Ferrexpo Regulatory News (FXPO)

1 Apr 2008 07:01

Ferrexpo PLC01 April 2008 1 April 2008 Preliminary Results for the Twelve Months ended 31 December 2007 Financial highlights > Revenue up by 28% to US$698m> EBITDA up by 65% to US$246m> EBIT for the year up by 63% to US$187m> Underlying earnings(1) up by 128% to US$152m> Operating C1 costs increased 8.6% vs Ukrainian PPI of 23.3%> Strong balance sheet. Gearing reduced to 26% from 48%> Dividend of 3.2 cents per share Operating highlights > 9% increase in iron ore output to 28.9 million tonnes> 19% increase in production of high quality (65% Fe) pellets from Company's own ore> Substantial savings in raw materials and energy per unit of output> Intensification of works in the northern extension of the current mine to increase the short-term iron ore output> Commencement of operations in Yeristovskoye deposit: infrastructure and site preparation works underway> Operations commenced at the TIS-Ruda port facility and established own fleet of railway cars Financial and production highlights (US$ '000, unless stated) 12 months ended 31 December 2007 12 months ended 31 December 2006 % Change-----------------------------------------------------------------------------------------------------------------Iron ore production (kt) 28,934 26,425 +9%Pellet production from own ore (kt) 8,793 8,149 +8%Of which 65% Fe content(kt) 3,701 3,112 +19%Revenue 698,216 547,310 +28%EBITDA 246,057 149,142 +65%EBIT 186,935 114,850 +63%Pre-Tax Profit 160,760 80,737 +99%Underlying earnings(1) 151,545 66,359 +128%Basic EPS (US cents per share (Usc)) 20.41 10.47 +95%------------------------------------------------------------------------------------------------------------------ (1) 'Underlying earnings' is an alternative earnings measure, which the directors believe provides a clearer picture of the underlying financial performance of the Group's operations. Underlying earnings is presented after minority interests and excludes adjusted items. Adjusted items are those items of financial performance that the Group believes should be separately disclosed on the face of the income statement to assist in the understanding of the underlying financial performance achieved by the Group. Adjusted items that relate to the operating performance of the Group include impairment charges and reversals and other exceptional items. Non-operating adjusting items include profits and losses on disposal of investments and businesses. Michael Abrahams, Chairman of Ferrexpo plc commented: "2007 was a significant and successful year for Ferrexpo. We became the firstUkrainian company to list on the London Stock Exchange. As such we are committedto best practice in our operations, marketing and corporate governance, and weare developing a significant and realistic growth programme. At a time of marketvolatility, Ferrexpo is well positioned for profitable long term growth. Wecontinue to develop our existing operations and progress discussions withpotential strategic partners with the intention to quadruple our output over thenext 10 years." Mike Oppenheimer, CEO of Ferrexpo plc commented: "We have delivered an excellent set of results, having increased volumes,delivered further real cost reductions and operational improvements, taking fulladvantage of the increasingly strong pricing environment for our products. Ourfavourable location and commitment to product quality have resulted in furtherprogress towards our objective of being the supplier of choice for our majorcustomers; we have successfully moved our sales book to the desired level oflong term contracts with direct linkage to global pricing. As we look forward,continued strong iron ore demand and pricing, tight cost control and anaccelerated development of our resources present us with significantopportunities to create shareholder value." For further information, please contact: Ferrexpo: +44 207 389 8304Mike Oppenheimer, CEOChris Mawe, CFOGavin Mackay, Manager Investor Relations & Corporate Communications Finsbury: +44 207 251 3801Robin WalkerAlex Simmons Notes to editors: Ferrexpo plc is a Swiss headquartered resources company with assets in Ukraine,principally involved in the production and export of iron ore pellets, used inproducing steel. Current output is over 9 million tonnes, approximately 85% ofwhich is exported to steelmakers around the world. The Ferrexpo Group listed onthe main market of the London Stock Exchange in June 2007 under the ticker FXPO.For further information please visit www.ferrexpo.com. Chairman's statement A significant and successful year I am pleased to report that Ferrexpo has achieved strong operational andfinancial performance for its first full year reporting period as a publiclylisted company. The Group retained its leading position as the largest exporterof iron ore pellets from the Ukraine and made considerable progress towards itsstated objective of becoming a world-class resources company. We are committedto best practice in our operations, marketing and corporate governance, and weare developing a significant and realistic growth programme. At an operational level, we increased production from our existing mine for thesixth year in a row, producing a total of 9.1mt of iron ore pellets, an increaseof 6% compared to 2006. Importantly, we produced 19% more high quality 65% Fepellets from our own ore. The increases in volume and product quality resulteddirectly from continued improvements in operating efficiency and capitalinvestment. This strong operational performance and the positive pricing that we have seenover the year resulted in an excellent financial performance: revenues for 2007were up 28% at US$698.2m (US$547.3m). pre-tax profit increased by 99% toUS$160.8m (US$80.7m); and Group EBITDA for the period increased by 65% toUS$246.1m (US$149.1m). Positioned for accelerated growth Our excellent operational and financial performance in 2007 has established astrong foundation for the accelerated growth plans of the Group. At the start of the year, we set out to achieve improvements in operatingefficiency, product quality and production growth. In marketing, we aimed tobecome the iron ore supplier of choice in our key markets. We have succeeded inall these endeavours, with substantial progress being made both at our existingoperations and with our growth projects. We hold the exclusive licences to a world class iron ore resource, arepositioned close to our core markets, and operating in a global marketenvironment that is increasingly positive for our business. Among the world'siron ore producers, we are very favourably positioned to take advantage of theopportunities these circumstances present and have made significant progress indeveloping the range of capabilities required to do so. Our strategy is to maximise the value of the Group through the acceleratedcommercialisation of our extensive undeveloped ore deposits, whilst ensuringcontinuous production growth and cost competitiveness in our existingoperations. The Board continues to refine and develop this strategy, with anoverarching focus on management's priorities to establish the operational,financial and risk management capabilities required for aggressive delivery onour project pipeline. Market environment Globally, iron ore is currently in short supply, driven by demand fromdeveloping nations, in particular China and India, and in our core EasternEuropean markets, where per capita steel consumption continues to grow in linewith their strong economic growth. This demand and supply dynamic has led tosignificant increases in international benchmark prices, and we anticipatefurther uplifts to our product prices in the current year on the back ofcontinued demand growth. Our customers foresee continuing solid demand for steelin 2008. We believe that the existing positive market environment for our business islikely to continue for the next two years and beyond. This is fundamentally dueto sustained strong demand for steel products and steel-making raw materials notonly in the developing economies of China and India, but also in Eastern Europe,the former CIS and several other parts of the world. Strong iron ore pricing isbeing underpinned by a slow supply response from the mining industry,attributable to the acute execution difficulties being experienced by many ofthe projects that have been launched to meet the demand surge, the need todevelop lower quality ore bodies and massive infrastructure investments requiredfor many of the new green field developments. The global steel industry has also been subject to increased environmentallimits on sinter plant construction, a declining global supply of high qualitylump iron ore and heightened productivity targets in steel making. These factorsare likely to result in sustained higher consumption ratios of pellets versusother forms of iron ore feed. From a cost perspective, the industry has witnessed fundamental structuralchanges in the past year. The production cost of the marginal tonne of iron orehas risen substantially and, in the view of many market commentators,permanently. We believe that this rebasing of production costs provides a newfloor for iron ore prices. Marketing and logistics We have had a very successful year in the crucial areas of marketing anddistribution, having extended one of our largest long term contracts to 2015,and initiated a major new long term supply agreement in Ukraine. To ensure access to world markets, the TIS-Ruda ocean-vessel port facility wascommissioned in May 2007 and formally recognised by the Port of Yuzhny inOctober 2007. Ferrexpo owns 49% of TIS-Ruda, the first privately owned dry bulkcommodity terminal in the former CIS, and has access to its 5mtpa exportcapacity. To enhance the reliability of supply, we are also in the process ofprocuring up to 550 railcars for use on the state railway infrastructure. We continue to develop the Group's logistical capabilities throughout thedelivery chain to allow further expansion of our global customer base inanticipation of our growing production. Investing activities Operating cash flow for 2007 was US$188.8m, an increase of 176% over theprevious year (US$68.3m). Together with the proceeds from our listing in June,this strong cash flow has allowed us to initiate investment in our acceleratedgrowth strategy. The Group invested US$104.4m in continuing to develop andupgrade our existing operations in 2007, and, in November 2007, the Boardcommitted a further US$158m in development capital expenditure for this purpose. In addition to the expansion and optimisation of the existing mine, we arefocusing our investment activities primarily on our major growth projects. TheBoard has approved a new accelerated business plan which envisages the paralleldevelopment of several of the Group's major expansion projects. The first ofthese is Yeristovskoye, for which the Board committed US$47m in September 2007for new draglines. This equipment will be used to commence stripping operationsat the Yeristovskoye deposit in 2008. Health and safety Considerable progress has been made in establishing health, safety andenvironmental management ("HSE") systems at Ferrexpo Poltava Mining ("FPM") anda culture of continuous improvement in HSE performance is evident. Sadly, wesuffered a fatality during 2007 and a further two in 2008. These tragedies aretotally unacceptable and have provided a rallying point for us to redouble ourefforts in continuing to introduce best practice in health and safetymanagement. We have now appointed Du Pont Safety Resources who has anoutstanding record of success in assisting companies to achieve a 'zero harm'objective. Management & people We continued to strengthen our management and operational capability. We arepleased to welcome to the Board Chris Mawe (previously Finance Director of UKCoal plc) as Chief Financial Officer and Oliver Baring (Chairman of Mwana Africaplc) as Senior Independent Non-executive Director. Our strong performance in 2007 is a direct result of the quality and dedicationof our people and their enthusiastic support for the major change programmesthat are now underway across all facets of our business. We are committed tobuilding the additional capability required to implement our aggressive growthplans in line with best practice, while containing costs and this is a criticalpriority for our executive team. On behalf of the Board, I would like to thankall our employees and our key partners for their ongoing support andcontribution. Corporate governance and social responsibility I am pleased to report that the Group has achieved substantial compliance withthe UK Combined Code on Corporate Governance within six months of its listing onthe London Stock Exchange, and our governance regime is now broadly in line withbest practice. The Board remains firmly committed to delivering high standardsof corporate governance in the future. The Board has constituted a Corporate Social Responsibility ("CSR") Committee,chaired by our Chief Executive, to monitor the management of the Group's health,safety, environmental and community programmes. CSR remains a priority and weare continuing to develop further initiatives to institutionalise safetyconscious behaviour, actively engage with local communities and to minimise ourimpact on the environment. Outlook The current year has started strongly with substantial increases in global ironore prices being announced. This has created a very positive environment for theannual price negotiations with our major customers and we expect the globalpricing trends to flow through to our new contract prices from 1 April 2008. We continue to grow production as our improvement and efficiency programmesimpact positively upon operations. Whilst we expect cost inflation to remain afactor, as a result of both industry wide issues and, in the short term,domestic Ukrainian inflationary pressures, particularly affecting those costswhich are State-regulated, our continued focus on efficiency will serve tomitigate this to some extent. Overall, based on the fundamentals of our company and the market, thesubstantial progress we are making with our existing mines and the execution ofour growth projects, the Directors believe the Group is well positioned forcontinued profitable growth. Dividend The Directors recommend a dividend in respect of profits generated for theFerrexpo Group in 2007 of 3.2 cents per share, for payment on 19 May 2008 toshareholders who were on the register of members at the close of business on 18April 2008. Operating and financial review Operating performance review Highlights > 9% increase in iron ore output to 28.9 million tonnes> 19% increase in production of high quality (65% Fe) pellets from Company's own ore> Substantial savings in raw materials and energy per unit of output> Intensification of works in the northern extension of the current mine to increase the short-term iron ore output> Commencement of operations in Yeristovskoye deposit: infrastructure and site preparation works underway> Operations commenced at the TIS-Ruda port facility and established own fleet of railway cars Production Operating statistics------------------------------------------------------------------------------ UOM FY2007 FY2006 Change +/- %------------------------------------------------------------------------------ Iron ore mined 000't 28 934 26 425 2 509 9 Fe content % 29.91 29.72 0.19 1 Iron oreprocessed 000't 29 024 26 507 2 517 9 Concentrateproduced (WMS) 000't 10 651 9 695 956 10 Fe content % 63.50 63.36 0.14 - Floatedconcentrate 000't 5 620 4 418 1 202 27 High grade 000't 4 032 3 392 640 19 Fe content % 67.28 67.25 0.03 - Purchased concentrate 000't 266 441 (175) (40) Fe content % 64.06 63.68 0.38 1Purchased iron ore 000't 172 51 121 237 Pellets produced from own ore 000't 8 793 8 149 644 8 Higher grade 000't 3 701 3 112 589 19 Fe content % 65,09 65,06 0,03 - Lower grade 000't 5 092 5 037 55 1 Fe content % 62.22 62.22 0.00 -------------------------------------------------------------------------------- UOM FY2007 FY2006 Change +/- %-------------------------------------------------------------------------------Pellets produced frompurchased concentrateand ore 000't 279 401 (122) (30) Lower grade 000't 207 392 (185) (47) Fe content % 62.22 62.22 (0.0) (0) Total pellet production 000't 9 072 8 550 522 6 Pellet sales volume 000't 9 261 8 740 521 6 ---------------- ------- -------- -------- -------- ------Gravel output 000't 3 162 3 023 139 5 Strippingvolume 000'm3 18 664 18 517 147 1 In 2007, the goals for our existing operations at FPM centred on continuing thedemonstrated trend of improvements across all areas of CSR, and in operatingefficiency, product quality and production growth. FPM mined 28,934kt of iron ore in 2007, 9.5% more than in the previous year. FPMcurrently mines two different types of iron ore; K22 which is a richer orecontaining a slightly higher percentage of iron, and K23 which is a leaner orecontaining slightly less iron. Improvements in mining conditions in the pitmeant that production growth was accompanied by a 17% increase in the proportionof rich (K22) ore mined. This increase in the overall quality of the ore minedresulted in a decrease in the proportion of lean (K23) ore used for processingto 53.8% (compared to 56.7% in 2006), which assisted in increasing theoperational efficiency of the FPM concentrating plant and improving concentratequality. FPM produced 10,651kt of concentrate in 2007, a 10% increase compared to 2006.Emphasis was placed on achieving higher quality concentrate. Upgrades to FPM'sbeneficiation technology resulted in improvements in magnetic iron yield to92.4% (91.8% in 2006). The quality of concentrate in the year under reviewincreased to 63.50% Fe, continuing the improving trend seen in previous years(63.36% and 62.63% in 2006 and 2005 respectively). Total pellet production in 2007 increased by 6% to 9,072kt (8,550kt in 2006).Production of pellets from own ore increased by 8%, while production of pelletsfrom purchased ore and concentrate declined as a result of concentrate markettightness and the consequent inability of the Group to realise sufficientmargins from this business. As a result of FPM's efficiency and mining volumeimprovements in 2007, the decline in production of pellets from purchased rawmaterials was more than offset by the increase in production of pellets fromFPM's own produced concentrate. The improvements in concentrate quality and increases in flotation volumesenabled FPM to substantially increase its production of higher quality 65% Fepellets. Production of 65% Fe pellets from own ore increased by 19% to 3,701kt,and now constitutes 42% of FPM's total production (38% in 2006), consistent withthe Group's commitment to quality enhancement and its "value in use" marketingstrategy. As a result of international iron ore benchmark price increases in 2007 andsuccess in our continued efforts to increase prices to appropriate levels on adelivered, 'value in use' basis, the Group achieved an average Delivery atFrontier ("DAF")/ Free on board ("FOB") price of US$72.3 per tonne of pelletssold in 2007, a 17% increase over the average achieved price in the previousyear (US$61.8 per tonne). At year end, the Group was selling approximately 85%of its output to established clients on the basis of long term supplyagreements. Business improvement programme We have continued to see positive results from our Business ImprovementProgramme ("BIP"), which remains a priority for FPM management. We havecommitted to an intensification of the BIP programme at FPM to accelerate theshift towards best in class operational performance assisted by GPR Dehler, aconsultant widely used in the mining industry to facilitate improvementinitiatives. FPM is now two years into a four-year programme which aims tointroduce global best operating practice across its different areas ofoperation. Following BIP recommendations, FPM concentrated on implementingvarious improvements to its mining facility in 2007, principally around theplanning and organisation of maintenance and repairs. This resulted insubstantial improvements in the availability and utilisation of miningequipment. It also enabled FPM to increase the operating efficiency of itsexisting mining equipment, allowing it to scale down plans to increase itsequipment fleet and thereby avoid unnecessary capital expenditure. As part of the BIP, the Group also implemented a range of training sessions formanagers and employees, and set up an initial team of FPM employees withresponsibility for implementing and monitoring the ongoing BIP initiatives. TheGroup has implemented various management changes, aimed at creating a culture ofcontinuous improvement. Costs The Group's cash cost of pellet production ("C1") in 2007 was US$31.79 pertonne, an increase of 8.6% over 2006 (US$29.26 per tonne). The UkrainianProducer Price Index ("PPI"), however, increased by 23.3% over the year.Relative to PPI, the Group therefore achieved a significant (approximately 15percentage points) real term reduction in costs compared to 2006. The challengefacing the Group in 2007 was to sustain operating efficiency under theseinflationary conditions. Management efforts were focused on implementingmeasures aimed at reducing the rates of consumption of energy and raw materialsthrough efficiency initiatives and improvements in technology. Electricity consumption per tonne of pellets produced from own ore, the largestsingle cost item, declined by 3.3% to 190.9KWHr per tonne of pellets producedfrom own ore during 2007. Gas consumption reduced by 8.5% requiring 18.44thousand cubic metres per tonne of pellets compared to 2006. There was also adecline of approximately 4% in the consumption of steel grinding bodies in 2007.More efficient use of machinery was also a factor mitigating againstinflationary increases. Efficiency programmes resulted in a reduction of the average number of employeesby 11% in 2007. Overall, 9,188 people were employed as at 31 December 2007. Thiswas due to more efficient operations and improved organisation. Total payroll costs were US$5.78 per tonne of pellets in 2007, an increase of 4%compared to 2006, significantly below the prevailing inflation rate of 16.6%.FPM has achieved a reduction in its labour cost in real terms, given the 11%reduction in personnel and the fact that Ukrainian CPI increased by 16.6% in2007. Total payroll cost in 2007 was US$42.6m (2006: US$38.3m), or US$4.70 pertonne of pellets produced (2006: US$4.48 per tonne). The Group's costs are principally denominated in Ukrainian Hryvnia, which is amanaged currency currently maintained at UAH5.05 to the US dollar. Distribution costs per tonne of pellets increased by 9.9%, from US$9.88 pertonne in 2006 to US$10.86 per tonne in 2007. This resulted from increases inrailway tariffs and port charges imposed by the Ukrainian authorities. The Grouphas begun to implement a series of measures to minimise the effect of risingdistribution costs. These include railcar purchases, renegotiating freight termswith customers, using transhipment ports with lower charges, using its own bargeport on the Dnieper River more intensively and investment in the TIS-Ruda portfacility. Capital expenditure The Group's total capital expenditure in 2007 was US$104.4m, 114% more than in2006 (US$48.8m). The major part of this, US$56.9m, was invested in the miningcomplex. The Group announced the commitment of US$47m of capital expenditure forsix draglines to be used for stripping operations at the new Yeristovskoye minein September 2007, and a further US$158m for the expansion and extension of thecurrent GPL mine. In March 2008 the Group announced US$55m for initial miningequipment for Yeristovskoye. Growth projects Mine expansion and life extension at existing operations We carried out extensive engineering work on the Gorishne - Plavninskoye -Lavrikovskoye (GPL) mine in 2007, in the course of fulfilling our commitment tooptimising our existing facilities. The work was undertaken in conjunction withTurgis Consulting (Proprietary) Limited ("Turgis"), the company's SouthAfrica-based mining engineering partner. This work revealed the potential toexpand and improve the mine beyond what was thought feasible at the time of ourlisting on the London Stock Exchange. The culmination of this came in November2007 when the Group announced the commencement of a project to expand productionat its current GPL mining operation to approximately 32mtpa by 2011 and toextend the life of the mine at these higher production levels for at least theperiod to 2032. The design of the pit expansion is such that the incremental oremined will consist entirely of richer (K22) ore, all of which will be used toproduce FPM's higher quality pellets. This project is currently underway, with the additional ore production allowingthe Group to take advantage of currently under-utilised processing capacity.This will increase high quality pellet production by approximately 15%, or1.3mtpa. We expect this project to deliver meaningful and capital-efficientgrowth as we continue to pursue opportunities for extracting greater value fromour current operations. The capital expenditure committed to this project in 2007 will be spent onstripping works over the next three years, with the remainder to be spent onadditional mining equipment. Major growth projects At the time of our listing on the London Stock Exchange, in June 2007, weinformed the market that we planned to double our production by 2014. Weproposed to do this by commissioning a second open-cut mine immediately to thenorth of our existing GPL mine, on the Yeristovskoye deposit. We now believethat further accelerated development of the deposits to the north of the GPLmine is feasible. Studies underway on the Yeristovskoye and Belanovskoyedeposits indicate that they can be developed essentially in parallel. Work isalso proceeding on plans to develop Galeshchinskoye, the deposit to the north ofBelanovskoye. Given the positive conditions prevailing in the global iron oremarket and our enhanced operational and project execution capability, thisacceleration will be of great benefit to Ferrexpo. We are now contemplating a fourfold increase in ore production within the next10 years. We are planning to accelerate the development of the Yeristovskoyemine by one year, and then to develop a mine at the Belanovskoye deposit soonthereafter. First ore from the Yeristovskoye mine is now expected in 2011, withinfrastructure and site preparation works already underway. Six new draglineswere ordered in September to assist in the stripping of Yeristovskoye at a costof US$47m. The Yeristovskoye mine is currently in detailed feasibility study,and the Board expects to consider final investment commitment to the entireproject during Q3 2008. Belanovskoye is currently at the pre-feasibility studystage, and development option studies for the Galeshchinskoye deposit are now inprogress. We have made significant progress in developing the capability to execute theseexpansion projects. A new operating entity, separate from FPM, is beingestablished to develop and ultimately operate the new assets and key seniormanagers have been appointed. This will facilitate the immediate introduction ofbest practice into these assets. We are developing our mining alliance with DTPTerassement S.A. (France) ("DTP") and project management alliance with WorleyParsons Europe Limited, and these are gathering momentum and have beeninstrumental in enabling us to aggressively pursue these growth projects withconfidence. Our growth projects are brownfield expansions of our existing business,supported by our existing transport and logistics infrastructure, and as, suchrepresent substantially lower risk additions of new iron ore capacity than manyof the iron ore projects that have been announced worldwide. The Group formed the separate operating entity to administer the three majorgrowth projects separately from the GPL operation. The Group has appointedGeorge Mover as Director General (designate) for this entity, and NikolayGoroshko, the former Acting Chief Financial Officer for the Group, has moved tobecome Chief Commercial Officer with responsibility for all financial andcommercial aspects of the projects. Dave Webster has moved from Chief ProjectsOfficer for the Group to Interim Chief Operating Officer with oversight of themajor growth projects and the GPL expansion project. It is intended that thisseparate operational entity will have best practice operations from the outset.The Group is actively recruiting quality employees for these projects, and hassigned a Memorandum of Understanding with DTP in respect of the planned contractmining alliance for Yeristovskoye. We are confident in our capacity to fund and execute our growth plans from ourown resources. However, we are actively discussing the mutual benefits ofinvestments in our growth assets with a range of strategic investors to providethe additional funding and execution capability that will be required if we areto progress our plans as aggressively as possible in order to take advantage ofthe extremely positive outlook for our products. Marketing Ferrexpo is a well established producer and has been supplying iron ore pelletsto some of its key customers for more than 20 years. Several of the Group'straditional customers within Central and Eastern Europe operate steel plantsthat were designed specifically to use its iron ore pellets, giving the Group anunrivalled position within these markets. Our marketing strategy aims to develop a portfolio of customers in a range ofmarket destinations that will enable us to achieve full value for our productsand provide sales volume growth commensurate with the pace of development of ournew producing assets. The Group currently views its markets in three main categories, Traditional,Natural, and Growth. The Group's "Traditional Markets" are those markets that the Group has suppliedhistorically, and in which it enjoys a competitive advantage based on itslocation. These include Austria, Ukraine, Poland, Slovakia, Romania, Bulgariaand Russia. Serbia is a more recent addition to this segment. "Natural Markets" are relatively new markets for the Group in regions where theBoard believes it has a competitive advantage which is yet to be exploited. Thissegment includes Western Europe, Turkey and the Middle East. "Growth Markets" are those which offer to add new and significant tonnageexpansion potential to the Group's customer portfolio. Currently China is themajor target, where five long term contracts are in place providing a solid basefor future sales growth. The Group's products are mainly sold in the international markets. Export salesare handled by its specialist sales and marketing arm, Ferrexpo AG, which isbased in Switzerland with additional offices in Kyiv, Shanghai and Hong Kong.The Group exported more than 80% of its production in 2007. Historically, theGroup has principally supplied pellets to iron and steel plants in Central andEastern Europe, although it is now increasingly supplying customers in Asia.18.4% of the Group's total sales in 2007 was sold into China. The share of pellet sales to Ukrainian customers increased from 14% in 2006 to19% in 2007, as a result of more reliable domestic demand from the expandingUkrainian steel industry. Domestic sales are made directly through FPM on anex-works basis. The following table shows the Group's principal export markets for iron orepellets for the years ended 31 December 2007 and 2006 (by volume): 2007 2006 ('000t) ('000t)Traditional Markets 5,900.7 5,641.9Natural Markets 187.9 390.7Growth Markets 1,576.0 1,419.5 Total 7,664.6 7,452.1 We seek to maximise the proportion of our production sold on long term contractsand to strengthen our relationships with our key customers, while alsoparticipating in a low level of short term sales. We have had a successful 2007,with a major new long-term contract in Ukraine, as well as the extension of ourcontract with VoestAlpine AG to 2015 and the extension of our contracts inSlovakia and Serbia. At the end of 2007, approximately 85% of our sales weremade under long-term supply agreements, against 77% in 2006, most of which aredirectly or indirectly linked to benchmark prices, and the balance subject toannual pricing based on market supply-demand fundamentals. Sales in 2007 reached 9,261kt and included growth in our highest return coremarkets of Eastern Europe and Ukraine. We were successful in establishing longterm business into Turkey, resuming sales to Russia and we delivered our firsttrial cargo to Japan. In addition, the Group completed its first long-term contract with a Chinesesteel mill in 2006, and has subsequently entered into four more such agreementsin China. The Group's expansion into China demonstrates its track record increating and building solid customer relations. It has increased its sales intoChina from 1.8% of total sales in 2004 to 15.0% in 2007. The Group sold itsremaining iron ore pellets on shorter term contracts consistent with the termsof trade in certain markets, or on the spot market as trials to new customers.The Board expects that the proportion of sales that will be made under long-termcontracts in 2008 will be broadly similar to that seen in 2007. Our focus on long term contracts links together with our aim of achieving higherprices through enhanced pellet quality and a better understanding of ourcustomers' requirements of its products. This is necessary in order to capturethe maximum price relative to its competitors' delivered cost to the customer ona 'value to the customer' basis. The Group continued to significantly reduce third party agents in varioushistoric marketing arrangements, and now has direct commercial and technicalrelationships with the majority of its end-users. This strategy will continue in2008. Pricing The Group achieved an average DAF/FOB price for the pellets it sold in 2007 ofUS$72.3 per tonne, an increase of 17% over the average achieved price for 2006(US$61.8 per tonne). Most of the Group's export sales are based on annuallynegotiated prices contained in supplements to long-term supply contracts. Aproportion of sales tonnage is directly tied to the international seabornetraded iron ore benchmark price ("Benchmark Price") movement agreed between themajor iron ore producers and specific western European or Asian steel producersfor a given year. Historically, the Group has often realised a discount to theprevailing Benchmark Price, but after adjustments for freight, quality,proximity and logistics impacts, this is no longer the case. Variations in theGroup's achieved price stem from price variations of pellets sold into differentjurisdictions, as well as the mix between our 62% Fe pellets and our 65% Fepellets (which attract a premium). Domestic sales have historically taken placeusing quarterly prices, but the Group has successfully moved a substantialproportion of Ukrainian sales to annual or long term contracts from 2007. Logistics We are committed to managing the fullest extent of our delivery chain to assureour customer service, to maximise overall sales margins and to ensure that ourgrowth plans are not frustrated by logistics constraints. This will be achievedby developing world class customer delivery chain logistics management as anintegral function of our sales and marketing activities. Selected investments inbarge, rail and port facilities will also be required to overcome logisticsbottlenecks in Ukraine and Eastern Europe and these are being contemplated withkey partners. Significant progress was made in 2007. Our investment in the TIS-Ruda oceanvessel terminal provides us with access to a private port on the Black Sea witha capacity of 5mtpa. This facility has significant expansion potential andprovides the base from which we can grow our seaborne trade as we expand ourproducing assets. In terms of rail freight, we acquired 110 rail cars in 2007,with a further 440 planned for delivery in 2008. This will allow us to benefitfrom lower rail tariffs afforded to users of own rolling stock and to enhancereliability. We also have major rail and waterway assessments underway inUkraine to determine future needs. FINANCIAL REVIEW Highlights > Revenue up by 28% to US$698m> EBITDA up by 65% to US$246m> EBIT for the year up by 63% to US$187m> Underlying earnings* up by 128% to US$152m> Operating C1 costs increased 8.6% vs Ukrainian PPI of 23.3%> Free cash flow of $139.0m> Strong balance sheet: gearing reduced to 26% from 48%> Dividend of 3.2 cents per share Revenues The Group achieved overall revenue growth of 27.6% compared with the prior year.The Group's revenue for the year increased by US$150.9m to US$698.2m. Thisstrong performance was principally due to improved average DAF/FOB pellet prices(including applicable distribution costs) which rose by 17% to US$72.3 per tonnecompared with US$61.8 per tonne in 2006. Sales volumes for the year increased to9,261kt (8,740kt in 2006) as did growth in the proportion of sales of higherpriced high-grade '65% pellets' which increased to 40.7% for 2007 from 35.1% in2006. Costs & margins A principal measure of operating performance of the business is C1 cost pertonne of pellets produced. This is defined as the cash production cost from ownore divided by the total volume of production. In 2007 the Group achieved C1cash cost of production from own ore of US$31.79 per tonne compared withUS$29.26 per tonne in 2006. This excellent performance was achieved in the face of Ukrainian PPI inflationof 23.3%. It is pleasing to report that the group was able to contain its C1costs significantly below general inflation due to reduced energy consumptionper tonne of pellets, improved operating efficiency and tight cost control ofother general production expenses. Higher sales prices principally improved the gross margin in the year which was51.9% (2006: 45.8%). Gross profit increased by 44.6% to US$362.3m (2006:US$250.6m). The Group pays distribution costs principally to deliver pellets to the borderof Ukraine or within Ukraine to supply domestic customers. Total distributioncosts per tonne of pellets sold increased to US$10.86 per tonne for the yearcompared with US$9.88 per tonne in 2006. This increase was primarily driven byhigher rail tariffs. General and Administration costs relate to the operations within Ukraine and atthe Swiss sales and holding Company, including Group costs. These amounted toUS$44.3m in 2007 compared with US$41.1m for the prior year. In 2006 General andAdministration costs included US$3.9m in relation to Vostok Ruda. The majorityof the Group's holding in Vostok Ruda was disposed of in 2006. UnderlyingGeneral and administration costs now reflect an appropriate level which isrequired for the Groups operation as a large public company. Initial public offering costs amounted to US$65.9m in the year, of whichUS$34.0m was expensed and US$31.9m offset against the share premium accountreserve. Ukrainian inflation Ukraine has experienced high inflation in 2007 as a result of high governmentspending and rapid economic growth. Inflation accelerated in the fourth quarterof 2007, particularly for electricity and natural gas, two of the Group's keycost inputs. We expect Ukrainian inflation will be high again in 2008. Whilstthis inflationary environment is a challenge to the cost base of the Group wehave a number of initiatives underway to assist us in managing our coststructure over the medium to long term and continue to focus on business inputscost control. Finance costs Net finance costs reflected lower overall debt levels post IPO and reduced toUS$22.7m from US$30.3m in 2006. This was due to strong operational cashgeneration and the receipt of IPO proceeds during the year. In December 2006 the Group restructured its bank debt, extending the maturitydates of its outstanding indebtedness and decreasing its cost of borrowings. Aspart of this restructuring, the Group raised a bank syndicated loan in aninitial amount of US$275.0m. This successful transaction was later increased toUS$335.0m as a result of oversubscription. This allowed the Group to reduce itsweighted average interest rate to 7.6% from 8.3% and to 8.2% from 9.2% onfloating and fixed interest rate financial liabilities, respectively. Taxation The Group derives taxable income mainly in Switzerland and Ukraine. Theeffective tax rate was 16.6% compared with 18.3% in 2006. Earnings As a result of the strong operational performance described above, the Group wasable to achieve an increase in underlying earnings of 128.4% to US$151.5m (2006:US$66.4m) and improve earnings per share ("EPS") significantly. Fully dilutedEPS rose strongly to 20.33 USc in 2007 (2006: 10.47 USc). Underlying EPS wassimilarly higher at 24.93USc in 2007 (2006: 10.92USc). Dividend The Directors recommend a dividend in respect of profits generated for theFerrexpo Group in 2007 of 3.2 US cents per share, for payment on 19 May 2008 toshareholders who were on the register of members at the close of business on 18April 2008. Balance sheet and cash flow The cash flow of the business is summarised in the table below: Year endedUS$ millions 31.12.07-------------------------------------------------------------------------------- EBITDA 246.1 Working capital movements (1.8)Net financial payments (24.0)Income tax paid (32.0)Movement in provisions and other non-cash items 0.5--------------------------------------------------------------------------------Net cash flow from operating activities 188.8Sustaining capital expenditure (49.8)--------------------------------------------------------------------------------Free cash flow 139.0 (Paid for) / Received from:Expansionary projects (54.6)Purchase of available-for-sale investments (12.1)Loans to Associates (5.0)Distributions (69.8)Net IPO proceeds 153.4Other receipts 9.7Reduction in debt 160.6-------------------------------------------------------------------------------- The strong operating results increased EBITDA by 65.0% to US$246.1m increasingEBITDA margin to 35.2% in 2007 from 27.2% in 2006. Net cash flow from operating activities amounted to US$188.8m in 2007 (2006:US$68.3m). This strong performance and the proceeds of our recent IPO haveenabled the Group to strengthen the Balance Sheet significantly. As a result,Net Financial Indebtedness has decreased to US$117.9m at 31 December 2007 (31December 2006: US$278.5m). Overall this cash flow was invested partly in the modernisation of plant andequipment for existing operations and partly in investments which lay thefoundations for the development of the unexploited ore body. Expenditure oncapital was US$104.4m in 2007 compared with US$48.8m in 2006. Of thisexpenditure US$54.6m related to expansionary projects and US$49.8m was appliedin replacement or modernisation of plant in the existing operations. Our increased financial strength is apparent in our debt to equity gearingratio. This was 26% at 31 December 2007 compared to 48% at 31 December 2006. During the year the Group continued its phased disposal of Vostok Ruda,disposing of 6.2% to an entity under common control for $5,613,000, resulting ina gain of $4,714,000. The remainder of the Vostok Ruda investment representing3.2% of the share capital is available for sale. Also during the year the Group acquired a stake of 9.91% in OJSC Stahanov, arail car construction plant, from an entity under common control. This is tohelp secure supplies of rail cars for our expanding logistic operations. Consolidated income statement Year ended Year endedUS$ 000 Notes 31.12.07 31.12.06--------------------------------------------------------------------------------Revenue 3 698,216 547,310Cost of sales 4 (335,936) (296,720)--------------------------------------------------------------------------------Gross profit 362,280 250,590--------------------------------------------------------------------------------Selling and distribution expenses (100,614) (86,376)General and administrative expenses (44,308) (41,140)Other income 4,844 2,583Other expenses (5,096) (5,078)--------------------------------------------------------------------------------Operating profit from continuing operationsbefore adjusted items 217,106 120,579--------------------------------------------------------------------------------Write-offs and impairment losses (1,568) (2,205)Share of gains of associates 687 -Net loss on disposal of subsidiary - (3,524)Gain on disposal of available for sale investment 4,714 -Initial public offering costs (34,004) ---------------------------------------------------------------------------------Profit before tax and finance 186,935 114,850----------------------- ------- ------- -------Finance income 5 3,242 2,326Finance expense 5 (25,950) (32,655)Foreign exchange loss 5 (3,467) (3,784)--------------------------------------------------------------------------------Profit before tax 160,760 80,737--------------------------------------------------------------------------------Tax 6 (26,725) (14,758)Profit for the year 134,035 65,979--------------------------------------------------------------------------------Attributable to:Equity shareholders of Ferrexpo plc 124,076 63,578Minority interest 9,959 2,401 134,035 65,979 Earnings per share:Basic 7 20.41 10.47Diluted 7 20.33 10.47 Dividends:Proposed ordinary dividend per share (US cents) 7 3.2 -Proposed ordinary dividend (US$ 000) 7 19,449 - Consolidated balance sheet US$ 000 As at 31.12.07 As at 31.12.06--------------------------------------------------------------------------------Assets Property, plant and equipment 364,545 301,343Goodwill and other intangible assets 156,827 156,534Investments in associates 17,637 16,950Available-for-sale financial assets 47,134 34,641Other non-current assets 15,179 916Deferred tax asset 8,107 ---------------------------------------------------------------------------------Total non-current assets 609,429 510,384--------------------------------------------------------------------------------Inventories 56,545 48,487Trade and other receivables 43,575 58,284Prepayments and other current assets 10,773 17,118Income taxes recoverable and prepaid 5,350 1,424Other taxes recoverable and prepaid 52,362 42,489Available-for-sale financial assets 2,941 1,451Short term deposits with banks 10 - 11,043Cash and cash equivalents 10 86,966 16,236--------------------------------------------------------------------------------Total current assets 258,512 196,532----------------------------------------------------------------------------------------------------------------------------------------------------------------Total assets 867,941 706,916-------------------------------------------------------------------------------- Equity and liabilitiesShare capital 121,628 -Share Premium 188,566 -Other reserves 14,258 137,482Retained earnings 216,616 163,164--------------------------------------------------------------------------------Equity attributable to equity shareholdersof the parent 541,068 300,646--------------------------------------------------------------------------------Minority interest 45,854 36,146--------------------------------------------------------------------------------Total equity 586,922 336,792--------------------------------------------------------------------------------Interest-bearing loans andborrowings 10 146,091 204,732Trade and other payables 2,583 10,484Defined benefit pension liability 16,169 14,501Shares redemption liability - 9,062Provision for site restoration 1,746 402Deferred tax liability 1,025 2,535--------------------------------------------------------------------------------Total non-current liabilities 167,614 241,716--------------------------------------------------------------------------------Interest-bearing loans andborrowings 10 54,537 81,243Trade and other payables 25,127 21,492Accrued liabilities and deferredincome 13,812 17,986Shares redemption liability 10,036 -Income taxes payable 7,717 4,646Other taxes payable 2,176 3,041--------------------------------------------------------------------------------Total current liabilities 113,405 128,408----------------------------------------------------------------------------------------------------------------------------------------------------------------Total liabilities 281,019 370,124----------------------------------------------------------------------------------------------------------------------------------------------------------------Total equity and liabilities 867,941 706,916-------------------------------------------------------------------------------- Consolidated cash flow statement Year ended Year endedUS$ 000 Notes 31.12.07 31.12.06--------------------------------------------------------------------------------Net cash flows fromoperating activities 9 188,846 68,300Cash flows from investing activitiesPurchase of property, plant and equipment (104,352) (48,760)Proceeds from sale of property, plant andequipment 1,896 374Purchase of intangible assets (435) (745)Deposits lodged at banks 9,011 8,732Purchases of available for sale securities (12,126) (3,119)Proceeds from sale of financial assets 5,704 2,408Interest received 4,805 1,473Dividends received - 17Acquisition of minority interest in subsidiaries - (231,945)Acquisition of associates - (16,950)Loans provided to related parties - (16,674)Loans provided to associates (5,000) -Loans repaid by related parties - 123,457Proceeds from disposal of subsidiaries - 4,338--------------------------------------------------------------------------------Net cash flows used in investing activities (100,497) (177,394)--------------------------------------------------------------------------------Cash flows from financing activitiesProceeds from borrowings and finance 175,244 565,593Repayment of borrowings and finance (276,084) (512,819)Dividends paid to minority interest (786) (245)Distribution under 50/50 tax ruling (5,000) (31,521)Proceeds from issue of share capital in Ferrexpo AG - 109,329Proceeds from issue of share capital in Ferrexpo plc:Initial public offering proceeds 202,072 -Non-initial public offering proceeds 99 -Initial public offering costs (48,648) (7,503)Share buyback in previous parent (64,055) ---------------------------------------------------------------------------------Net cash flows from financing activities (17,158) 122,834--------------------------------------------------------------------------------Net increase in cash and cash equivalents 71,191 13,740Cash and cash equivalents at the beginning of the year 16,236 2,496Currency translation differences (461) ---------------------------------------------------------------------------------Cash and cash equivalents at the end of the year 86,966 16,236-------------------------------------------------------------------------------- Notes to the Consolidated Financial Information Note 1: General information The financial information for the year ended 31 December 2007 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 December 2006 have been delivered to the Registrar of Companies and those for 2007 will be delivered following the Company's annual general meeting convened for Thursday 15 May 2008. This preliminary announcement is based on unaudited results for the year ended 31 December 2007. Note 2: Summary of significant accounting policies Whilst the preliminary announcement has been prepared in accordance withInternational Financial Reporting Standards ('IFRS') and International FinancialReporting Interpretation Committee ("IFRIC") interpretations adopted for use bythe European Union and with those parts of the Companies Act 1985 applicable tocompanies reporting under IFRS, this announcement does not itself containsufficient information to comply with IFRS. The Board approved the fullfinancial statements that comply with IFRS in March 2008. The financialstatements have been prepared under the historical cost convention as modifiedby the recording of pension assets and liabilities and the revaluation ofcertain financial instruments. The accounting policies applied are consistent with those adopted and disclosedin the Group's annual financial statements for the year ended 31 December 2006. Note 3: Revenue Revenue for the year ended 31 December 2007 consisted of the following: Year ended Year endedUS$ 000 31.12.07 31.12.06--------------------------------------------------------------------------------Revenue from sales of ore pellets:Export 560,805 467,099Ukraine 128,731 73,089-------------------------------------------------------------------------------- 689,536 540,188-------------------------------------------------------------------------------- Revenue from services provided 3,005 3,158Revenue from other sales 5,675 3,964-------------------------------------------------------------------------------- 698,216 547,310-------------------------------------------------------------------------------- Export sales by geographical destination were as follows: Year ended Year ended US$ 000 31.12.07 31.12.06-------------------------------------------------------------------------------- Austria 160,324 140,286China 103,223 83,258Slovakia 81,516 54,143Serbia 83,708 64,015Czech Republic 55,617 52,775Bulgaria 27,389 15,587Poland 23,766 15,571Romania 7,038 23,838Germany - 4,183Turkey 9,777 12,302Japan 5,029 -Italy 3,418 -Other - 1,141-------------------------------------------------------------------------------- 560,805 467,099-------------------------------------------------------------------------------- During the year ended 31 December 2007 sales made to three customers accountedfor approximately 53.9% of the net sales revenue (2006: 55.3%). Note 4: Cost of sales Cost of sales for the year ended 31 December 2007 consisted of the following: Year ended Year endedUS$ 000 31.12.07 31.12.06--------------------------------------------------------------------------------Materials 92,449 62,002Purchased ore and concentrate 17,587 16,703Electricity 74,621 65,535Personnel costs 47,402 46,231Spare parts and consumables 14,663 27,072Depreciation and amortisation 25,635 24,895Fuel 28,086 25,798Gas 25,576 20,806Royalties and levies 8,570 7,678Other 1,347 --------------------------------------------------------------------------------- 335,936 296,720-------------------------------------------------------------------------------- Cost of sales is reconciled to "C1" costs in the following manner: Year ended Year endedUS$ 000 31.12.07 31.12.06-------------------------------------------------------------------------------- Cost of sales 335,936 296,720 Depreciation and amortisation (25,635) (24,895)Purchased ore and concentrate (19,911) (19,396)Production cost of gravel (2,101) (2,728)Stock movement in the period (6,284) (9,930)Pension current service cost (1,877) (1,784)Other (555) 484--------------------------------------------------------------------------------C1 Cost 279,573 238,471------------------------------------------------------------------------------- Own ore produced tonnes 8,793,000 8,149,000C1 cash cost per tonne $ 31.79 29.26 "C1" costs represent the cash costs of production of own ore divided byproduction volume of own ore, and excludes non cash costs such as depreciation,pension costs and stock movement, and costs of purchased ore, concentrate andthe production cost of gravel. Note 5: Financing income/expense Finance revenue and costs for the year ended 31 December 2007 consisted of thefollowing: Year ended Year endedUS$ 000 31.12.07 31.12.06--------------------------------------------------------------------------------Finance incomeInterest income on bank deposits 2,457 2,326Other finance revenue 785 --------------------------------------------------------------------------------- 3,242 2,326--------------------------------------------------------------------------------Finance expenseInterest expense on financialliabilities measured at amortised cost (21,493) (27,425)Interest on defined benefit plans (1,462) (1,269)Bank charges (1,642) (3,870)Other finance costs (1,353) (91)-------------------------------------------------------------------------------- (25,950) (32,655)-------------------------------------------------------------------------------- Foreign exchange loss (3,467) (3,784)--------------------------------------------------------------------------------Net finance expense (26,175) (34,113)-------------------------------------------------------------------------------- Note 6: Income tax expense Major components of income tax expense for the year ended 31 December 2007consisted of the following: Year ended Year endedUS$ 000 31.12.07 31.12.06--------------------------------------------------------------------------------Current income tax 31,163 16,371Deferred income tax (4,438) (1,613)-------------------------------------------------------------------------------- 26,725 14,758-------------------------------------------------------------------------------- The Group's income was subject to taxation in Ukraine, Switzerland and theUnited Kingdom. During the year ended 31 December 2007 the corporate income taxwas levied on taxable income less allowable expenses at the following rates: - Ukraine 25% (2006: 25%) - Switzerland 9.8 - 16.2% (2006: 9.3%) - UK 30% (2006: 30%) The effective income tax rate differs from the corporate income tax rates. Theweighted average of the statutory rates was 17.6% for 2007 (2006: 13.9%). Thisis calculated as the average of the statutory tax rates applicable in thecountries in which the Group operates, weighted by the profit/(loss) before taxof the subsidiaries in the respective countries as included in the consolidatedhistorical financial information. The effective tax rate is 16.6% (2006: 18.3%) The changes in the weighted average statutory income tax rate are largely due toa change in the weighting of profit/ (loss) before tax in the variousjurisdictions in which the Group operates. A reconciliation between the income tax charged in the accompanying historicalfinancial information and income before taxes multiplied by the weighted averagestatutory tax rate for the year ended 31 December 2007 is as follows: Year ended Year endedUS$ 000 31.12.07 31.12.06--------------------------------------------------------------------------------Profit before tax 160,760 80,737 Notional tax computed at the weighted average statutory tax rate of 17.6% (2006: 13.9%) 28,234 11,18650/50 Swiss tax ruling (472) (1,991)(Recognition)/derecognition of deferred tax assets - 791Tax indexation of fixed assets (6,084) -Expenses not deductible for tax purposes 4,675 4,759Prior year items 32 13Other 340 ---------------------------------------------------------------------------------Income tax expense 26,725 14,758-------------------------------------------------------------------------------- Note 7: Earnings per share and dividends paid and proposed The earnings per share ('EPS') calculation has assumed that the number ofordinary shares issued pursuant to the share exchange agreements in relation tothe acquisition of Ferrexpo AG by Ferrexpo plc have been in issue throughout2006 and 2007 which is consistent with the pooling of interests method used toaccount for combinations of businesses under common control. The directorsbelieve that this measure of EPS provides a more meaningful comparison with theGroup's ongoing business than using the statutory EPS which would only reflectshares issued based on the actual date of issue. Furthermore this approachprovides the same results as if the Ferrexpo AG shares, outstanding between 2006and 2007, have been multiplied by the exchange ratio shares in Ferrexpo plc. Basic EPS is calculated by dividing the net profit for the year attributable toordinary equity shareholders of Ferrexpo plc by the number of ordinary shares asdefined above. Year ended Year ended 31.12.07 31.12.06--------------------------------------------------------------------------------Profit for the period attributable to equity shareholders Basic earnings per share (US cents) 20.41 10.47Diluted earnings per share (US cents) 20.33 10.47 Underlying earnings for the period Basic earnings per share (US cents) 24.93 10.92Diluted earnings per share (US cents) 24.84 10.92 The calculation of the basic and diluted earnings per share is based on thefollowing data: Year ended Year endedThousands 31.12.07 31.12.06-------------------------------------------------------------------------------- Number of sharesBasic number of ordinary shares outstanding 607,796 607,471Effect of dilutive potential ordinary shares 2,403 ---------------------------------------------------------------------------------Diluted number of ordinary shares outstanding 610,199 607,471-------------------------------------------------------------------------------- The number of ordinary shares in issue excludes the shares held by the FerrexpoAG Employee Benefit Trust. Diluted earnings per share is calculated by adjustingthe number of ordinary shares in issue on the assumption of conversion of allpotentially dilutive ordinary shares. All share awards are potentially dilutiveand have been included in the calculation of diluted earnings per share. 'Underlying earnings' is an alternative earnings measure, which the directorsbelieve provides a clearer picture of the underlying financial performance ofthe Group's operations. Underlying earnings is presented after minorityinterests and excludes adjusted items. The calculation of underlying earningsper share is based on the following earnings data: Year ended Year endedUS$ 000 31.12.07 31.12.06-------------------------------------------------------------------------------- Profit attributable to Equityholders 124,076 63,578 Writeoffs/impairments 1,568 2,205Loss on disposals - 3,524IPO costs 34,004 -Gain on sale of available for sale investment (4,714) -Tax on adjusting items (3,217) (1,432)Minority interests (220) (1,213)Tax on Minority interests 48 (303)--------------------------------------------------------------------------------Underlying earnings 151,545 66,359-------------------------------------------------------------------------------- Adjusted items are those items of financial performance that the Group believesshould be separately disclosed on the face of the income statement to assist inthe understanding of the underlying financial performance achieved by the Group.Adjusted items that relate to the operating performance of the Group includeimpairment charges and reversals and other exceptional items. Non-operatingadjusting items include profits and losses on disposal of investments andbusinesses. Dividends paid and proposed Year ended Year endedUS$ 000 31.12.07 31.12.06--------------------------------------------------------------------------------Dividends proposedDividend proposed by subsidiary tominority $0.015 (2006: $0.01) 251 563-------------------------------------------------------------------------------- 251 563-------------------------------------------------------------------------------- Year ended Year endedUS$ 000 31.12.07 31.12.06-------------------------------------------------------------------------------- Dividends paid during the periodFinal dividend paid by parent company proposed in 2004 - 108Final dividend proposed in previous years to minorityinterest 786 178-------------------------------------------------------------------------------- 786 286-------------------------------------------------------------------------------- The directors are proposing a dividend in respect of profits generated by theFerrexpo Group in 2007 of 3.2 US cents per ordinary share. Based on shareseligible for dividends as at 31 December 2007 this will result in a distributionof US$ 19,449,000 of shareholders' funds. These financial statements do notreflect this dividend payable, in accordance with UK Companies Act and IFRS, asit is still subject to shareholder approval. The Ferrexpo AG Employee Benefit Trust, has waived the right to receivedividends on the shares it holds. Note 8: EBITDA The Group calculates EBITDA as profit from continuing operations before tax andfinance, adjusted for depreciation and amortisation, non-recurring itemsincluded in other income & other costs, and the net gain/loss on disposal ofsubsidiaries and associates. The Group presents EBITDA because it believes thatEBITDA is a useful measure for evaluation of its ability to generate cash and ofits operating performance. Year ended Year endedUS$ 000 31.12.07 31.12.06-------------------------------------------------------------------------------- Profit before tax and finance 186,935 114,850 Write-offs and impairment losses 1,568 2,205Net loss on disposal of subsidiary - 3,524Net gain on disposal of availablefor sale investment (4,714) -Initial public offering costs 34,004 -Depreciation and amortisation 28,264 28,563--------------------------------------------------------------------------------EBITDA 246,057 149,142-------------------------------------------------------------------------------- The Group has changed how it defines EBITDA from that used in prior periodswhich now excludes the effect of foreign exchange gains/losses because the Groupbelieve this is a more appropriate reflection of its ability to generate cashand of its operating performance. Note 9: Reconciliation of profit before income tax to net cash flow fromoperating activities Year ended Year endedUS$ 000 31.12.07 31.12.06-------------------------------------------------------------------------------- Profit before income tax 160,760 80,737Adjustments for:Depreciation of property, plant and equipment andamortisation of intangible assets 28,265 28,563Interest expense 24,488 27,425Interest income (3,242) (2,326)Dividend income - (17)Movement in allowance for doubtful receivables 336 183Loss on disposal of property, plant and equipment - 601Write off and impairment losses 1,568 2,021Site restoration provision 1,269 -(Gains)/ losses on disposal ofinvestments available for sale (4,714) 31Losses from disposal of subsidiaries and associates - 3,524Initial public offering costs 34,004 -Share of income from associates (687) -Defined benefit plan expense 3,915 3,163Foreign exchange loss 3,467 645--------------------------------------------------------------------------------Operating cash flow before working capital changes 249,429 144,550-------------------------------------------------------------------------------- Changes in working capitalDecrease / (increase) in trade accounts receivable and other receivables 13,951 (38,658)(Increase) / decrease in inventories (7,840) 9,237Increase / (decrease) in trade and other accounts payables 6,534 (2,467)(Increase) / decrease in other taxes receivable (14,411) ---------------------------------------------------------------------------------Operating cash flows after working capital changes 247,663 112,662-------------------------------------------------------------------------------- Interest paid (24,525) (28,119)Income tax paid (32,018) (14,562)Post employment benefits paid (2,274) (1,681)--------------------------------------------------------------------------------Net cash flows from operatingactivities 188,846 68,300-------------------------------------------------------------------------------- Note 10: Net financial indebtedness Year ended Year endedUS$ 000 31.12.07 31.12.06-------------------------------------------------------------------------------- Cash and cash equivalents 86,966 16,236Term deposits - 11,043 Current borrowings (54,537) (81,243)Non-current borrowings (146,091) (204,732) Short term due for equipment (1,664) (9,300)Long term due for equipment (2,569) (10,462)--------------------------------------------------------------------------------Net financial indebtedness (117,895) (278,458)-------------------------------------------------------------------------------- Net financial indebtedness as defined by the Group comprises cash and cashequivalents, term deposits, interest bearing loans and borrowings and amountspayable for equipment. Payables for equipment comprised balances due to foreign suppliers for miningequipment denominated in USD and EURO which are interest bearing but includedwithin trade payables. This information is provided by RNS The company news service from the London Stock Exchange