Ferrexpo Regulatory News (FXPO)

2 August 2019

Ferrexpo plc

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

2019 Half Year Results

Ferrexpo plc today announces its unaudited financial results for the six months ended 30 June 20191.

Financial Highlights

·; Revenue up 28% to US$787 million due to higher iron ore fines prices and an increase in sales volumes

·; Underlying EBITDA A up 59% to US$372 million (1H 2018: US$234 million)

·; Profit after tax up 78% to US$270 million

·; Declared interim ordinary dividend up 100% to 6.6 US cents (1H 2018: 3.3 US cents)

·; Net debt A reduced to US$282 million (31 December 2018: US$339 million)

·; Capital investment doubled to US$114 million

Steve Lucas, Non-Executive Chairman, said:

"I am pleased to report half-year EBITDA of US$372 million, up almost 60% compared to 1H 2018, and a profit after tax of US$270 million, up 78% compared to 1H 2018. During the period we continued to benefit from strong pricing for our high-grade iron ore pellets, which helped deliver healthy cash flows. This enabled us to allocate capital to further reduce debt, increase organic investment in our assets to drive medium term growth and declare a record interim dividend to shareholders."

Ferrexpo has a diversified sales portfolio selling to world class steel mills under long term contracts using international benchmark pricing. Currently steel demand is muted in some regions reflecting increased raw material costs and weaker end-user demand. The Group, however, has the ability to deploy tonnage to other markets to offset any regional weakness. Overall pricing remains attractive compared to historic levels."

1H 2019 Financial Summary:

1 These results have not been subject to a review as per the announcement of 3 July 2019

2 Note: net debt as of 30 June 2019 included a US$6 million effect from the first time application of IFRS16 Leases.

Market Environment

·; Significant increase in the iron ore fines price

·; Supply of pellets remained tight in 1H 2019

·; Average realised FOB price increased 28% compared to 1H 2018

Operational Highlights

·; 5% increase in pellet production compared to 1H 2018

·; Proportion of high quality 65% Fe pellet to 96% of total output (1H 2018: 94%)

·; 4% increase in sales volumes compared to 1H 2018

·; C1 cash cost US$46 per tonne up US$4.4 per tonne reflecting domestic inflation of 9% and a 5% appreciation of the local currency

·; Capital investmentA increased by US$58 million to US$114 million reflecting modernisation of processing facilities and near term organic growth opportunities to increase production by 1.5MT to 12MTPA

Corporate Governance

·; The Independent Review into the use of funds donated by Ferrexpo to the Blooming Land Charity remains ongoing, the Independent Review Committee is seeking to conclude its review as soon as possible

·; Appointment of Graeme Dacomb, a retired partner from Ernst & Young, as an independent non-executive director and as Chair of the Audit Committee

·; In July 2019, appointment of MHA MacIntyre Hudson, the UK member of Baker Tilly International, as the Company's new auditor. Baker Tilly International has significant audit capability in Ukraine having operated there since 1999

·; Further appointments to the Board of directors to be announced in due course

Health and Safety

·; No work related fatalities (FY 2018: one)

·; Group Lost Time Injury Frequency Rate 0.45 per million man hours (FY 2018:1.18, 1H 2018: 0.97)

Alternative Performance Measures

Words with the symbolA are defined in the Alternative Performance Measures section on pages 34 and 35.

There is an analyst and investor meeting at 09.00 BST today at the offices of JPMorgan at 60 Victoria Embankment, London EC4Y 0JP. A live video webcast and slide presentation of this event will be available on www.ferrexpo.com. It is recommended that participants register before 08.45 BST. The presentation will be hosted by Steve Lucas (Chairman), Kostyantin Zhevago (CEO) and Chris Mawe (CFO).

Webcast link: https://edge.media-server.com/mmc/p/srmiia5u

For further information contact:

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 2018, the Group produced 10.6 million tonnes of pellets, a 2% increase compared to 2017, 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

I am very pleased to report there were no work related fatalities at Ferrexpo in 1H 2019 (2018: one). We remain firmly focused on achieving zero fatalities or injuries.

The Group has continued to perform well in 1H 2019. Compared with 1H 2018 pellet production was up 5%, sales volumes increased 4%, revenue increased by 28% while profit after tax increased by 78%. Strong cash flow generation funded capital investment of US$114 million and dividend payments of US$78 million whilst reducing net debt by US$57 million to US$282 million (31 December 2018: US$339 million).

1H 2019 was notable for the large increases in prices for all grades of iron ore. The Benchmark 62% Fe iron ore fines price increased by US$45 per tonne from 1 January 2019 to 30 June 2019. While the 65% Fe iron ore fines price increased by US$41 per tonne from US$88 per tonne as of 1 January 2019 to US$129 per tonne as of 30 June 2019.

During the period, the majority of seaborne iron ore pellet traded under long term contracts moved to a higher grade index as the basis for pricing. This move allowed Ferrexpo to directly capture the price premium currently contained in the 65% Fe price over the 62% Fe price, while pellet premiums were in line with 1H 2018. The average 65% Fe iron ore fines price was US$105 in 1H 2019 compared to an average 62% Fe fines price of US$70 per tonne in 1H 2018. In 2H 2019, Ferrexpo will continue to follow international benchmark pricing for its products. Currently steel demand is muted in some regions reflecting increased raw material costs and weaker end-user demand. The Group has the ability to deploy tonnage to other markets to offset any regional weakness.

Pellets are one of the most productive sources of iron in the steelmaking process while also reducing energy inputs, slag volumes and carbon emissions for a steel mill and helping to improve the quality of the final steel product. As such pellets receive a price premium over other types of iron ore.

The Group is making good progress towards the completion of its US$100 million investment to expand concentrate production. This will allow the Group to increase pellet production by approximately 1.5 million tonnes to 12 million tonnes per annum in 2021 compared to production of 10.6 million tonnes expected in 2019.

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 is undertaking engineering studies to expand its pelletising capacity from 12 million tonnes to over 20 million tonnes per annum.

The Group is committed to maintaining low net debt and paying dividends to shareholders (see Dividends). Capital allocated to investment will be for incremental high IRR projects with the goal of sustainably increasing output to approximately 20 million tonnes over the medium term.

Dividends

The Directors have declared an ordinary interim dividend of 6.6 US cents per Ordinary Share (1H 2018: 3.3 US cents per Ordinary Share) for payment on 3 September 2019 to shareholders on the register at the close of business on 16 August 2019. The ex-dividend date will be 15 August 2019. The dividend will be paid in UK Pounds Sterling, with an election to receive in US Dollars.

Independent Review of Blooming Land Charity

As previously disclosed, the Company has established the Independent Review Committee ("IRC") to carry out an independent review into the use of funds donated by Ferrexpo to the Blooming Land Charity (the "Charity"). The work of the IRC and its advisers is being conducted in accordance with the terms of reference approved by the Board (as detailed in the Group's 2018 Annual Report and Accounts) and includes a forensic review conducted by BDO LLP, review of relevant documentation, interviews with Ferrexpo employees and directors, correspondence with the Charity and other third parties, and advice from legal counsel in the UK and Ukraine. Significant work has been undertaken by the IRC and its advisers and this remains ongoing. At present, there are no material changes to the Company's interim conclusions published in the 2018 Annual Report and Accounts. The IRC is seeking to conclude its review as soon as possible.

Board Appointment

The Board of Ferrexpo remains committed to the highest levels of corporate governance and transparency.

During the period, the Group was pleased to announce the appointment of Graeme Dacomb as an independent non-executive director and as the Chair of the Audit Committee. Graeme was a partner at Ernst and Young for 26 years where, for his last twelve years, he was a lead partner in the extractive industry, responsible for coordinating the provision of a full suite of services to multinational mining and oil and gas clients including Xstrata, Fresnillo, and BP across a broad range of countries including emerging markets. In addition to audit services, he provided critical advice for his clients on corporate governance structures, risk management, acquisitions, disposals and financial systems and controls. From 2011 to 2018, Graeme was a member of the Financial Reporting Review Panel.

Ferrexpo's programme to recruit new Board members is ongoing. As part of the selection process a wide range of factors are taken into consideration including requirements for diversity, mining sector experience and emerging market knowledge.

Auditor Appointment

In July 2019, Ferrexpo announced that following the completion of an audit tender led by the Company's Audit Committee, MHA MacIntyre Hudson, the UK member of Baker Tilly International, was appointed as the Company's new auditor. Baker Tilly International operates one of the top ten audit networks in the world and, importantly, has significant audit capability in Ukraine having operated there since 1999.

Iron Ore Market Review

Iron Ore Pricing

During the period the majority of seaborne iron ore pellets traded under long term contracts were priced on a higher grade index. This was a change in precedent for the industry and allowed producers of 65% Fe pellets, such as Ferrexpo, to directly capture the price premium for its higher grade ore.

1H 2019 was notable for the large increase in iron ore pricing for all grades of ore especially when compared to a relatively stable period of pricing in 2018 (the 62% Fe iron ore fines price fell US$2 per tonne from 1 January 2018 to 31 December 2018 to US$73 per tonne). The benchmark 62% Fe iron ore fines price rose by US$45 per tonne from 1 January 2019 to 30 June 2019, a 62% increase, and traded above US$100 per tonne for the first time since 2014.

The 65% Fe iron ore fines price rose US$41 per tonne from US$88 per tonne as of 1 January 2019 to US$129 per tonne as of 30 June 2019. The relative decline in the price difference between 65% Fe ore and 62% Fe ore reflected an adjustment to the product mix by steel mills in favour of lower grade product due to lower steel prices and lower demand outside China. 1H 2019 also saw the return of high grade iron ore concentrate supply from producers in Brazil and Canada which were offline in 1H 2018. This was offset by weather disruptions in Northern Brazil which provided support for the 65% Fe fines price.

The overall price received by Ferrexpo in 1H 2019 benefitted from the substantially higher iron ore fines price as well as a pellet premium in line with 1H 2018.

Iron Ore Supply

The significant increase in the iron ore fines price in 1H 2019 was driven by severe supply disruptions from the major iron ore producing regions which account for over 80% of seaborne supply and a 10% increase in Chinese steel production in 1H 2019 compared with 1H 2018.

In terms of supply side disruptions, all three regions shown in the table below were expecting higher year on year supply, however, due to the tragic tailings dam accident in Minas Gerais in January 2019 and significant weather disruptions in Northern Brazil and Australia (with iron ore shipments from Brazil and Australia in April and May dropping to their lowest since 2015) seaborne supply is now expected to fall in 2019 compared with 2018. The expected reduction in seaborne supply in 2019 is largely due to lower output from traditional sources. At current price levels, however, supply from non-traditional sources could re-enter the market.

In 1H 2019, Chinese port inventories reached a five-year low, however, in June seaborne supply recovered strongly as weather related issues in Australia and Brazil eased.

Freight

The C3 freight rate, which is principally used as a freight reference in the pricing of the Group's sales contracts, was on average US$15 per tonne in 1H 2019 (1H 2018: US$17 per tonne). This reflected lower iron ore shipments from Australia and Brazil. The average C3 rate in July has increased to approximately US$24 per tonne, likely reflecting the recovery in iron ore shipments.

Iron Ore Pellet Supply

In 1H 2019, the supply of pellets to the global export market reduced due to major supply disruptions in Brazil with an estimated 11 million tonnes of pellet capacity closed. In the second half of the year, incremental increases in pellet output are expected from Brazil, Canada and the Middle East.

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 capacity in coming years.

Demand Environment

According to the World Steel Association, 1H 2019 global crude steel production was up 5% to approximately 925 million tonnes (1H 2018: 881 million tonnes). Crude steel production in China was at high levels in 1H 2019, increasing approximately 10% vs. 1H 2018 to 492 million tonnes, due to lower than expected winter production restrictions, government stimulus and high expectations of strong steel demand for the rest of the year in order to offset trade war uncertainty.

The World Steel Association, however, forecasts global steel output to increase by approximately 1% in 2019 compared with 2018 to 1,735 million tonnes given an expected reduction in steel output due to contracting steel margins and an overall forecast decline in global GDP growth from 3.6% in 2018 to 3.3% in 2019 (source: IMF). Steel output in Europe has been impacted by higher raw material costs and lower industrial production especially in the automotive sector.

As in the past, Ferrexpo continues to expect underlying demand for pellet to be supported by requirements for iron ore of a higher grade and in a form that reduces energy inputs, slag volumes and air emissions in the steelmaking process while improving the quality of the final product. This is likely to be further supported by rising CO2 prices in Europe and the potential introduction in other markets. 

As a pellet exporter with established operations relatively close to major import markets, Ferrexpo stands to benefit from the strong long term expected pellet market dynamics.

In the short term, however, demand may be lower due to reduced steel mill profitability and utilisation rates. Ferrexpo sells its pellets under long term contracts to high quality steel mills throughout the world and can access all major markets, reducing reliance on any one region. Incumbent pellet producers' benefit from high barriers to entry, and the Group maintains a competitive cost of production relative to the majority of its peers.  

Financial Review

The Group has continued to perform well in 1H 2019. Compared with 1H 2018 pellet production is up 5%, sales volumes increased 4%, revenue increased by 28% while profit after tax increased by 78%. Strong cash flow generation funded dividend payments of US$78 million and capital investment of US$114 million whilst reducing net debt by US$57 million to US$282 million (31 December 2018: US$339 million).

Revenue

Group revenue increased by 28% to US$787 million in 1H 2019 (1H 2018: US$617 million) principally due to a significant increase in Ferrexpo's realised FOB price and an increase in pellet sales volumes.

Higher realised prices during the period mainly reflected a substantial increase in the iron ore fines price.

Headline pricing 1H 2019 vs. 1H 2018

During the period the majority of seaborne iron ore pellets traded on a long term contract moved to a higher grade index as the basis for pricing. This further benefitted Ferrexpo's price realisations by capturing the quality premium inherent in 65% Fe ores. The average 65% Fe iron ore fines price was US$105 in 1H 2019 compared to an average 62% Fe fines price of US$70 per tonne in 1H 2018. The difference in price increased revenue by US$155 million. Pellet premiums were in line with 1H 2018.

Lower freight rates during the period increased net revenue by approximately US$9 million. For further information see Iron Ore Pricing (Iron Ore Market Review). 

Sales volumes for the period increased 4% to 5.0 million tonnes (1H 2018: 4.8 million tonnes), increasing revenue by US$21 million. For further information see Operational Review - Marketing.

Costs

C1 Cost of Production

The Group's average C1 cash cost of productionA was US$46.0 per tonne in 1H 2019 compared with US$41.6 per tonne in 1H 2018.

Cost inflation moderated in 1H 2019 compared with US$45.0 per tonne in 2H 2018 (FY 2018: US$43.3 per tonne).

The increase in costs was primarily due to domestic cost inflation and a strong local currency against the US Dollar adding US$2.3 per tonne to the C1 cash cost compared to 1H 2018. Ukrainian inflation was 9% in 1H 2019 while the Hryvnia appreciated by 13% in real terms compared to the same period of 2018. Over 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.

Higher stripping activities to support product quality and in preparation for mining within the next two years increased the cash cost by US$1.4 per tonne while ongoing repair and maintenance in the processing plant and pelletiser increased the C1 cost by US$0.8 per tonne. Lower gas (-7% 1H 2019 vs. 1H 2018) and diesel fuel (-2% 1H 2019 vs. 1H 2018) prices were offset by higher biofuel and bentonite prices.

In 2H 2019, costs remain subject to local inflation, the Hryvnia exchange rate and commodity prices.

On 1 July 2019, the government of Ukraine announced the liberalisation of the electricity market. This aims to increase competition as per the liberalisation of the gas market in 2015.

The table below contains the split of the Group's C1 cash cost per tonne, which remains broadly in line with the same period last year.

The Group's C1 cost represents the cash costs of production of iron pellets from own ore (to the mine gate), 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 were US$132 million (1H 2018: US$122 million). This included an increase in rail tariffs of 15% from April 2019. International freight costs arising from CFR sales of US$49 million (1H 2018: US$45 million) are included in revenue and selling and distribution costs. The increase in international freight reflects higher sales volumes and an increased proportion of sales to North East Asia.

General, Administrative and Other Expenses

General and administrative and other expenses increased to US$45 million compared with US$42 million in 1H 2018. This reflected an increase in local personnel costs due to the appreciation of the local currency against the US Dollar and higher audit and professional fees as a result of the independent review into the Blooming Land Charity. For further information see Independent Review of Blooming Land Charity on page 4 and Notes 17 Commitments and contingencies and 19 Related party disclosure.

Currency

Ferrexpo prepares its accounts in US Dollars. The functional currency of the Ukrainian operations is the Hryvnia and approximately half of the Group's operating costs are in local currency. In 1H 2019, the Hryvnia appreciated from UAH27.688 per Dollar on 1 January to UAH26.166 per Dollar as of 30 June 2019 and resulted in an increase of the Group's productions costs. For further information see C1 Cost of Production above. The total operating forex loss resulting from the conversion of US$ denominated assets in Ukraine remained stable at US$16 million in 1H 2019 and 1H 2018.

Ukrainian Hryvnia vs. US Dollar

Source: National Bank of Ukraine

Underlying EBITDAA

Underlying EBITDAA in 1H 2019 increased 59% to US$372 million compared to US$234 million in 1H 2018.

This reflected a 28% increase in the Group's received pellet price of US$157 million compared to 1H 2018 and higher sales volumes of US$9 million. This was partially offset by an increase in costs of US$28 million.

Interest

Interest expense declined 38% to US$15 million compared to US$24 million in 1H 2018 due to a lower outstanding debt balance and final repayment of high cost Eurobonds in April 2019. The average cost of debt for the period ended 30 June 2019 was 7.5% (average 30 June 2018: 8.1%). The decrease was due to the repayment of US$173 million Eurobonds at 10.375%.

Further details on finance expense are disclosed in Note 7 Net finance expense of the accounts.

Tax

The income tax expense for 1H 2019 was US$47 million (1H 2018: US$27 million) based on an expected weighted average tax rate of 15% for the full year, in line with 1H 2018 and an effective full year tax rate of 14.5% in 2018.

Further details on taxation are disclosed in Note 8 Taxation and Note 17 Commitments and contingencies; Legal of the accounts.

Profit for the Period

Profit for the period increased 78% to US$270 million compared with US$152 million in 1H 2018 reflecting higher profit before tax and finance and lower interest expense.

Cash Flows

Net cash flow from operating activities was US$256 million (1H 2018: US$156 million). Working capital reflected a net outflow of US$70 million. This was principally due to an increase in pellet stocks and trade receivables given the higher price environment.

During 1H 2019, there was an outflow of US$78 million related to dividends paid in January 2019 and May 2019 (1H 2018: US$74 million). In July a further dividend of approximately US$39 million was paid following approval at the Group's AGM in May 2019.

Capital InvestmentA

Capital expenditureA in 1H 2019 was US$114 million compared to US$56 million in 1H 2018. During the period, US$19 million was spent on stripping activities for future production growth, US$14 million was invested in the concentrate expansion programme which is on track for completion by the end of 2020 and is expected to increase pellet production by 1.5 million tonnes per annum in 2021. US$6 million was invested in new rail cars, the Group received 200 rail cars during the period and ordered an additional 400 cars which will be paid for and delivered in 2H 2019. The remaining US$67 million was used for sustaining and other capital investment.

Debt

Ferrexpo has a strong balance sheet with low levels of debt. Net debt to EBITDAA for the last 12 months was 0.44x compared with 0.67x as of 31 December 2018. In 1H 2019 gross debt reduced to US$374 million (31 December 2018: US$402 million) and net debt, as of 30 June 2019, was US$282 million reflecting a cash balance of US$92 million (31 December 2018 net debt: US$369 million). Net debt as of 30 June 2019 included an effect of US$6 million as a result of the first time application of IFRS16 Leases.

The Group has a US$400 million 2017 PXF facility, of which US$360 million was drawn as of 30 June 2019. This facility will amortise over twelve quarters commencing in 1Q 2020. The Group has other facilities of US$9 million which mostly relate to export credit agency funding and will amortise monthly over the next 18 months.

Related Party Transactions

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

Operational Review

Health and Safety

In 1H 2019, there were no fatalities at the Group's operations (FY 2018: one fatality).

The Group's Lost Time Injury Frequency Rate ("LTIFR") in 1H 2019 at 0.45 per million man hours showed a significant improvement compared to 2018 as can be seen from the table below.

The number of accidents at the Group halved to five in 1H 2019 compared with 10 in 1H 2018. While Ferrexpo is pleased with these improvements it is determined to make further improvements with the belief that only zero harm is acceptable.

Pellet Production

Total 1H 2019 pellet production increased 5% to 5.4 million tonnes (1H 2018: 5.1 million tonnes). Production during 1H 2018 was impacted by a planned 65 day pellet line refurbishment in 2Q 2018. The fourth and final pellet line refurbishment is scheduled to take place in 3Q 2019. As such, the Group maintains its 2019 full year production guidance of 10.6 million tonnes in line with 2018.

In 1H 2019, the Group continued to focus on improving the quality of its output and increased the proportion of high grade 65% Fe pellets to 96% of total output (1H 2018: 94% of total output). The table below summarises production in 1H 2019 and 1H 2018.

Pellet Production 1H 2019 and 1H 2018 ('000)

Whilst current production levels are constrained by bottlenecks in the beneficiation plant the Group is making good progress towards de-bottlenecking and expanding the concentrator by 2020 which will allow for the production of 12 million tonnes of pellets per annum.

Capital Investment

A summary of current projects under execution in 1H 2019 is shown in the table below:

Capital Investment for Future Growth

The Group's approved capital projects are in the table above. Ferrexpo is on track to reach 12 million tonnes of pellet output by 2021. Ferrexpo is currently considering a series of projects which will allow expansion of pellet capacity to 20 million tonnes per annum. This includes further development of the Group's beneficiating capacity, expansion of the Group's pelletising capacity and debottlenecking of logistics infrastructure including rail and port. A preliminary estimate of the required capital investment per tonne is approximately US$150-US$200 per tonne of incremental output.

Marketing

Ferrexpo's sales volumes for 1H 2019 increased 4% to 5.0 million tonnes (1H 2018: 4.8 million tonnes).

Ferrexpo benefits from a diversified sales portfolio with leading steel mills throughout the world, 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).

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:

In 1H 2019, 10-15% of the Group's pricing referenced the average 65% Fe CFR China iron ore fines price for the prior quarter less one month. This has a lagging impact on the Group's received price. In 2H 2019, this is expected to reduce to 8% of Group volumes.

Overall long term customer performance in 1H 2019 was in line with contract agreements and no volumes were sold into the Chinese spot market. The Group has achieved a higher production rate in 1H 2019 and sells to top class steel mills under long term contract throughout the world. Weakness in one region, as is currently being experienced in Europe, can be compensated for by sales into other regions based on international pricing methodology.

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

Update on Risks 

The Group considers that the risks facing the business, as highlighted on pages 38 to 47 of the 2018 Annual Report and Accounts published in April 2019, remain relevant. An update is provided below on material developments of key risks during the first half of 2019.

Global Steel Demand and Realised Price

The Group's realised price is principally impacted by demand for iron ore which is highly correlated to global demand for steel and steel mill profitability. In 1H 2019, steel profit margins in Europe, China and North East Asia continued to fall from 3Q 2018 levels. To date, in 2019 steel mill margins have been under pressure due to higher raw material costs and weaker end-user demand.

The iron ore forward curve for 62% Fe iron ore fines is currently in backwardation with delivery in December 2019 at $100 per tonne compared to spot on 30 July 2019 of approximately US$121 per tonne (although this remains higher than the 1H 2019 average of US$92 per tonne and the average 2018 price of US$70 per tonne). The expected price fall is due to lower forecast steel demand and non-traditional supply re-entering the market mainly from Chinese domestic producers. For further information see Iron Ore Supply (Iron Ore Market Review).

Lower iron ore fines prices will reduce the Group's realised price and profitability.

Pellet Premiums

Historically, pellet premiums have been correlated to steel mill profitability as they are the most productive source of iron in a blast furnace and thus trade at a price premium to other types of iron ores. When steel producer profitability is under pressure the reduction in usage of higher cost raw materials could lead to lower demand for iron ore pellets and or a fall in pellet premiums.

Lower pellet premiums will reduce the Group's realised price and profitability.

Market Mix

In 1H 2019, pellet premiums in China average US$33 per tonne compared with the average Atlantic pellet premium of US$67 per tonne for 62% Fe pellets. A change in sales mix away from the Atlantic pellet premium could have an impact on the average realised price and the Group profitability.

Freight Rates

Ferrexpo's received price is referenced to transparent freight indices such as the Baltic Exchange C3 freight price2, with higher freight rates reducing the Group's realised price. In 1H 2019, the C3 index decreased by US$2 per tonne to US$15 per tonne compared to 1H 2018. Freight rates are largely influenced by the price of oil and demand for seagoing vessels from bulk commodity producers. As of 31 July, freight rates had risen 53% to US$23 per tonne compared to the average for 1H 2019. An increase in freight rates will reduce the Group's received price and its profitability.

2 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.

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 consolidated 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 2019

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 2019.

Interim Consolidated Statement of Cash Flows

1) Dividend paid during the comparative period ended 30 June 2018 is net of withholding tax of US$3,187 thousand that is payable subsequent to the period end (30 June 2019: nil; 31 December 2018: nil). 

Interim Consolidated Statement of Changes in Equity

1) A detailed description of the impact from the adoption of new accounting standards and interpretations as at the end of the comparative period 31 December 2018 is provided in Note 3 New accounting policies in the 2018 Annual Report & Accounts.

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 2018: 50.3%; 30 June 2018: 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 2018 Annual Report & Accounts.

At 30 June 2019, the Group also holds through PJSC Ferrexpo Poltava Mining an interest of 49.9% (31 December 2018: 49.5%; 30 June 2018: 49.4%) in TIS Ruda LLC, a Ukrainian port located on the Black Sea. As this is an associate, it is accounted for using the equity method of accounting. The interest in the associate increased as a result of the increase of the Group's shareholding in PJSC Ferrexpo Poltava Mining from 99.1% to 100.0% in June 2019.

Note 2: Summary of significant accounting policies

Basis of preparation

The interim condensed consolidated financial statements for the six months period ended 30 June 2019 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 2018.

The interim condensed consolidated financial statements have not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on Review of interim financial information and do not include all of the information required for full annual financial statements.

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 2018. 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 2018, 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 qualified and contained a statement under section 498(3) of the Companies Act 2006. The auditors' report did not contain a statement under section 498(2) of the Companies Act 2016.

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 of this set of financial statements.

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 2018 except for the adoption of the new standards that became effective as of 1 January 2019.

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

IFRS 16 Leases

The Group applied IFRS 16 Leases, as issued in January 2016, for the first time as of 1 January 2019. The standard replaces the previous leases standard, IAS 17 Leases, and related interpretations. IFRS 16 establishes the principles for the recognition, measurement, presentation and disclosure of leases for the customer ("lessee") and the supplier ("lessor") and eliminates the classification of leases as either operating or finance for the lessee as is required by IAS 17. Instead, it introduces a single lessee accounting model requiring a lessee to recognise assets and liabilities for all leases unless the underlying asset has a low value or the lease term is 12 months or less.

In accordance with the transition provisions set out in IFRS 16, the Group elected to apply the standard retrospectively, with the cumulative impact of the first-time adoption recognised at the date of initial application. On transition, the Group grandfathered its previous assessment of operating leases under IAS 17 and recognised for these lease contracts rights of use assets and corresponding lease liabilities on the consolidated statement of financial position with no impact on retained earnings. The lease liabilities were measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate at initial application which is the interest rate that the Group would have to pay to borrow over a similar term the funds necessary to obtain an asset of a similar value to the right of use asset in a similar economic environment. The corresponding right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the consolidated statement of financial position as at the end of the comparative period ended 31 December 2018. The balance of lease liabilities and right-of-use assets relating to leases classified as finance leases as at the end the comparative period ended 31 December 2018 was carried forward to the date of initial application. The new requirements of the standard as to whether a contract contains a lease component or not were applied to the identification of new lease contracts signed subsequent to 1 January 2019.

On transition, the Group elected to apply the following practical expedients and exemptions, as permitted under the transition provisions set out in the standard:

·; application of a single discount rate to a portfolio of leases with similar characteristics;

·; recognition exemption for low value and short-term leases, which are therefore recognised in the consolidated income statement on a straight line basis;

·; account for each lease component and any associated non-lease components as a single lease component instead of separating the non-lease components from the lease ones.

Currently, the Group leases land, buildings and lease equipment. The vast majority of land leases are for land used for the extraction of ore and are not within the scope of IFRS 16 according to the scope exemptions set out in the standard. The new standard primarily resulted in the recognition of right-of-use assets and lease liabilities in respect of long-term rental contracts for several of the Group's office premises with rental periods of five to ten years, land not used for the direct extraction of ore as well as for lease equipment.

The following table provides a reconciliation between the balance of operating lease commitments as at 31 December 2018 and the lease liability recognised on 1 January 2019:

1) Leases of land refer to land not used for the direct extraction of ore in Ukraine, the Group's country of operations. These lease agreements with the Ukrainian government typically have a duration of up to 49 years requiring land lease payments in the form of rental taxes based on annually determined rates by the government. As a consequence, the lease liabilities relating to land not used for the direct extraction of ore (including leases under permanent terms) are recognised over a lease term of 12 months reflecting the period over which substantially fixed lease payments are expected. Beyond this period, payments are subject to non-market driven changes in either the normative value of land and/or in the rental tax rate and therefore cannot be considered in-substance fixed payments or as variable lease payments that depend on an index or a rate.

The lease liability is measured at the net present value of the remaining lease payments, discounted using the interest rate implicit in the lease or, when not available, the incremental borrowing rate computed for a group of leases with similar characteristics as regards to type of asset, lease term, contract currency and economic environment.

The right-of-use asset is recognised at the commencement date of the lease (when the asset is ready for use) and initially measured at cost. The cost includes the balance of the lease liability recognised, initial direct costs and lease payments made at or before the commencement date. In subsequent periods, the value of the right-of-use assets is adjusted for accumulated depreciation, impairment losses and any remeasurement of the lease liability. The right-of-use asset is depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term.

The following tables provide the details of the cumulative effects from the application of the new standard IFRS 16 Leases on the consolidated statement of financial position as of 1 January 2019 and the consolidated statement of financial position and the consolidated income statement as at 30 June 2019:

The adoption of IFRS 16 Leases has not had any material impact on the Underlying EBITDA and on basic and diluted earnings per share.

The impact on the net cash flows from operating activities from payments for short-term and low value leases was US$241 thousand for the six months ended 30 June 2019.

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

·; Annual Improvements to IFRS Standards 2015-2017 Cycle contains amendments to IFRS 3 Business Combinations and IFRS 11 Joint arrangements, IAS 12 Income taxes and IAS 23 Borrowing costs.

·; Amendments to IAS 19 Plan amendment, curtailment or settlement 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.

·; Amendments to IAS 28 Long-term interests in associates and joint ventures clarifies that other interests in associates and joint ventures, including long-term interests not accounted for using the equity method of accounting and that, in substance, form part of the net investment in those associates and joint ventures fall within the scope of IFRS 9.

·; IFRIC 23 Uncertainty over income tax treatments clarifies the accounting treatment for uncertainties in income taxes. The new interpretation is to be applied to the determination of taxable results, tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12 Income Taxes.

·; Amendments to IFRS 9 Financial instruments: Prepayment features with negative compensation clarifies the classification of particular pre-payable financial assets and the accounting for financial liabilities following a modification.

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 New accounting policies included in the 2018 Annual Report & Accounts and outlines the expected impact of the following amendments that will become effective in future periods.

·; 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.

·; Amendments to IAS 1 and IAS 8: Definition of material is effective for the financial year beginning on 1 January 2020 and introduces a revised definition of material information. In the new definition, reference is made to the concepts of obscured information and reasonable expectation that the information is going to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements.

Full disclosure of the final assessment of the impact of these amendments will be provided in the Annual Report & Accounts for the year ending 31 December 2019.

The Group does not expect an impact on its consolidated financial statements from all other standards, interpretations and amendments issued at the reporting date, but not yet to be adopted for these financial statements.

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 the recoverability of capitalised lean and weathered ore and critical judgements relate to taxation in terms of the tax legislation in Ukraine.

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 detailed description of the critical estimates and judgements are disclosed in the Group's 2018 Annual Report & Accounts.

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 39.

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 increased by US$28,941 thousand after net debt repayments of US$38,326 thousand during the period ended 30 June 2019 (31 December 2018: US$94,500 thousand; 30 June 2018: US$43,524 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 34 and 35.

Note 4: Revenue

Revenue for the six months period ended 30 June 2019 consisted of the following:

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

Operating expenses for the six months period ended 30 June 2019 consisted of the following:

Operating expenses include:

Audit and non-audit services for the period ended 30 June 2019 include US$1,810 thousand relating to audit services provided by the previous audit firm of the Group for the comparative period ended 31 December 2018.

Note 6: Foreign exchange losses and gains

Foreign exchange losses and gains for the six months period ended 30 June 2019 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 Share capital and reserves for further details.

Note 7: Net finance expense

Net finance expense for the period ended 30 June 2019 consisted of the following:

Note 8: 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 2019, the income tax expense was based on an expected weighted average tax rate of 15.0% for the financial year 2019, compared to an effective tax of 14.5% for the financial year 2018.

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 the end of the comparative period 30 June 2018 was classified as non-current due to the uncertainty in respect of the timing of the recovery. This prepaid balance was fully offset against income tax payable as at the end of the comparative period 31 December 2018.

Note 9: 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 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$51,154 thousand as of 30 June 2019 (31 December 2018: US$167,611 thousand; 30 June 2018: US$86,114 thousand) for the remainder of the financial year 2019.

Although accounts are published in US Dollars and dividends are declared in US Dollars, the shares are denominated in UK Pounds sterling and dividends are therefore paid in UK Pounds Sterling.

The final ordinary dividend for 2018 proposed at the year-end 2018 totalling US$38,695 thousand was paid in July 2019.

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

Note 10: Property, plant and equipment

During the six months period ended 30 June 2019, the additions to property, plant and equipment totalled US$123,619 thousand (30 June 2018: US$62,396 thousand; 31 December 2018: US$147,461 thousand) and the net book value of the disposals of property, plant and equipment totalled US$1,187 thousand (30 June 2018: US$3,409 thousand; 31 December 2018: US$5,966 thousand). The total depreciation charge for the period was US$40,116 thousand (30 June 2018: US$30,192 thousand; 31 December 2018: US$66,378 thousand).

The carrying value of property, plant and equipment includes capitalised borrowing costs on qualifying assets of US$33,053 thousand (31 December 2018: US$25,499 thousand; 30 June 2018: US$21,178 thousand).

Note 11: Right-of-use assets

The right-of-use assets recognised as at 30 June 2019 and as at the date of first-time application comprised:

During the six months period ended 30 June 2019, the additions to right-of-use assets totalled US$2,114 thousand and the total depreciation charge for the period was US$1,795 thousand.

Note 12: Other taxes recoverable and prepaid

As at 30 June 2019, taxes recoverable and prepaid comprised:

As at 30 June 2019, US$33,131 thousand of the VAT receivable relates to the Group's Ukrainian business operations (31 December 2018: US$42,738 thousand; 30 June 2018: US$26,667 thousand) of which US$653 thousand (31 December 2018: US$13,328 thousand; 30 June 2018: US$726 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$914 thousand (31 December 2018: US$1,020 thousand; 30 June 2018: US$1,366 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 2019, inventories comprised:

Inventories are held at the lower of cost or net realisable value.

Inventories classified as non-current comprise lean and weathered ore stockpiles that are, based on the Group's current processing plans, not planned to be processed within the next year. It is the Group's intention to process this ore at a later point of time and it is expected that it will take more than one year to process this stockpile, depending on the Group's future mining activities, processing capabilities and anticipated market conditions.

Note 14: Cash and cash equivalents

As at 30 June 2019, cash and cash equivalents comprised:

The debt repayments net of proceeds during the period ended 30 June 2019 totalled US$38,326 thousand (31 December 2018: US$94,500 thousand; 30 June 2018: US$43,524 thousand) affecting the balance of cash and cash equivalents. Further information on the Group's gross debt is provided in Note 15 Interest bearing loans and borrowings.

The balance of cash and cash equivalents held in Ukraine amounts to US$25,074 thousand as at 30 June 2019 (31 December 2018: US$21,416 thousand; 30 June 2018: US$27,205 thousand).