while cost inflation is expected to persist, though at a lower rate, reflecting the full impact of rising oil and energy prices as well as higher mining costs

· Ferrexpo is investing to increase its processing plant capacity while completing a large maintenance programme at its pelletising facilities. Once these programmes are complete in 2020 the Group expects production to increase by approximately 1.5 million tonnes to 12 million tonnes per annum compared to 10.4 million tonnes in 2017.

Alternative Performance Measures

Words with the symbol A are defined in the Alternative Performance Measures section below.

There is an analyst and investor meeting at 09.00 GMT today at the offices of Deutsche Bank at Winchester House, 75 London Wall, London EC2N 2DB. A live video webcast and slide presentation of this event will be available on www.ferrexpo.com. It is recommended that participants register at 08.45. The presentation will be hosted by Steve Lucas (Chairman), Kostyantin Zhevago (CEO) and Chris Mawe (CFO).

Webcast link: https://edge.media-server.com/m6/p/3mk2vpog

For further information contact:

Ferrexpo:

Maitland:

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 40 years. Ferrexpo's resource base is one of the largest iron ore deposits in the world. In 2017, the Group sold 10.5 million tonnes of pellets ranking it as the 3rd largest exporter of pellets to the global steel industry with a market share of approximately 8.5%. Ferrexpo has a diversified customer base supplying steel mills in Austria, Germany, Japan, South Korea, Taiwan, China, Slovakia, the Czech Republic, Turkey and Vietnam. Ferrexpo has a premium listing on the main market of the London Stock Exchange under the ticker FXPO. For further information, please visit www.ferrexpo.com

Introduction

The iron ore market in 1H 2018 was notable to previous periods for a number of reasons. The benchmark 62% iron ore fines price was relatively stable, trading in a US$17 per tonne range averaging US$69.7 per tonne, which was 6% lower than 1H 2017, while premiums and discounts for higher and lower quality iron ore material expanded. The most significant increase in pricing was for iron ore pellets, with the Platts Atlantic pellet premium rising 28% to US$58 per tonne compared to 1H 2017, representing a record 83% of the average benchmark iron ore fines price. Prices for low quality ore with high levels of alumina and phosphorus were heavily discounted.

There was also a dislocation in the relationship with the 62% iron ore fines price and the oil price, which increased 37% in 1H 2018. The higher oil price led to significantly higher freight rates, thereby reducing the received price for suppliers as well as leading to cost inflation for Ferrexpo and the industry. Due to the higher freight rates, at some points during the period, lower quality producers were realising prices similar to levels of 2016.

As a producer of high quality iron ore pellets, Ferrexpo was well placed to benefit from the above price dynamics.

In line with the rest of the industry, the Group experienced commodity cost inflation. Together with a stronger local currency which appreciated by 7% against the Dollar. Local PPI inflation was 18% during the period. C1 cost per tonne growth should moderate along with local inflation, assuming the Hryvnia remains broadly stable against the Dollar. Approximately half of the Group's operating costs are in local currency which are related to the Hryvnia exchange rate and local inflation rates.

In 2Q 2018, Ferrexpo successfully completed a major refurbishment of one of its four pellet lines. The Group's production rate is expected to increase in 2H 2018, with further significant improvement expected once the final pellet line has been refurbished in 2H 2019 and the Group has completed its investment to expand pellet feed production by 2020. This will allow the Group to increase production by approximately 1.5 million tonnes to 12 million tonnes per annum compared to 10.4 million tonnes in 2017.

Ferrexpo is one of the few pellet producers globally with the capacity to increase production significantly on a brownfield basis within its existing infrastructure. The Group has initiated engineering studies to expand its pelletising capacity from its currently planned 12 million tonnes to over 20 million tonnes per annum. It expects engineering studies to be complete by the end of 2019.

The Group's capital allocation strategy remains to keep an appropriate balance between a strong balance sheet, attractive shareholder returns (in the form of dividends) and investment in volume growth. This strategy has been designed to reduce the risks inherent in growing output in an emerging market (where it can from time to time experience constraints on the availability of debt) while selling its product in a volatile commodities market.

Dividends

The Directors have declared an interim dividend of 3.3 US cents per Ordinary Share (1H 2017: 3.3 US cents per Ordinary Share) for payment on 26 September 2018 to shareholders on the register at the close of business on 24 August 2018. The ex-dividend date will be 23 August 2018. The dividend will be paid in UK Pounds Sterling, with an election to receive in US Dollars.

Ferrexpo's dividend policy is to pay a base level of sustainable dividends through the commodities cycle of approximately US$40 million per annum (or 6.6 US cents per year). The dividend will be split equally between an interim dividend and a final dividend payable normally in October and May, following respectively the Company's interim results and Annual General Meeting.

The Board will assess the merits of paying additional returns to shareholders via special dividends, to be paid from cash flows in excess of the Group's needs when taking into account debt repayments and development capital expenditure A. If appropriate, the Group will pay special dividends at an appropriate time in its reporting cycle.

Health and Safety

In 1H 2018, there were no fatalities at the Group's operations (FY 2017: one fatality).

The Group's Lost Time Injury Frequency Rate ("LTIFR") in 1H 2018 was 0.97 per million man hours compared to 1.38 per million man hours in 2H 2017 and in line with 1H 2017* at 0.95 per million man hours.

The 1H 2018 result included an improvement at FYM which has now operated without lost-time injuries ("LTIs") for seven months. At the Group's barging operations, one LTI occurred during the period compared to nil in 1H 2017 and 5 in 2H 2017.

(*Figure restated due to amended hours worked during 1H 2017.)

Financial Review

Revenue

Group revenue increased by 4% to US$617 million (1H 2017: US$591 million). This was driven by a 5% increase in Ferrexpo's realised FOB price.

The Group's received FOB price is calculated by taking the average Platts 62% iron ore fines price, adjusting for iron content and impurities, adding a pellet premium (which is typically negotiated annually, half-yearly or quarterly) and deducting the cost of freight, which is typically the C3 index2.

In 1H 2018, the Platts 62% iron ore fines index fell 6% to an average of US$69.7 per tonne from US$74.2 per tonne in 1H 2017. Net pellet premiums increased 32% in 1H 2018. For further information see Market Review on page 9.

In line with higher oil prices, C3 freight costs increased approximately 37% from US$13 per tonne to US$18 per tonne in 1H 2018, reducing the increase in the Group's overall realised FOB netback price.

For further information see Introduction, Market Review and Update on Risks.

Sales volumes for the period of 4.8 million tonnes (1H 2017: 5.1 million tonnes) were impacted by delayed rail shipments on national railways due to "go slow" industrial action in May and June. Shipments have returned to normal levels and it is expected that the increase in pellet stocks of approximately 300 thousand tonnes will be sold in 2H 2018.

2C3 freight is the benchmark freight index from Tubarao, Brazil to Qingdao, China and used as reference in the pellet industry for pricing contracts.

Costs

C1 Cost of Production

The Group's average C1 cash cost of production A was US$41.6 per tonne in 1H 2018 compared to US$31.7 per tonne in 1H 2017.

The increase in costs was primarily due to commodity and local cost inflation with commodity linked costs increasing US$3.3 per tonne and local inflation related costs increasing approximately US$1.9 per tonne. Together these increases amounted to approximately US$4.9 per tonne or half of the cost increase. This included a 15% increase in electricity tariffs which are linked to the ARA coal price, while higher gas and fuel costs reflected a US$19 per barrel, or 37%, increase in the European Brent spot price in 1H 2018 compared to 1H 2017. Higher grinding media costs reflected higher steel prices.

Local PPI was 18% in 1H 2018 compared to 1H 2017, and wages increased by US$1 per tonne or 20% in 1H 2018. The Hryvnia appreciated by 7% against the Dollar from 1 January 2018 to 30 June 2018. Approximately half of the Group's operating costs are in local currency and are impacted by the Hryvnia exchange rate and inflation. For further information see Currency below.

Repair and maintenance costs increased by US$2.6 per tonne due to higher levels of maintenance activities in 1H 2018.

At FPM, higher levels of stripping increased mining costs by approximately US$2.6 per tonne reflecting increased delivery of high grade material to support higher quality pellet production.

Improved consumption norms reduced costs by US$0.23 per tonne.

The table below breaks down the Group's C1 cash cost by input, approximately 60% of costs are commodity related.

The Group's C1 cost represents the cash costs of production of iron pellets from own ore, divided by production volume from own ore, and excludes non-cash costs such as depreciation, pension costs and inventory movements, also the costs of purchased ore, concentrate and gravel.

Selling and Distribution Costs

Total selling and distribution costs of US$122 million (1H 2017: US$100 million) included higher international freight costs arising from CFR sales of US$45 million (1H 2017: US$33 million), also the full impact of a 15% increase in rail tariffs in November 2017 and higher bunker costs at the Group's barging business which were substantially offset by higher revenue.

Currency

Ferrexpo prepares its accounts in US Dollars. The functional currency of the Ukrainian operations is the Hryvnia.

In 1H 2018, the Hryvnia appreciated from UAH28.067 per Dollar on 1 January to UAH26.189 per Dollar as of 30 June 2018. This resulted in a non-cash operating forex loss of US$16 million (1H 2017: US$5 million).

Ukrainian Hryvnia vs. US Dollar

Source: National Bank of Ukraine

Underlying EBITDA A

Underlying EBITDA A for the period was US$234 million compared to US$287 million in 1H 2017. This reflected a higher received price compared to 1H 2017 due to record pellet premiums offset by an increase in the C1 cash cost per tonne and increased rail tariffs. On a net basis these factors reduced EBITDA by approximately US$25 million. An increase in stocks of approximately 300 thousand tonnes reduced EBITDA by circa US$14 million while slightly lower production volumes, reflecting a pellet line refurbishment, impacted EBITDA by US$3 million. Non-cash operating forex losses, reflected the appreciation of the Hryvnia against the Dollar, lowered EBITDA by approximately US$10 million.

Interest

Interest expense declined 14% to US$24 million compared to US$28 million for 1H 2017 due to a lower outstanding debt balance. The average cost of debt for the period ended 30 June 2018 was 8.1% (average 30 June 2017: 7.7%). The increased average rate reflected amortisation of the Group's pre-export finance facility which has a lower cost than the Group's outstanding US$173 million Eurobond.

Further details on finance expense are disclosed in Note 8 of the accounts.

Tax

The income tax expense for 1H 2018 was US$27 million (1H 2017: US$25 million) based on an expected weighted average tax rate of 15% for the full year. 

Further details on taxation are disclosed in Note 9 of the accounts.

Profit for the Period

Profit for the period was US$152 million compared to US$216 million in 1H 2017 reflecting lower profit before tax and finance of US$59 million, as described above.

Cash Flows

Net cash flow from operating activities was US$156 million (1H 2017: US$194 million). Working capital included an outflow of US$24 million related to the increase in stocks of ore for processing (1H 2017: US$27 million). This ore is of lower grade and is expected to be processed once the Group has additional beneficiation capacity in place. Inventories also included a US$14 million increase in pellet stocks due to the temporary delay in rail shipments in May and June, while spare parts increased by US$12 million due to a higher level of repair and maintenance activity.

During 1H 2018, the Group paid out US$74 million of dividends related to dividends declared in December 2017 and March 2018 (1H 2017: US$39 million).

Capital Investment A

Capital expenditure A in 1H 2018 was US$56 million compared to US$45 million in 1H 2017. Of this, approximately US$28 million was spent on sustaining capital, including a substantial refurbishment of one of the Group's four pellet lines during the period as well as reconstruction of two grinding sections in the concentrator.

As part of the Group's concentrator expansion programme to increase production by 1.5 million tonnes of pellets per annum, the Group is near completion of a new medium fine crushing unit which is expected to commence operation in 3Q 2018. This will improve equipment reliability and increase the amount of ore crushed by up to 6 million tonnes per annum. This additional capacity will be fully utilised once the remaining sections to increase concentrator capacity to the equivalent of 12 million tonnes of pellets per annum are completed in 2020.

Debt

Ferrexpo has low leverage with net debt to EBITDA A for the last 12 months of 0.74x in line with 31 December 2017 at 0.73x. In 1H 2018 gross debt reduced to US$451 million and net debt, as of 30 June 2018, was US$369 million reflecting a cash balance of US$82 million. On 27 July 2018, the Group made the final amortisation of its 2013 US$350 million PXF of US$44 million. The Group's remaining debt maturing in 2H 2018 is US$11 million of ECA funding, with no other debt repayments until March 2019.

The Group's debt facilities consist of US$195 million outstanding on its 2017 PXF facility which will commence quarterly amortisation of US$24 million in 1Q 2019, US$173 million of Eurobonds which are due for repayment in April 2019 and US$26 million of export credit agency funding amortising monthly over the next 48 months (including the US$11 million mentioned above).

The Group has trade finance facilities of US$70 million which can be used to finance certain shipments, of which US$16 million was utilised at the end of June 2018.

Related Party Transactions

Related party transactions are disclosed in Note 19 to the accounts.

Iron Ore Market Review

Iron Ore Pricing

In 1H 2018, the benchmark 62% Fe iron ore fines price was notable for being relatively stable compared to previous periods, while high grade ore prices showed steadily increasing premiums over mid and lower grade iron ore prices. Of all iron ore market segments, pellet premiums saw the largest increase in pricing during the period reflecting strong demand and a continued supply deficit.

The average benchmark 62% Fe iron ore fines price in 1H 2018 was US$69.7 per tonne, 6% lower than the US$74.2 per tonne average of 1H 2017. The price traded in a US$17 per tonne range between US$63 and US$80 per tonne, including 15 successive weeks when the price traded between US$63 and US$68 per tonne. By contrast, in 1H 2017 the price traded in a US$41 per tonne range between US$54 and a high of US$95 per tonne.

High and low grade iron ore prices are diverging

The average price premium of 65% Fe fines over 62% Fe fines in 1H 2018 was US$19 per tonne (1H 2017: US$13 per tonne), increasing to an average of US$24 per tonne in June 2018. This reflected value being ascribed to low alumina, low phosphorus and high iron content ore.

See Figure 1 at this link

http://www.rns-pdf.londonstockexchange.com/rns/5955W_1-2018-8-2.pdf

Premiums and discounts are widening reflecting iron content and impurities

See Figure 2 at this linkhttp://www.rns-pdf.londonstockexchange.com/rns/5955W_1-2018-8-2.pdf

Pellet premiums increased significantly during the period. The Platts Atlantic pellet premium increased by 28% from US$45 per tonne in 1H 2017 to US$58 per tonne in 1H 2018, while the Chinese blast furnace spot pellet premium was trading at close to US$60 per tonne as of 30 June 2018.

In general terms, pellet prices are currently based on the average benchmark 62% Fe fines price together with a pellet premium, less freight costs.

Part of the increase in pellet premiums during the period reflected the value being assigned to higher quality 65% Fe material in the market compared to 62% Fe fines.

Freight rates increased in line with the oil price in 1H 2018, reducing the overall received price.

Demand environment

According to the World Steel Association, global crude steel production increased 4.6% in the 1H of 2018 compared to 1H 2017 to 881 million tonnes with growth seen across all major regions. China increased steel production by 6.0% while the key pellet markets of Europe (including Turkey) and North East Asia (South Korea and Japan) increased production by 2.1% and 2.2% respectively. Encouragingly, other emerging economies in South Asia, South East Asia, Middle East and North Africa continued to increase their steel production at impressive rates which, if sustained, will mitigate the impact on the global iron ore market of a potential slowdown in Chinese steel production in the years ahead.

Higher steel production, continued positive profit margins for steel mills and further rationalisation of the Chinese steel industry led to an increase in global utilisation rates which partly underpinned demand for higher grade ores, including pellets. Macquarie believe global capacity utilisation in 1H 2018 was in the region of 84% while Chinese crude steel capacity utilisation was approximately 94%, as can be seen from the graph below.

Crude steel capacity utilisation

See Figure 3 at this link

http://www.rns-pdf.londonstockexchange.com/rns/5955W_1-2018-8-2.pdf

Since 2016, China has embarked on supply side reforms and implementation of environmental standards in the steel sector in order to eliminate excess capacity, improve the financial performance of state owned enterprises and significantly improve air quality. This has resulted in record profit margins for steel mills, which increasingly require imported high grade raw materials to reduce their environmental impact and to maximise their steel production.

In 2017, around 50 million tonnes of steel capacity was closed in China and in 2018 a further 30 million tonnes of steel capacity is expected to be shut.

Ongoing environmental reforms require steel mills to significantly reduce their emissions of sulphur dioxide, nitrogen oxide and carbon dioxide over the next three years to 2020. This encourages mills to demand high-quality raw materials, especially those that do not require sintering, and to install desulphurisation equipment to capture sulphur dioxide released in the sintering process. Failure to comply with the regulation can potentially result in the forced suspension of iron making operations.

The response of Chinese steel makers to this new operating environment and the impact of a maturing steel market (following many years of high growth peaking in 2014) mean that the requirements of Chinese mills are converging with steel mills in developed countries where lower grade iron ore is no longer as demanded.

In Europe, expected consolidation of the steel industry should underpin profitability and continue to support global capacity utilisation over the long term.

Steel mills look to use pellets to maximise output and increase efficiencies, to lower emissions and to increase the quality of their final product as they look to move up the value chain.

As a pellet exporter with established operations relatively close to major import markets, Ferrexpo stands to benefit from increasing demand for pellets. Incumbent pellet producers benefit from high barriers to entry, while Ferrexpo maintains a competitive cost relative to the majority of its peers.  

Pellet supply

In 1H 2018, the supply of pellets to the global export market remained in deficit. Supply was impacted by a ten-week strike at the fourth largest exporter of pellets (whose 2017 market share was approximately 8% of the global export market). Production and shipments from this pellet exporter recommenced in June 2018 but it is estimated that approximately two million tonnes of production were lost during the strike. There was also a reduction in Russian exports during the period (of around 2.5 million tonnes) compared to 1H 2017 as a supplier opted to sell to the domestic market instead.

The largest exporter of pellets increased its supply of pellets by approximately 1 million tonnes in 1H 2018 as it re-introduced higher-cost marginal capacity. It is expected to add a further 3 million tonnes of high-cost supply in 2H 2018. CRU expects that these restarts could add approximately 12 million tonnes a year to the seaborne market once in full operation.

The pellet feed market in 1H 2018 was also impacted by suspension of operations at a major supplier in Brazil, reducing pellet feed supply by approximately 12 million tonnes on an annualised basis. This has negatively impacted pellet production in Bahrain and China. Currently the operation is expect to restart at the end of 2018.

The overall size of the supply-constrained pellet export market in 2018 is expect to be in line with 2017 at around 124 million tonnes. The restart of further seaborne supply from Brazil, which has been out of the market since 2016, remains uncertain in terms of timing and the volume to be produced, while the high capital intensity associated with developing greenfield pellet supply is unlikely to lead to any significant new supply in coming years.

Higher structural capacity utilisations in the steel sector should continue to support demand for higher quality iron ore inputs and Ferrexpo believes pellet demand will remain strong for the foreseeable future.

Operational Review

Marketing

Ferrexpo's sales volumes for 1H 2018 totalled 4.8 million tonnes (1H 2017: 5.1 million tonnes), reflecting delays in rail shipments during May and June 2018. Pellets tied up in the supply chain between production and customers, as of 30 June 2018, were approximately 700 thousand tonnes. Given the strong demand environment, the Group plans to reduce this stock to normal levels of around 400 to 450 thousand tonnes in 2H 2018.

The table below shows the breakdown of sales by key market regions. Sales to China and South East Asia include sales to Vietnam and Taiwan.

Sales Volume by Market Regions:

Ferrexpo benefits from a diversified sales portfolio with leading steel mills, while its logistics routes to customers provide a competitive advantage given Ukraine's central geographical location. Ferrexpo's average shipping duration to Asia is 30 days compared to its main pellet-producing competitors in Brazil (40 days shipping time), Canada (55 days) and Norway (50 days).

Ferrexpo's realised price for its 65% Fe iron ore pellets is calculated by taking the average PLATTS 62% Fe CFR China iron ore fines index for an agreed time period (see sales volume by pricing terms), adjusted for quality and adding a pellet premium. For sales to the Far East, delivery is made on CFR terms with the resulting FOB netback determined by the actual cost of freight. For sales to European and regional markets, delivery is generally made on FOB/DAP terms which is determined by deducting a transparent freight market index such as C3. The current average length of the Group's sales contracts is approximately three years.

The table below shows the split of sales volume priced according to agreed reference periods for the 62% Fe fines spot price. Most sales (around 62%) are priced on the current month average 62% Fe fines price. No volume during the period was sold on a spot basis given the strong demand from the Group's long-term target customers.

Sales Volume by Pricing Terms:

For further information on iron ore prices and freight see Market Review and Revenue.

Pellet Production

1H 2018, pellet production was similar to 1H 2017 at 5.1 million tonnes (1H 2017: 5.2 million tonnes). Production during the period was impacted by a planned 65 day pellet line refurbishment in 2Q. The Group has now refurbished 3 out of its 4 pellet lines. The final pellet line refurbishment is currently expected to take place in 2H 2019.

The Group continues to maintain a high proportion of 65% Fe pellets within its production mix. The ratio of Ferrexpo Premium Pellets of the total was 94% compared to 95% in 1H 2017. The table below summarises production in the first half of 2017 compared to the first half of 2016.

Pellet Production 1H 2018 and 1H 2017 ('000)

Capital Investment for Future Growth

Ferrexpo has initiated engineering studies to expand its pelletising capacity from the currently planned 12 million tonnes up to 20 million tonnes. This would be achieved by increasing the capacity of each of the four pelletising lines together with the required increases in processing capacity (either by further expanding the existing FPM beneficiation plant, or by installing primary crushing and concentrate capacity at FYM). The Group expects to start this development programme in 2020, once the current investment to increase production to 12 million tonnes of pellets per annum, is complete.

For information on capital investment in 1H 2018 see Capital Investment under Financial review.

Update on Risks 

The Group considers that the risks facing the business, as highlighted on pages 34 to 39 of the 2017 Annual Report and Accounts published in March 2018, remain relevant. An update is provided below on material developments of key risks during the first half of 2018.

Realised Price

Ferrexpo continues to be exposed to international freight rates, as all of its long term contracts are priced with reference to transparent freight indices such as the Baltic Exchange C3 freight price3. In 1H 2018, the C3 index increased by 37% to US$18.2 per tonne compared to 1H 2017. Freight rates are largely influenced by the price of oil. In 1H 2018, the Brent price increased by US$19 per tonne, or 37%, compared to 1H 2017. A further increase in oil prices and / or freight rates could reduce the Group's received price.

3 Seaborne freight rates, such as C3, are published by the Baltic Exchange and represent the cost for ocean transportation of iron ore from the Brazilian port of Tubarão (where the largest seaborne suppliers of pellets are based) to Qingdao, China (the largest steel producing country in the world). As Ferrexpo sells to international customers, the price it receives includes reference to C3 or other global benchmarks.

Operating Risks

The Group continues to be subject to fluctuations in commodity prices, particularly to changes in energy prices including oil. The Group's cost base is also subject to fluctuations in the Hryvnia/Dollar exchange rate as approximately half of operating costs are in local currency. In 1H 2018, the Hryvnia was broadly stable against the Dollar.

The Group looks to partly offset cost inflation through increases in mining and production efficiencies. There is a risk that the Group is unable to offset inflation through production efficiencies and that the Group's cost base could increase as a result negatively impacting the financial results of the Group.

For further information see Costs in the Financial Review and Pellet Production in the Operational Review.

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.

A list of current Directors is maintained on the Ferrexpo plc website which can be found at www.ferrexpo.com.

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

Steve Lucas

Chairman

Chris Mawe

Chief Financial Officer

1 August 2018

Independent Review Report to Ferrexpo plc

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 which comprises the Consolidated Income Statement, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow statement and related notes 1 to 20. We have read the other information contained in the half-yearly financial 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 International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance 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 IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial 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 half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, 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 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 half-yearly financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Statutory Auditor

London, UK

1 August 2018

Interim Consolidated Income Statement

Interim Consolidated Statement of Comprehensive Income

Interim Consolidated Statement of Financial Position

The financial statements were approved by the Board of Directors on 1 August 2018.

Kostyantin Zhevago Christopher Mawe

Chief Executive Officer Chief Financial Officer

Interim Consolidated Statement of Cash Flows

1) Dividend paid in the period ended 30 June 2018 is net of withholding tax of US$3,187 thousand that is payable subsequent to the period end.

Interim Consolidated Statement of Changes in Equity

Notes to the Interim Condensed Consolidated Financial Statements

Note 1: Corporate information

Organisation and operation

Ferrexpo plc (the "Company") is incorporated in the United Kingdom, which is considered to be the country of domicile, with its registered office at 55 St James's Street, London, SW1A 1LA, UK. Ferrexpo plc and its subsidiaries (the "Group") operate two mines and a processing plant near Kremenchug in Ukraine, an interest in a port in Odessa and sales and marketing activities around the world including offices in Switzerland, Dubai, Japan, China, Singapore and Ukraine. The Group also owns logistics assets in Austria which operates a fleet of vessels operating on the Rhine and Danube waterways and an ocean going vessel which provides top off services and operates on international sea routes. The Group's operations are vertically integrated from iron ore mining through to iron ore concentrate and pellet production and subsequent logistics. The Group's mineral properties lie within the Kremenchug Magnetic Anomaly and are currently being extracted at the Gorishne-Plavninske and Lavrykivske ("GPL") and Yerystivske deposits.

The majority shareholder of the Group is Fevamotinico S.a.r.l. ("Fevamotinico"), a company incorporated in Luxembourg and ultimately owned by The Minco Trust, of which Kostyantin Zhevago, the Group's Chief Executive Officer, is a beneficiary. At the time this report was published, Fevamotinico held 50.3% (31 December 2017: 50.3%; 30 June 2017: 50.3%) of Ferrexpo plc's issued share capital.

The Group's interests in its subsidiaries are held indirectly by the Company, with the exception of Ferrexpo AG, which is directly held. The Group's consolidated subsidiaries are disclosed in the Additional Disclosures of the Annual Report and Accounts 2017.

At 30 June 2018, the Group also holds through PJSC Ferrexpo Poltava Mining an interest of 49.5% (31 December 2017: 49.5%; 30 June 2017: 49.4%) in TIS Ruda, a Ukrainian port located on the Black Sea. As this is an associate, it is accounted for using the equity method of accounting.

Note 2: Summary of significant accounting policies

Basis of preparation

The interim condensed consolidated financial statements for the six months period ended 30 June 2018 have been prepared in accordance with International Accounting Standard ('IAS') 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all of the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2017.

The interim condensed consolidated financial statements do not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for the full year is based on the statutory accounts for the financial year ended 31 December 2017. A copy of the statutory accounts for that year, which were prepared in accordance with International Financial Reporting Standards ('IFRS') issued by the International Accounting Standard Board ('IASB'), as adopted by the European Union as they apply to financial statements of the Group for the year ended 31 December 2017, have been delivered to the Register of Companies. The auditors' report under section 495 of the Companies Act 2006 in relation to those accounts was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Going concern

The Group has assessed that, taking into account: i) its available cash and cash equivalents available at the date of authorisation of the interim condensed consolidated financial statements; ii) its cash flow projections for the period of management's going concern assessment; and iii) events and conditions beyond the period of management's going concern assessment, it has sufficient liquidity to meet its present obligations and cover working capital needs for the aforementioned period and will remain in compliance with its financial covenants throughout this period. Therefore, the Group continues to adopt the going concern basis of accounting for the preparation

Accounting policies adopted

The accounting policies and methods of computation adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2017 except for the adoption of the new standards that became effective as of 1 January 2018.

New standards and interpretations adopted with an impact on the Group's consolidated financial statements

IFRS 9 Financial instruments

The Group applied IFRS 9 Financial instruments for the first time as of 1 January 2018 and elected to apply the modified retrospective method. The new standard became effective as of 1 January 2018 and replaces IAS 39 and includes a new expected loss impairment model, changes to the classification and measurement requirements of financial assets as well as to hedge accounting.

The impact from the application of IFRS 9 on the Group's consolidated financial statements is predominantly related to the expected loss impairment model as the new standard established a new approach for the assessment of loans and receivable balances, including trade receivables, with a focus on the risk of default in the future rather than based on incurred losses in the past. The changes to classification and measurement of financial instruments is unchanged on application of the new standard and the Group does not intend to apply hedge accounting under IFRS 9.

IFRS 15 Revenue from customer contracts

The Group applied IFRS 15 Revenue from customer contracts for the first time as of 1 January 2018. The Group elected to apply the "modified retrospective" method, under which comparative financial information is not restated. The new standard establishes the principles for the disclosure of useful information in the financial statements about the nature, amount, timing and uncertainties of revenue and cash flows arising from contracts with customers. Under IFRS 15 the revenue recognition model changed from one based on the transfer of risk and reward of ownership to the transfer of control of ownership. The Group's revenue is predominantly derived from sales of iron pellets, where the point of recognition is dependent on the contractual sales terms based on the International Commercial terms ("Incoterms"). As the time of the transfer of risks and rewards coincides with the transfer of a control, the timing and the amount of revenue recognised is not affected for the majority of the Group's sales. For the Incoterms Cost, Insurance and Freight ("CIF"), and Cost and Freight ("CFR"), the Group must contract for and pay the freight necessary to bring the goods to the named port of destination. Consequently, the freight service on sales contracts with CIF and CFR Incoterms meet the criteria of a separate performance obligation and a portion of the revenue earned under these contracts, representing the obligation to perform freight service, is deferred and recognised over time as this obligation is fulfilled, along with the associated costs.

The tables on the following page provide the details of the cumulative effects from the application of the new standards on the consolidated statement of financial position as of 1 January 2018 and the consolidated statement of financial position and the consolidated income statement as at 30 June 2018.

The freight service on sales contracts with CIF and CFR Incoterms meets the criteria of a separate performance obligation so that the portion of the revenue earned under these contracts, representing the obligation to perform freight services, is deferred and recognised over time as this obligation is fulfilled, along with the associated costs. The effect from the expected loss impairment model to be applied under the new standard is primarily calculated based on publically available ratings default risks of the Group's customers with outstanding receivable balances as at end of a reporting period. There are no non-current receivable balances to be considered in the computation of the Group's expected loss as all of the Group's receivable balance are classified as current based on the agreed terms and conditions.

The table above shows the impact on the operating result from the application of the new accounting standards only. The impact from the separate presentation of the total freight revenue related to the sales of iron pellets and concentrate is shown in Note 4.

New standards, interpretations and amendments adopted without impact on the Group's consolidated financial statements

· IFRIC 22 Foreign currency transactions and advance considerations clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency.

· Amendment to IFRS 2 Share-based payments: Classification and measurement of share-based payments clarifies the classification of share-based payment transactions with net settlement features, the measurement of cash-settled share-based payment transactions that include a performance condition and of modifications of share-based payment transactions from cash-settled to equity-settled.

· Annual improvements to IFRS standards 2014-2016 cycle contains amendments to IFRS 1 First-time Adoption of IFRS and IAS 28 Investments in associates and joint ventures.

New standards, interpretations and amendments not yet adopted 

A detailed description of the expected impact from the adoption of new accounting standards and interpretations that are in issue, but are not yet effective is provided in Note 3 of the Annual Report & Accounts for the year ended 31 December 2017 and outlines the expected impact of the following standards and interpretations that will become effective in future periods.

· IFRS 16 Leases is effective for the financial year beginning on 1 January 2019. If the new standard were applied as of 30 June 2018, right-of-use assets and corresponding lease liabilities of US$15,167 thousand, before the effect from discounting, would have been recognised without a material effect on the operating result.

· IFRIC 23 Uncertainty over income tax treatments is effective for the financial year beginning on 1 January 2019. The Group is currently in the process to complete the impact assessment, but does not expect a material impact on its consolidated financial statements from this new interpretation.

· Annual Improvements to IFRS Standards 2015-2017 Cycle is effective for the financial year beginning on 1 January 2020 and contains amendments to IAS 12 Income taxes and IAS 23 Borrowing costs. The Group does not expect a material impact on its consolidated financial statements from these annual improvements.

· Amendments to IFRS 9 Financial instruments: Prepayment features with negative compensation is effective for the financial year beginning on 1 January 2019 and clarifies the classification of particular pre-payable financial assets and the accounting for financial liabilities following a modification. The Group does not expect a material impact on its consolidated financial statements from these amendments.

· Amendments to IAS 19 Employee benefits: Plan amendment, curtailment or settlement is effective for the financial year beginning on 1 January 2020. The amendments provide guidance, in the case of plan amendment, curtailment or settlement, on the measurement of the current service cost and the net interest for the period after the re-measurement and clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. The Group does not expect a material impact on its consolidated financial statements from these amendments.

· Amendments to References to the Conceptual Framework in IFRS standards is effective for the financial year beginning on 1 January 2020 and introduces a new chapter on measurement, guidance on reporting financial performance, improved definitions of an asset and a liability and clarifications in areas, such as the roles of stewardship, prudence and measurement uncertainty in financial reporting.

Full disclosure of the final assessment of the impact of these standards, interpretations and amendments will be provided in the Annual Report & Accounts for the year ending 31 December 2018.

Use of critical estimates and judgements

In the course of preparing financial statements, management has to make estimates and judgements that can have a significant impact on the Group's consolidated financial statements. The most critical accounting estimates include taxation (recoverability of deferred tax assets), capitalisation of deferred stripping costs and the recoverability of capitalised lean and weathered ore. Critical judgements relate to taxation (tax legislation in Ukraine) and classification of net investments in foreign operations. The use of inaccurate assumptions in assessments made for any of these estimates and judgements could result in a significant impact on the Group's financial position and/or financial performance. The critical estimates and judgements are the same as those disclosed in the Group's consolidated financial statements for the year ended 31 December 2017.

Seasonality

The Group's operations are not affected by seasonality.

Note 3: Segment information

The Group is managed as a single entity, which produces, develops and markets its principal product, iron ore pellets, for sale to the metallurgical industry. While the revenue generated by the Group is monitored at a more detailed level, there are no separate measures of profit reported to the Group's Chief Operating Decision-Maker ("CODM"). In accordance with IFRS 8 Operating Segments, the Group presents its results in a single segment, which are disclosed in the income statement for the Group. Management monitors the operating result of the Group based on a number of measures including Underlying EBITDA, gross profit and the net debt.

Underlying EBITDA and gross profit

The Group presents the Underlying EBITDA as it is a useful measure for evaluating the Group's ability to generate cash and its operating performance. The Group's full definition of Underlying EBITDA is disclosed in the Glossary on page 41.

Net debt

Net debt as defined by the Group comprises cash and cash equivalents less interest bearing loans and borrowings.

The Group's balance of cash and cash equivalents decreased by US$15,492 thousand after net debt repayments of US$43,524 thousand during the period ended 30 June 2018 (31 December 2017: US$238,670 thousand; 30 June 2017: US$162,507 thousand). Net debt is an Alternative Performance Measure ("APM"). Further information on the APMs used by the Group, including the definitions, is provided on pages 36 and 37.

In the current period, management have reviewed the presentation of the accrued interest and have re-classified it from interest bearing loans and borrowings to accrued liabilities in order to better reflect the nature of this balance in the presentation. US$9,358 thousand and US$9,599 thousand have been re-presented for the comparative periods ended 31 December 2017 and 30 June 2017 to be on a consistent basis and reducing the net debt by these amounts.

Note 4: Revenue

Revenue for the six months period ended 30 June 2018 consisted of the following:

The Group applied IFRS 15 Revenue from customer contracts for the first time as of 1 January 2018 and elected to apply the modified retrospective method.

As required under IFRS 15, the freight revenue related to the sales of iron ore pellets is shown separate from the revenue from sales of iron ore pellets and concentrate due to its separate performance obligations. This applies to sales made under the Incoterms Cost, Insurance and Freight ("CIF") and Cost and Freight ("CFR"). The information of the comparative periods have been re-presented to be on a consistent basis with the current period. There has been no restatement of the underlying financial information.

Total revenue from sales of iron ore pellets and concentrate by geographical destination were as follows:

The Group markets its products across various regions. The disclosure of the segmentation reflects how the Group makes its business decisions and monitors its sales. Information about the composition of the regions is provided in the Glossary.

Note 5: Operating expenses before special items

Operating expenses for the six months period ended 30 June 2018 consisted of the following:

Operating expenses include:

Special items not included in the operating expenses are shown in Note 7.

Note 6: Foreign exchange losses and gains

Foreign exchange losses and gains for the six months period ended 30 June 2018 consisted of the following:

Operating foreign exchange gains and losses are those items that are directly related to the production and sale of pellets (e.g. trade receivables, trade payables on operating expenditure). Non-operating gains and losses are those associated with the Group's financing and treasury activities and with local income tax payables.

The translation differences and foreign exchange gains and losses are predominantly depended on the fluctuation of the exchange rate of the Ukrainian Hryvnia against the US Dollar. The table below shows the closing and average rate of the most relevant currencies of the Group compared to the US Dollar.

Exchange differences arising on translation of non-USD functional currency operations (mainly in Ukrainian Hryvnia) are included in the translation reserve. See Note 18 for further details.

Note 7: Special items

Special items for the six months period ended 30 June 2018 consisted of the following:

Special items include those items, which due to their expected infrequency of the events or non-operational nature giving rise to them, are reported separately on the face of the income statement. These items are excluded from Underlying EBITDA, which is an Alternative Performance Measure ("APM"). Further information on the APMs used by the Group, including the definitions, is provided on pages 36 and 37.

Special items comprise:

· Operating special items are those that relate to the operating performance of the Group and principally include write-offs and impairment losses and restructuring charges, if any.

· Non-operating special items are items relating to changes in the Group's asset portfolio.

· Tax special items are significant non-recurring tax items or the tax effect of other special items. Further details are provided in Note 9.

Note 8: Net finance expense

Net finance expense for the period ended 30 June 2018 consisted of the following:

The presentation of the interest expense on loans and borrowings has been changed in the current period to reflect an interest expense measured at amortised cost using the effective interest rate method by presenting the effect from the amortisation of prepaid arrangement fees in interest expense on loans and borrowings and not in bank charges as done in the previous periods. In order to be consistent with the presentation in the current period, the amounts of US$3,532 thousand and US$7,013 thousand have been reclassified from bank charges to interest expense on loans and borrowings for the comparative periods ended 30 June 2017 and 31 December 2017. The total finance expense remained unchanged.

Note 9: Taxation

The Group pays corporate profit tax in a number of jurisdictions and its tax rate is influenced by the mix of profits primarily between Ukraine, Switzerland, the United Kingdom and Dubai, as well as the level of non-deductible expenses for tax purposes in each of these jurisdictions. For the period ended 30 June 2018, the income tax expense was based on an expected weighted average tax rate of 15.0% for the financial year 2018, compared to an effective tax of 12.3% for the financial year 2017.

No special tax items during the period ended 30 June 2018, compared to US$3,426 thousand recorded during the comparative periods ended 31 December 2017 and 30 June 2017, respectively, reflecting the net effect from the capitalisation of a deferred tax asset from available tax loss carry forwards and temporary differences totalling US$28,822 thousand for an Ukrainian subsidiary and the de-recognition of a deferred tax asset of US$25,396 thousand as a result of the latest development of ongoing court proceedings in Ukraine. Further information on the ongoing court proceedings is provided in Note 17.

During the financial years 2013, 2014 and 2015, current VAT receivable balances in Ukraine were mainly recovered in exchange for prepayments of corporate profit tax resulting in a remaining income tax receivable balance of US$5,846 thousand as at 30 June 2018 (31 December 2017: US$5,454 thousand; 30 June 2017: US$5,866 thousand) relating to prepayments made by two other Ukrainian subsidiaries and is classified as non-current due to the uncertainty in respect of the timing of the recovery.

Note 10: Earnings per share and dividends paid and proposed

Basic EPS is calculated by dividing the net profit for the period attributable to ordinary equity shareholders of Ferrexpo plc by the weighted average number of Ordinary Shares.

Diluted earnings per share are calculated by adjusting the weighted average number of Ordinary Shares in issue on the assumption of conversion of all potentially dilutive Ordinary Shares. All share awards are potentially dilutive and have been considered in the calculation of diluted earnings per share.

The calculation of the basic and diluted earnings per share is based on the following data:

The basic number of ordinary shares is calculated by subtracting the shares held in treasury from the total number of ordinary shares in issue.

Dividends proposed and paid

Prior to the dividend proposed below and taking into account relevant thin capitalisation rules and dividend-related covenants for the Group's major bank debt facilities, the total available distributable reserves of Ferrexpo plc is US$86,114 thousand as of 30 June 2018.

The final dividend paid for 2017 includes withholding tax of US$3,187 thousand that is payable subsequent to the period ended 30 June 2018.

Note 11: Property, plant and equipment

During the six months period ended 30 June 2018, the additions to property, plant and equipment totalled US$62,396 thousand (30 June 2017: US$45,539 thousand; 31 December 2017: US$123,643 thousand) and the net book value of the disposals of property, plant and equipment totalled US$3,409 thousand (30 June 2017: US$1,635 thousand; 31 December 2017: US$6,447 thousand). The total depreciation charge for the period was US$30,192 thousand (30 June 2017: US$26,863 thousand; 31 December 2017: US$55,520 thousand).

The carrying value of property, plant and equipment includes capitalised borrowing costs on qualifying assets of US$21,178 thousand (31 December 2017: US$17,810 thousand; 30 June 2017: US$17,698 thousand).

Note 12: Other taxes recoverable and prepaid

As at 30 June 2018, taxes recoverable and prepaid comprised:

As at 30 June 2018, US$26,667 thousand of the VAT receivable relates to the Group's Ukrainian business operations (31 December 2017: US$21,254 thousand; 30 June 2017: US$19,673 thousand) of which US$726 thousand (31 December 2017: US$678 thousand; 30 June 2017: US$109 thousand) was overdue. Management is of the opinion that the overdue balances will be recovered during the next 12 months in full.

The total VAT receivable balance shown in the table above is net of an allowance of US$1,366 thousand (31 December 2017: US$1,190 thousand; 30 June 2017: US$1,052 thousand) to reflect the uncertainties in terms of the recovery of VAT receivable balances related to one of the Ukrainian subsidiaries with its mine still being developed.

Note 13: Inventories

As at 30 June 2018, inventories comprised: