Ferrexpo Regulatory News (FXPO)

10 March 2016

FERREXPO plc

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

2015 Full Year Results

Ferrexpo plc, currently the third largest exporter of iron ore pellets to the global steel industry, today announces its financial results for the year ended 31 December 2015.

Michael Abrahams, Non-Executive Chairman, said:

"Ferrexpo is one of the lowest cost pellet producers in the world enabling it to remain profitable and cash generative during the current commodities downturn. The Group's production and marketing operations continue to perform very well, producing record levels of pellets, notably a significant increase in the output of the Group's premium 65% Fe pellets, and increasing Ferrexpo's presence in key markets. In 2015, Ferrexpo's price realisations outperformed the Platts 62% Fe iron ore fines price by 11 percentage points and its cost of production reduced by 30%. This performance has been underpinned by the relative stability of pellet premiums over the Platts iron ore fines price, which declined 42% compared to 2014, and the completion of the Group's four year investment programme which has increased product quality, boosted operating efficiencies and contributed to lower costs.

For the year ended 2015, Ferrexpo has reported an EBITDA, before special items, of US$313 million (2014: US$496 million) and an EBITDA margin of 33% (2014:36%).Trading in 1Q 2016 has been encouraging. The Platts Atlantic pellet premium has firmed in March 2016 to US$30 per tonne compared US$26 per tonne in January 2016 and US$28.5 per tonne in February 2016. While, the spot pellet premium in China, according to Mysteel, has also strengthened from approximately US$11 per tonne at the end of 2015 to currently US$16 per tonne.

The increase in pellet premiums reflects a shortage of supply of pellets in the seaborne market which is underpinned by continuing demand for pellets from steel mills. In contrast, there is expected to be an oversupply of iron ore fines in 2016, which is likely to maintain pressure on the iron ore fines price, despite some recovery seen so far this year due to seasonally weaker supply.

The Group's C1 cash cost has further reduced to an average of US$24.3 per tonne in February 2016 (average December 2015: US$26.4 per tonne) further strengthening its position on the global pellet cost curve.

Net debt at the end of the 2015 amounted to US$868 million (31 December 2014: US$678 million), the increase was principally due to the insolvency of Bank Finance and Credit ('Bank F&C'), the Group's transactional bank in Ukraine, in September 2015, which resulted in a US$175 million reclassification of cash held at Bank F&C as restricted. Cash on hand as of 31 December 2015 was US$35 million (31 December 2014: US$627 million). Cash as of 29 February 2016, was US$36 million following the repayment of US$39 million of debt in January and February 2016.

Lastly, I would like to welcome Sir Malcom Field as a new non-executive independent director to the Board. Also as announced in 2015, I will be standing down later this year as your Chairman. Following a long search we are now in advanced discussions with a candidate, who is expected to succeed me as Chairman following a suitable handover period of no more than a few months. The candidate is expected to join the Board in the near future." 

Extract of 2015 Financial Performance:

Summary of 2015 Operational and Financial Results:

· No work related fatalities (2014: three)

· Record production volume up 6% to a record 11.7 MT (2014: 11.0 MT)

· Record production of 65% Fe pellets, up 79% to 10.4 MT (2014: 5.8 MT)

· Average C1 cash cost reduced 30% to US$32 per tonne, further reducing to US$24.30 per tonne in February 2016

· Platts 62% Fe CFR iron ore fines price 42% lower in 2015, average US$56 per tonne vs. US$97 per tonne in 2014

· Ferrexpo realised price (FOB) outperformed Platts index by 11%, declining 31% compared to 2014 due to relatively stable pellet premiums year on year, increased revenue from additional 65% Fe pellets sales and lower C3 freight

· Sales volumes increased 1.5% to 11.3 MT (2014: 11.2 MT) reflecting higher sales to Germany and Japan as well as first shipments to South Korea

· EBITDA margins remained strong at 33% (2014: 36%) due premium product offering and low positioning on pellet cost curve

· Special items reflect:

· Allowance for restricted cash at Bank F&C of US$146 million after expected tax relief

· Disposal proceeds from Ferrous Resources of US$42 million

· Impaired assets of US$5.6 million

· Capex reduced to US$65 million (2014: US$235 million) reflecting the completion of the Group's investment programme, to increase quality and volume of output, as well the low iron ore price environment

· Net debt at 31 December 2015 US$868 million (31 December 2014: US$678 million) principally reflecting the US$175 million reclassification of cash held at Bank F&C. During the year the Group repaid US$394 million of debt

· Net debt to EBITDA of 2.78x (31 December 2014:1.37x) below the Group's target of 3x

· Cash balance as of 31 December 2015 US$35M, cash balance as of 29 February 2016 US$36M after US$39M of debt repayments year to date

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

Webcast link: http://edge.media-server.com/m/p/vtxsnni2

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. The Group is currently the third largest supplier of pellets to the global steel industry and the largest exporter of pellets from the CIS. In 2015, it produced a record 11.7 million tonnes of pellets, a 6% increase compared to 2014. Ferrexpo has a diversified customer base supplying steel mills in Austria, Slovakia, the Czech Republic, Germany and other European states, as well as in China, India, Japan, Taiwan and South Korea. Ferrexpo is listed on the main market of the London Stock Exchange under the ticker FXPO. For further information, please visit www.ferrexpo.com

CHAIRMAN'S STATEMENT

Michael Abrahams CBE DL Chairman

Ferrexpo is a long established iron ore pellet exporter to the global steel industry.

Ferrexpo produces a pelletized iron ore product, which receives a premium over the Platts 62% Fe iron ore fines price. The Group sells to high quality steel mills that produce predominantly sophisticated steel products. Ferrexpo's operations are centrally located in Europe enabling it to reliably supply customers in both central and Western Europe, by rail and barge, and in Asia, by cape size vessel via its port facilities on the Black Sea.

The Group has and continues to build on its position as a key supplier to premium steel mills around the world. Most recently developing long-term relationships in Germany and Japan. In 2015 it made its first shipments to South Korea.

According to CRU[1], in 2015, Ferrexpo was the lowest cost pellet producer in the world, enabling it to remain profitable during the current downturn, and the fourth largest exporter of pellets to the global steel industry. The Group operates a long life and well invested asset base. The mining operations are in the Poltava region of central Ukraine, remote from the area of conflict in the east of the country. Operations continue to be unaffected by the ongoing unrest.

Economic conditions in Ukraine, however, have remained fragile in 2015. The National Bank of Ukraine ('NBU') estimates that GDP declined by 10% following a 7% decline in 2014.

Iron Ore Market

The supply of iron ore requires periods of large scale capital investment while demand from steel mills is heavily influenced by global economic growth, which has recently been primarily determined by China. A mis-match between new supply which takes time to displace higher costs sources of iron ore, and slowing world demand for steel has led to further iron ore price weakness in 2015.

In 2015, the average Platts 62% Fe iron ore fines price index declined 42% from US$97 per tonne to US$56 per tonne. Ferrexpo's average realised price, however, outperformed the index by 11 percentage points, reducing 31% compared to 2014. This reflects the premium that Ferrexpo, as a pellet producer, receives in addition to the iron ore fines price, as well as improved product and customer mix and lower international freight costs.

Ferrexpo Operations

In 1Q 2015, Ferrexpo completed its four year investment programme to increase the volume and quality of output. In addition to the new Ferrexpo Yeristovo mine completed earlier, Ferrexpo completed the multi-year programme in the processing facilities increasing concentrate grade and quantity with the commissioning of the final flotation circuits. As a result, pellet output increased to record levels for the third consecutive year, up 6% to 11.7 million tonnes of pellets (2014: 11.0 million tonnes) while production of premium 65% Fe pellets grew by almost 80% to 10.4 million tonnes (2014: 5.8 million tonnes).

The cost to produce and rail pellets to Ukrainian border points for dispatch was reduced in the year and is now below 2007 levels in US Dollar terms. This has been as a result of a combination of local currency weakness against the US Dollar, lower input prices of commodities, such as oil and gas, and productivity gains from mining and processing improvements. These operating improvements have led to a reduction in controllable costs, achieved through the consistent execution of the Group's strategy, namely the modernisation of FPM's mining and processing facilities, the development of the FYM mine with associated best in class infrastructure, and a focus to improve operational KPI's to world class levels.

[1] CRU pellet cost curve analysis January 2016

2015 Financial Result

The weak iron ore price environment was reflected in a lower Group EBITDA of US$313 million (2014: US$496 million). Significantly reduced iron ore prices were partly offset by higher sales volumes, relatively stable premiums for pellets over the iron ore fines price, an improvement in sales mix towards 65% Fe pellets, which receive a price premium over 62% Fe pellets, lower freight costs and significantly reduced costs. Accordingly, despite the challenging circumstances for both the iron ore industry and Ukraine, the Group was able to report operating profit, before special items, of US$251 million (2014: US$409 million).

Special items totalled US$110 million after an expected tax relief credit (2014: US$84 million). Further details can be found below, see Bank F&C, as well as in the Performance Review on page 9 and in notes 10, 14, 15, 16 and 18 to the financial statements.

Delivery of Strategy

In 2015, the Group continued to advance its strategy to become the lowest cost and largest producer of blast furnace iron ore pellets to the global market. Ferrexpo's operational progress, since its IPO in 2007, shows steady volume growth, cost control and development of a global marketing presence and logistics network supplying an increasingly high quality customer base. Total pellet output has increased 29% since 2007 and so too have its logistics capacity allowing Ferrexpo to competitively ship, rail and barge product to customers around the world.

Since 2007, Ferrexpo has generated US$3.3 billion in free cash flow from operations. Shareholders have received US$572 million in dividends and capital returns whilst, at the same time, Ferrexpo has invested approximately US$2.0 billion into its Ukrainian operations making it one of the largest investors in the country over that period.

Bank F&C

On the 18 September 2015, Bank Finance and Credit JSC ('Bank F&C'), the Group's main transactional bank in Ukraine, entered temporary administration on the order of the Deposits Guarantee Fund of Ukraine, following a decision by the NBU on 17 September 2015 that Bank F&C was insolvent. 

The decision by the NBU was following recapitalisation of the bank during 2015 by its owner, Kostyantin Zhevago, for approximately UAH2.6 billion together with several agreed funding tranches of UAH1.45 billion from the NBU. On 18 December 2015, after a search for suitable investors during the temporary administration, the NBU announced that Bank F&C's banking licence had been revoked and that the bank would be liquidated in due course.

The liquidation process is now underway and in accordance with applicable procedures, the Group submitted its claims in January 2016. This included US$175 million, which reflects the funds held at Bank F&C on 17 September 2015, and which has been recorded as a charge in the income statement, as well as a claim for approximately US$10 million which relates to funds that have not been released back to the Group as applicable legislation requires. FPM filed a court claim against Bank F&C, under the management of the Deposit Guarantee Fund, for the release of the c.US$10 million. At a hearing on 4 December 2015, it was ruled that the cash should be returned to FPM. This was subsequently appealed and a new hearing is expected to take place in April 2016. For further information see notes 16 and 18 to the financial statements.

Once made, claims are converted into local currency at the exchange rate prevailing at the date of the liquidation decision of the NBU, which in Bank F&C's case was 17 December 2015. In total this amounted to UAH4,269,301,945.

Due to the uncertainty of the liquidation process and the potential length of time involved in realising the assets and making any distributions to creditors, the Group has recognised, as a special item, an allowance for an amount held with Bank F&C. Under the applicable regulations, the Liquidator is required to report provisionally on the status of Bank F&C's assets compared to its liabilities. This is currently expected in 2Q 2016 at which time the Group will make a further assessment of the position.

If ultimately no recovery is forthcoming, this will result in a loss of cash, after expected tax relief, of US$146 million.

The Board of Ferrexpo were surprised and deeply concerned by the temporary administration following the ongoing recapitalization of Bank F&C with the support of the NBU. The Ukrainian banking sector has experienced several such unexpected events in 2015 with 45 banks placed into temporary administration and the number of operational banks falling from 163 to 117 by the end of the year. The Board fully recognizes the risks involved in operating in Ukraine and is in the process of reviewing its local banking arrangements whilst still recognizing the need to maintain an acceptable proportion of operational liquidity in country.

Bank F&C was ultimately controlled by Ferrexpo's largest shareholder and CEO Kostyantin Zhevago. The relationship between Ferrexpo and Bank F&C was overseen by Ferrexpo's Committee of Independent Directors and governed by the relationship agreement between Kostyantin Zhevago and the Company.

For further information on Bank F&C see Ukrainian Banking Sector Risk on page 24 and notes 16 and 18 to the financial statements.

Ukrainian Banking Relationships

Bank F&C had been an effective transactional bank for the Group for over fifteen years, notwithstanding an unpredictable economic and political backdrop in Ukraine throughout that time, including a fragile banking sector which between 2008 and October 2015 was regarded as having a negative outlook by Moody's credit rating agency. In November 2015, post the completed sovereign US$15.3 billion restructuring deal in August 2015, Moody's upgraded the outlook to stable for seven Ukrainian banks. However, Moody's also expressed that the macro profile for the Ukrainian banking sector "remains very weak".

The Group is now in the process of developing alternative banking relationships and currently uses Ukrsibbank, a local bank owned by BNP Paribas and the European Bank for Reconstruction and Development, as its main transactional bank.

For further information on the Ukrainian Banking Sector see Ukrainian Banking Sector Risk on page 24.

Corporate Governance and Risk Management

The Board of Ferrexpo has constantly managed the risks facing the business. This includes taking into account the country of operation and all associated counterparty risks such as the recovery of VAT, the requirement to prepay corporate profit tax and the management of legal and other related claims, amongst others.

The Board of Ferrexpo is disappointed by the potential loss resulting from the insolvency of Bank F&C, but notes the overall reduction achieved in exposure to total counterparty risk in Ukraine, through the substantial decline in the outstanding VAT balance and the elimination of the requirement to prepay corporate profit tax. The Board of Ferrexpo is also pleased to finally see progress in the resolution of the long standing legal claim for approximately 40% of Ferrexpo Poltava Mining which was being contested actively between 2010 and early 2015.

The Board continues to actively manage local counterparty risk whilst taking into consideration that the productive base of the Group resides exclusively in Ukraine, currently rated Caa3 by Moody's, and thus carries inherent risks both in terms of operation and financial management. For further information see the Risk Section on page 21.

Debt Amortisation Schedule and Liquidity

In 2015, the Group repaid US$394 million of debt and as of 31 December 2015 gross debt had declined 31% to US$904 million compared to 31 December 2014 (US$1.3 billion). US$154 million of the debt repayment related to a prepayment to extend the Group's US$500 million Eurobond from April 2016 to April 2019, reflecting the Group's active management during the year to match its cashflow generation to its debt amortisation schedule.

Net debt as of 31 December 2015, increased to US$868 million (31 December 2014: US$678 million) principally reflecting the US$175 million reclassification of cash held at Bank F&C, for which an allowance was made.

As of 29 February 2016, the Group has a US$346 million bond maturing in equal parts in April 2018 and April 2019, a US$350 million pre export financing ('PXF') facility maturing in eight equal quarterly instalments starting in November 2016, and a US$420 million PXF facility, of which the remaining US$88 million is due to be repaid in five monthly amounts completing in July 2016. Cash on hand as of 29 February 2016 was US$36 million following the repayment of US$39 million of debt year to date.

Dividends

The Board is pleased by the continued strong operational performance of the Group, its lower costs and the recent strength in the iron ore market. The Board is not recommending a final dividend for the year, in view of the uncertain iron ore pricing outlook and current gearing levels, although it is very pleased with progress to date in 2016. The Board will keep returns to shareholders under review and will return to dividend payments at an appropriate time which takes into account the strength of the business following over US$2 billion of investment and its financial position.

Board Succession

As part of the board refreshment process started in 2013, we have been developing succession planning for the non-executive directors in order to conform to the Corporate Governance Code and, in particular, to ensure that the Board is provided with the necessary breadth of experience and expertise.

Ferrexpo appointed two new Directors during the year following the appointment of Bert Nacken in 2014. Mary Reilly was appointed in May 2015 and brings extensive audit and financial experience from her previous career as a partner of Deloitte LLP. She became Chairman of the Audit Committee in November. In October 2015, David Frauman was appointed to provide additional experience on a short term basis. Having done so, he is now standing down and I am grateful to him for the wise counsel he has provided to the Board.

I am pleased to announce today that Sir Malcolm Field has been appointed as an independent non-executive director to the Board with immediate effect.

Mike Salamon, who joined the Board in March 2009, will not be standing for re-election at the Group's AGM in May 2016. On behalf of the Company, I would very much like to thank Mike for his outstanding contribution to the Company's affairs over the last seven years.

In view of the provisions of the Corporate Governance Code, the Board intends that when an independent director has completed a nine year term he will no longer be viewed as independent and will therefore retire from the Board once a suitable successor has been found. Wolfram Kuoni and Oliver Baring, who joined the Board in June and December 2007 respectively, will accordingly seek re-election at the AGM on the understanding that they will retire from the Board once appropriate successors have been found. A Ukrainian successor to Ihor Mitiukov, who also joined the Board in June 2007, is expected to be announced shortly and at that time Ihor will retire from the Board. Meanwhile, he also seeks re-election at the AGM.

In line with our previously stated intention that I should stand down as your Chairman at the 2016 AGM, we are now in advanced discussions with a candidate who is expected to succeed me, following a suitable handover period of no more than a few months. The candidate is expected to join the Board in the near future. I will seek re-election at the AGM in order to facilitate the handover.

OUTLOOK

The iron ore price has currently recovered from the low point reached in December 2015 of US$38.50 per tonne to around US$62 per tonne (as of 8 March 2016). In addition, since the start of the year, pellet premiums have increased while freight rates have fallen, both of which are improving the Group's received price on an FOB basis. The Group has also continued to reduce its cash cost of production which has declined from an average of US$26.40 per tonne in December 2015 to an average of US$24.30 per tonne in February 2016.

As a result of a forecast oversupply of iron ore fines in 2016, however, prices are expected to fall further in the present macroeconomic environment, while industry participants take additional measures to reduce costs or curtail production.

Ferrexpo sells iron ore pellets which, in contrast to iron ore fines, are forecast to be in under supply, and demand is expected to grow in the period to 2020. The Group's operations are positioned at the bottom of the global pellet cost curve, and it is well placed to remain profitable in the current challenging market conditions as it has consistently been throughout its 40 year history.

PERFORMANCE REVIEW

Kostyantin Zhevago Chief Executive Officer

Chris Mawe Chief Financial Officer

FINANCIAL RESULTS

In 2015 Ferrexpo responded to the challenging environment with a strong marketing and operational performance which helped offset the impact of the lower iron ore price.

Revenue

Group revenue for the period decreased by 31% to US$961 million compared to US$1,388 million in 2014. This reflected a 42% decline in the average Platt's 62% Fe iron ore fines price which reduced Ferrexpo's revenue by US$467 million.

Ferrexpo's net realised DAP/FOB price, outperformed the Platts iron fines index by 11%. This was due to relatively stable pellet premiums year-on-year, higher revenue received for additional 65% Fe pellet sales (compared to 62% Fe pellet sales) and lower C3 freight (which led to a higher net back FOB price for the Group). Together these factors added US$146 million to 2015 revenue. Lower freight costs charged to customers as well as lower revenue from the Group's barging business and other reduced total revenue by US$108 million compared to 2014. Group sales volume increased 1.5% to 11.3 million tonnes (2014:11.2 million tonnes). For further information see Market Review, Marketing and Logistics on pages (11, 14 and 15).

Costs

While revenue declined by US$428 million the Group was able to reduce costs by US$294 million, before operating foreign exchange gains, in 2015 compared to 2014.

The majority of the cost savings were driven by a 30% decline in the Group's C1 cash cost of production to US$31.9 per tonne (2014: US$45.9 per tonne) as well as lower rail and international freight costs. The lower costs were due to a combination of a weaker Hryvnia against the US Dollar, operating efficiency gains, lower oil prices and weak international freight rates. For further information see Currency, Logistics, Production Costs and Mining and Production Efficiencies on pages 10, 15, 16 and 17.

Operating Profit before Adjusted Items

Operating profit from continuing operations before adjusted items was US$251 million in 2015 compared to US$409 million in 2014. This includes a non-cash operating foreign exchange gain of US$26 million. (2014: US$76 million). For further information see Currency on page 10 below.

EBITDA

EBITDA for the period was US$313 million compared to US$496 million in 2014. The decline reflected the fall in iron ore prices during the period offset by an improved sales mix, higher sales volumes and significant cost reductions.

Special Items

Total special items for the year, after expected tax relief credit, amounted to US$110 million (2014: US$84 million).

The Group has recorded an allowance for US$175 million held at Bank F&C at the time the bank was placed into administration by the National Bank of Ukraine ('NBU') in September 2015. If this amount is ultimately not recovered, this would result in a loss, after an expected tax relief credit, of US$146 million. For further information on Bank F&C see the Chairman's Statement on page 4, Ukrainian Banking Sector Risk on page 24 and notes 10, 12 and 16 to the financial statements.

During the year the Group disposed of its stake in Ferrous Resources resulting in a gain on disposal of US$41 million. In 2014 a US$84 million impairment of the Group's holding in Ferrous Resources was recorded.

In 2015, the Group impaired assets with a value of US$5.6 million. This principally related to the write-off of US$4.6 million.

Interest

Finance expense was US$72 million (2014: US$68 million). The average cost of debt for the period was 5.97% compared to an average cost of 4.85% in 2014. The increase reflected a gradual rise in US LIBOR as well as the amortisation of the Group's lower cost US$420 million pre-export banking facility commencing in 2H 2014 while the Group was required to pay a higher coupon on its Eurobond (partly offset by a lower principal amount outstanding). 56% of the Group's debt is floating with the remaining 44% fixed. For further information on the Group's debt see Cash Flows below on page 11 and Financial Management on page 20.

Tax

In 2015, the Group's underlying tax charge, before special items, was US$22 million resulting in an effective tax rate of 13.7% compared to 20.9% in 2014 or US$70 million.

Ferrexpo has recognised a US$28 million deferred tax asset related to the allowance booked for restricted cash. Overall the Group has recorded a tax credit of US$6 million for the year compared to a US$70 million tax charge in 2014.

The balance of prepaid corporate profit tax in Ukraine decreased to US$54 million as of 31 December 2015, compared to US$74 million as of 31 December 2014. The decrease was mainly driven by the devaluation of the Hryvnia against the US Dollar.

Further details see note 12 of the financial statements.

Currency

Ferrexpo prepares its accounts in US Dollars. The functional currency of the Ukrainian operations is the Hryvnia. During 2015 the Hryvnia devalued from UAH15.77 per US Dollar as of 1 January 2015 to UAH24.00 per US Dollar as of 31 December 2015. The average rate for the period was UAH21.86 per US Dollar (2014 average: UAH11.89 per US Dollar). Balances at 31 December 2015 are converted at the prevailing rate. The devaluation of the currency since 31 December 2014 has resulted in a US$472 million reduction in the net assets of the Group and has been reflected in the translation reserve. Since 31 December 2015, the Hryvnia has further depreciated to approximately UAH27 per US Dollar.

Capital Expenditure

Capital expenditure reduced significantly in 2015 to US$65 million (2014: US$235 million) as the Group completed, in 1Q 2015, its major investment programme to increase the production of 65% Fe pellets as well as overall production volumes. Following this completion and given the low iron ore price environment, Ferrexpo has reduced its discretionary capital expenditure. For further information see Capital Investment on page 18.

The table below presents the breakdown of capital expenditures in 2015 and 2014.

Capital expenditure breakdown:

Cash Flows

Net cash flows from operating activities in 2015 totalled US$128 million compared to US$288 million in 2014. The reduction principally reflected the lower iron ore price environment, partly offset by lower costs together with a US$73 million increase in working capital during the year. The increase in working capital primarily reflected higher levels of pellet stocks held due to lower prevailing prices at the year-end compared to expectations for 1Q 2016.

Capital expenditure decreased significantly to US$65 million (2014: US$235 million), for further details see Capital Investment on page 18.

Dividends paid during the period were US$78 million in line with 2014 at US$77 million. The Group received US$42 million from the sale of Ferrous Resources.

During the period the Group's cash position, before the reclassification of cash held at Bank F&C as restricted, reduced by US$406 million. The reduction was primarily a result of the repayment of US$394 million of debt (2014: US$119 million) of which US$154 million related to Eurobonds to extend the tenor from April 2016 to 2018 and 2019, US$210 million related to the amortisation of a US$420 million banking facility and the remainder related to repayment of Export Credit Agency funding.

For further details see Financial Management on page 20.

Net debt as of 31 December 2015, increased to US$868 million (31 December 2014: US $678 million) principally reflecting the US$175 million reclassification of cash held at Bank F&C, for which an allowance was made.

For further information see the Chairman's statement on page 4, Financial Management on page 20 and notes 15, 16 and 18 of the financial statements).

MARKET REVIEW

In 2015, total world steel production declined by 2.5% to 1.68 billion tonnes (2014: 1.73 billion tonnes). China, the world's largest steel producer, reduced its steel output by 2.2% to 873 million tonnes. The fall in global steel output resulted in a 1.8% decline in total iron ore consumption, and the Platts 62% Fe iron ore fines price, CFR China declined by 42% from an average of US$97 per tonne in 2014 to US$56 per tonne.

Steel and iron ore statistics 2015 vs. 2014

Source: CRU iron ore market outlook January 2016 statistical review

Exports of iron ore fines declined by approximately 1% in 2015 (see table above), however, the market share of the four largest iron ore fines suppliers, increased to 85% (2014: 80%) at the expense of high cost suppliers who could not remain cash generative at the price levels experienced in 2015.

Geographic export of iron ore fines 2015 vs. 2014

Source: CRU iron ore market outlook January 2016 statistical review

Iron ore fines supply from Australia and Brazil increased 5.0% and 5.3% respectively while supply from the rest of the world decreased 25.2%.

Exports of pellets grew 4.3% in 2015 to 151 million tonnes. This growth was due to new supply from market leaders Vale and Samarco. In contrast to the sharp decline in the iron ore fines price of 42%, the long-term contract premium paid for pellets in the key markets of Western Europe and North East Asia declined approximately 13% in 2015 from US$38 per tonne in 2014. According to Mysteel data, Chinese spot pellet premiums in 2015 declined on average by approximately 16% from US$27 per tonne in 2014 to US$23 per tonne reflecting available pellet feed from higher cost domestic iron ore producers.

The link below highlights the top exporters of pellets to the global blast furnace and direct reduction steel markets in 2015 and the FOB cost curve which shows the cost of pellet production, including in-country distribution costs, for the major pellet producers in 2015. Ferrexpo was the fourth largest exporter to the blast furnace pellet market and the lowest cost pellet producer in 2015, according to CRU. 

http://www.rns-pdf.londonstockexchange.com/rns/6505R_-2016-3-10.pdf 

Pellets are a niche subsector of the iron ore market. The table below shows that historically there has been limited supply growth in pellets with exports of pellets increasing by only 45 million tonnes since 2000 (including Samarco pellet capacity, which is currently idled, of 30 million tonnes).

This compares to an increase of 759 million tonnes since 2000 in the iron ore fines segment. The limited availability of pellets reflects the highly capital intensive nature of installing beneficiation and pelletising facilities. A greenfield pellet project from mine to end product would likely cost in the region of US$1 billion to US$3 billion.

The tragic failure of a Samarco tailings dam in November 2015 resulted in the shutdown of its operations. Samarco produced approximately 30 million tonnes or around 20% of the pellet export market which is currently absent from the market. As a result capacity utilisation rates of other pellet producers are expected to increase in 2016. There is a possibility that higher cost idled pellet capacity of up to 7 million tonnes could re-enter the market if pellet premiums provide an acceptable return, however, overall pelletising capacity is not expected to increase significantly in the coming years due to high capital barriers to entry.

Limited historic growth in pellet capacity due to high barriers to entry

Source: CRU iron ore market outlook January 2016 statistical review.

Demand for pellets is expected to show the strongest growth in the period to 2020 as the table below from CRU highlights with pellets forecast to grow by 4.1% on CAGR basis, while demand for iron ore fines is expected to decline by 1.2%. The decline in demand for iron ore fines is due to lower steel demand, tighter emission controls as well as improved blast furnace utilisation rates, as more expensive uneconomic steel capacity is closed, which is expected to favour pellet use over sinter fines.

Pellet demand to show strongest growth in iron ore

Source: CRU iron ore market outlook January 2016 statistical review.

Ferrexpo believes that the above market dynamics favor large scale, low cost efficient producers of sinter fines or high quality niche producers of pellets (not considered as the core business of larger producers). Ferrexpo is in the niche segment which is shown in the chart below and represents 250 million tonnes of supply out of the total world market nearing two billion tonnes of iron ore products.

The Group's past investment strategy of improving the quality of its product together with its low cost base and premium customer portfolio should ensure that Ferrexpo's operations can withstand the current cyclical downturn and emerge as a stronger and fitter Group.

MARKETING

Ferrexpo's realised price for its 65% Fe iron ore pellets is calculated by taking the average Platts iron ore fines CFR China index, adjusting for quality and adding a pellet premium. For sales to the Far East, delivery is made on CFR terms with the resulting FOB netback determined by the actual cost of freight. For sales to European and regional markets, the resulting FOB/ DAP netback is determined by deducting transparent freight market indices (such as C3) and adding appropriate freight costs for the relevant point of sale.

The C3 freight index, as published by the Baltic Exchange, represents the industry benchmark price to transport goods by sea from Tubarao, Brazil to Qingdao, China. The C3 index declined dramatically during the year following the substantial fall in the oil price. On average C3 freight reduced by US$9.4 per tonne to US$11.2 per tonne in 2015 (2014: US$20.6 per tonne) resulting in a higher net back price for the Group.

Due to relatively stable pellet premiums under long-term contracts (see Market Review), the additional iron premium received for selling a higher proportion of 65% Fe pellets and lower freight rates, the Group's average received price in 2015 outperformed the Platts 62% Fe iron ore fines CFR index by 11%, declining on average by 32% compared to the 42% decline of the Platts index.

The Group typically negotiates pellet premiums annually, half-yearly or quarterly while a monthly or three month average is usually used to determine the average iron ore fines index price, as can be seen from the table below. The sales made at a fixed price on a particular day reflects efforts to secure margins in a falling market.

Sales volume by pricing terms:

In 2015, Ferrexpo increased sales volumes by 1.5% to 11.3 million tonnes of pellets compared to 11.2 million tonnes in 2014. The Group sold 9.9 million tonnes of 65% Fe pellets, up 74% compared to 5.7 million tonnes in 2014. Importantly, the high quality pellets also enabled the Group to improve the sales mix by penetrating further into premium markets and away from low end markets.

The table below shows the breakdown of sales by key market regions. Overall tonnages delivered to Western Europe and North East Asia increased due to increased marketing focus in these markets, following the increase in 65% Fe pellet production. The increase in sales volumes in 2015 was lower than the increase in production volumes due to a larger number of discrete delivery points utilised during the year to service the changing sales portfolio.

Sales volume by market regions:

LOGISTICS

Selling and distribution costs decreased by 27% to US$226 million (2014: US$312 million) as a result of the devaluation of the local currency and lower international freight rates.

Costs to transport the Group's pellets to border points for international dispatch were US$112 million (2014: US$145 million). The 23% reduction was mainly due to the Hryvnia depreciation against the US Dollar, as 100% of rail costs are in local currency, as well as cost actions taken by management. Rail tariffs did increase by approximately 30% year-on-year, however, the increase was offset by the Hryvnia devaluation.

International freight costs reduced significantly to US$75 million in 2015 compared to US$123 million in 2014. This was driven by lower oil prices and depressed market conditions in the shipping industry. For further information on C3 freight see Marketing on page 14. Ferrexpo loaded 23 capesize vessels during the year (2014: 22).

MINING AND PRODUCTION

Ferrexpo is pleased to report an excellent year of operational improvement in 2015 with the Group delivering its strategy to increase the volume and quality of its output while remaining a low cost, efficient producer. The Group increased total pellet production by 5.8% to a record 11.7 million tonnes (2014: 11.0 million tonnes). Importantly, as planned, it increased the output of premium 65% Fe pellets by 78.6% to 10.4 million tonnes, another record for the Group. This compares to 5.8 million tonnes of 65% Fe pellets produced in 2014. In the 4Q 2015, the Group produced at or close to 1 million tonnes per month, of which 95% of production was 65% Fe pellets. The Group's current nameplate capacity is 12 million tonnes per annum. In 2016, Ferrexpo has planned for approximately 92% of its production to be premium 65% Fe pellets with the remaining production of 62% Fe pellets in line with existing customer requirements.

Health and Safety

The Group is pleased to be able to report that there were no work related fatalities during the year (2014: three). The lost time injury frequency rate ('LTIFR') however increased during the period to 0.96 per million man hours (2014: 0.86 per million man hours).

The LTIFR at Ferrexpo Poltava Mining ('FPM') (including contractors) increased to 0.75 per million man hours in 2015 (2014: 0.47 per million man hours) while Ferrexpo Yeristovo Mining's ('FYM') LTIFR increased to 0.74 per million man hours (2014: nil). Ferrexpo believes the increase in LTIFRs was due to a failure to correctly follow safety procedures and a lack of safety standard enforcement by team leaders.

This has been addressed across the Group's operating subsidiaries with retraining and instruction processes completed with all staff that access mobile equipment, along with increased auditing and observations by team leaders during periods of high activity, such as shift change overs and meal breaks.

LTIFR for the Group's barging operation, DDSG, including leased crews, was 4.93 per million man hours worked (2014: 9.08 per million man hours worked). The difference in LTIFR between the mining and barging operations principally reflects the lower hours worked at the barging operations compared to the mining operations. DDSG has seen a significant improvement in LTIFR since a new provider of leased crews was appointed during the year who prioritises health and safety training.

Production Statistics

Production Costs

Costs

C1 Cash Cost of Production

The Group's C1 cash cost of production reduced by US$14.0 per tonne to US$31.9 per tonne compared to US$45.9 per tonne in 2014. Of this 30% cost reduction, approximately US$8.0 per tonne was due to the Hryvnia devaluation against the US Dollar, while US$4.1 per tonne was driven by increased production volumes, efficiency gains and reduced stripping volumes (see Mining and Production Efficiencies below) and US$2.7 per tonne was due to lower oil prices. Higher levels of production of the Group's 65% Fe pellet, which requires additional grinding and beneficiation, increased costs by US$0.8 per tonne.

In 2015, the average exchange rate of the Hryvnia per US Dollar was 21.9 compared to 11.7 in 2014. The higher rate in 2015 reduced the C1 cost by 17% as approximately 50% of the Group's cost to produce a pellet is in Hryvnia. For further information on the impact of the Hryvnia devaluation see Currency on page 10.

Local C1 cost inflation during the period was primarily driven by wage inflation (+23% vs. average 2014) and electricity price increases (+41% vs. average 2014) following the large devaluation of the Hryvnia in February 2015. These costs, however, are still significantly lower in US Dollar terms than the prior period. The table below shows the month on month change in CPI for the year. Inflation rose strongly in March and April following the devaluation in February and thereafter the rate of increase started to slow with some months showing deflation. For further information see Update on Risks: Inflation on page 25.

Ukrainian 2015 Month-on-Month CPI

Source: www.ukrstat.gov.ua

The following table shows the % breakdown of the Group's cost base by category:

Mining and Production Efficiencies

In 2015, the Group optimised output from the FPM and FYM pits so that it could maximise production, and minimise costs per tonne. This resulted in a significant reduction in stripping volumes as the revised mine plan more closely correlated with the Group's production requirement. Since implementation in January 2015, this has resulted in a 36% decrease in the amount of waste material moved compared to 2014.

The Group also implemented several productivity improvements during the year which led to improved truck efficiency and a greater amount of material movement per truck. On average, together FPM and FYM increased the amount of material moved per truck in operation by 50% from 302 tonnes per truck per hour to 452 tonnes per truck per hour. This was achieved through a combination of hot seating, faster changeovers and improved fleet management.

Another focus area during the year was improved drilling and blasting which led to increased excavator productivity. For example, excavator productivity at FYM increased by over 25% during the year.

Overall, the above actions reduced the C1 cash cost by approximately US$4.1 per tonne or US$46 million in 2015.

Business Improvement Programme

The BIP aims to increase process efficiencies and reduce consumption norms in the production process thereby reducing the total cost of production by up to 2% per annum.

Focus areas included increasing plant throughput, increasing mobile mining fleet utilisation, debottlenecking processing activities, and improving process control. FPM undertook 27 BIP projects during the year while FYM undertook 11 projects.

In 2015, the BIP projects generated cost savings and efficiency improvements of an estimated UAH68 million or US$3 million.

As gas and electricity represent approximately 40% of the cash cost of production, a major focus of the BIP is to identify and implement material energy savings projects in the mining and processing operations.

In September 2015, Ferrexpo began using sunflower husks as a natural gas replacement for one of its four pelletising lines. Ukraine is the largest producer of sunflower seeds in the world and the Group sourced the husks from a local company in the Poltava region. FPM saved over three million cubic metres of natural gas providing a cost saving of US$0.2 million. In December 2015, line number two of the pelletiser began to use husks. The Group intends to replace up to 30% of its total natural gas consumption in the pelletiser with sunflower husks.

Environmental Impact

As in previous years, the Group is able to report there were no incidents regarding emissions or discharges that exceeded permissible environmental limits during the year.

CO2 Emissions

The table below shows that the Group's carbon intensity ratio in 2015 was in line with 2014. FPM, FYM, FBM and the barging operations collected information on greenhouse gas emissions created by solid, liquid, and gaseous fuels, as well as refrigerants, explosives, purchased steam and electricity.

Note: 2014 data has been restated due to an incorrect factor applied to the conversion of natural gas from cubic metres into tonnes.

CO2 emissions directly generated by the operations were 0.68 million tonnes in 2015 compared to 0.80 million tonnes in 2014. The reduction in direct emissions is as a result of a 36% reduction in stripping volumes and a corresponding 31% decline in diesel consumption. Emissions generated from indirect sources, such as electricity purchased from Ukraine's national grid were 2.05 million tonnes in 2015 compared to 1.93 million tonnes in 2014.

CAPITAL INVESTMENTS

In 1Q 2015, the Group commissioned the final sections of the new flotation units allowing the production facilities to produce a greater proportion of premium 65% Fe pellets while also increasing overall production volumes. This was the final part of a four year investment programme to modernise and increase the volume and quality of the Group's output. As such capital expenditure reduced significantly in 2015 to US$65 million (2014: US$235 million).

In the current iron ore price environment capital expenditure is expected to be between US$25 million to US$75 million per annum. The actual amount of expenditure will be determined by the iron ore price and the Group's cash generation ability as well as Ferrexpo's aim to balance capital expenditure with net debt reduction. If appropriate, capital investment could include small scale, high return projects that will incrementally increase production capacity.

The Group has spent over US$2 billion since its IPO in 2007 developing additional iron ore mining capacity at FYM and modernising FPM's mining and production facilities to increase pelletising output to 12 million tonnes of nameplate capacity per annum. The Group now has a well invested asset base which is efficient and low cost.

CSR

Ferrexpo is an important contributor to the Ukrainian economy and has been consistently so for many years despite commodity cycles. Since its IPO on the London Stock Exchange in June 2007, the Group has paid approximately US$507 million in income and other taxes as well as US$105 million for royalty payments. According to the State Statistics Service of Ukraine, it is the largest exporter of pellets in the CIS and in 2015 the Group's revenue was 1.8% of the country's total export revenue.

The Group is also a major customer of state run infrastructure. For example in 2015, FPM was the number one customer of the Ukrainian rail network.

Ferrexpo is the largest employer in Komsomolsk, Poltava employing approximately one fifth of the population as employees or contractors. In 2015, according to the State Statistics Service of Ukraine, the average wage at Ferrexpo was 72% higher than the national average and 15% higher than the average wage received in the Ukrainian mining industry.

Due to Ukraine's weak public finances and fragile economy as well as the ongoing unrest in the east of the country, the Group continued its support for local and regional communities during the period. Community support donations were US$26 million in 2015 compared to US$39 million in 2014. The majority of this expenditure was paid to a Charity organisation called Blooming Land who then distributed the Funds to three separate charities called "Ukraine - Healthy Country (Diabetes A to Z)", "Healthy Sight (To see it all)" and "Institute of social programmes (Happy old age)" to be used on projects within Ukraine.

PEOPLE

Ferrexpo is pleased to report that it continues to maintain a good relationship with its workforce and that there was no labour related disruption to production during the year. There have been no significant industrial actions or labour disputes at FPM since its privatisation in 1995, or at FYM since its inception.

As of 31 December 2015, the Group employed 9,469 staff and 1,547 contractors (31 December 2014: 9,658 staff and 1,927 contractors).

Average personnel costs at the Group's Ukrainian operations accounted for 8% of the cash cost of production per tonne of pellets (2014: 10%). In 2015, the Group experienced wage inflation of approximately 23% in local currency.

Ferrexpo believes it is important to attract, retain and develop skilled workers. In 2015, approximately 79% of the local workforce underwent training initiatives, principally related to safety and professional training. The Board would like to express its sincere appreciation to all of the Group's employees, especially in Ukraine, for their contribution to 2015's financial results and for their continued dedication during a challenging time in the country and in the iron ore industry.

UKRAINE

In 2015, Ukraine's economy continued to contract, although to a lesser extent as the year progressed. Real GDP decreased by 17.2%, 14.6% and 7.2% in the first, second and third quarters of 2015 respectively. The NBU estimates that GDP will fall by 10% for the year following a 7% decline in 2014. A significant proportion of the country's productive capacity is located in the eastern part of Ukraine which is experiencing ongoing conflict. This has affected GDP growth as well as the banking sector which has continued to face an increase in non-performing loans. The banking sector has also been impacted by the Hryvnia devaluation against the US Dollar as a high proportion of the financial system is Dollar based. Due to these events, the banking system is experiencing severe liquidity constraints and is regarded as significantly undercapitalised by all rating agencies.

Access to external financing in this environment has been limited for Ukrainian companies given the weak economy, the challenging geopolitical environment as well as uncertainty as to whether the coalition government has the political support to implement policies that are necessary to restore macroeconomic stability, promote sustainable growth, and strengthen governance and transparency.

In March 2015, Ukraine received a new four year US$17.5 billion rescue package from the IMF to help stabilise the country's weak financial position. To date US$6.7 billion of this has been disbursed. Further disbursements are contingent upon implementation of comprehensive economic reforms. In particular, it requires a further reform of Ukrainian tax legislation to bring a substantial portion of the shadow economy into the formal economy, continued reform of the energy sector through the introduction of uniform market-based energy prices, and reform of social benefits and pensions.

The country secured a debt restructuring in August 2015 for US$15.3 billion of government debt, thereby avoiding a sovereign default with private creditors, although Russia has filed a lawsuit against it for defaulting on a US$3 billion bond.

Although this has been a difficult time for Ukraine, Ferrexpo has avoided disruptions to its operations and has continued to trade profitably. As an exporter it has benefited from the devaluation of Hryvnia against the US dollar.

For further information see Risks Relating to Ukraine on page 24.

FINANCIAL MANAGEMENT

Net debt as of 31 December 2015, increased to US $868 million (31 December 2014: US $678 million) principally reflecting the US$175 million reclassification of cash held at Bank F&C, for which an allowance was made. Net debt to EBITDA as of 31 December 2015 was 2.78x (31 December 2014: 1.4x).

In 2015, the Group repaid US$394 million of debt and as of 31 December 2015 gross debt had declined 31% to US$904 million compared to 31 December 2014 (US$1.3 billion). US$154 million of the debt repayment related to a prepayment to extend the Group's US$500 million Eurobond from April 2016 to April 2018 and 2019, reflecting the Group's active management during the year to match its cashflow generation to its debt amortisation schedule.

As of 29 February 2016, the Group has a US$420 million pre export financing ('PXF') facility, of which US$88 million is remaining and due to be repaid in five monthly amounts completing in July 2016, a US$350 million PXF facility, maturing in eight equal quarterly instalments starting in November 2016, and the above US$346 million Eurobond maturing in equal parts in April 2018 and April 2019. Cash on hand as of 29 February 2016 was US$36 million following the repayment of US$39 million of debt year to date.

 As a result of the forecast cash flows of the business, the large reserve base and the competitive positioning of the business on the global iron ore and pellet cost curves, the accounts have been drawn up on a going concern basis, however attention is drawn to the Going Concern section of the financial statements, note 2, on page 36 and the risks facing the business on page 21.

PRINCIPAL RISKS

The list of the principal risks and uncertainties facing the Group's business that follows below is based on the Board's current understanding. Due to the very nature of risk it cannot be expected to be completely exhaustive. New risks may emerge and the severity or probability associated with known risks may change over time.

RISKS RELATING TO THE GROUP'S STRATEGY

DEBT MATURITY PROFILE

Possible Impact

Due to the weak iron ore price, Ferrexpo has been reviewing its debt facilities with a view to better matching the positive cash flow generation of the business to its debt amortisation profile.

Ferrexpo remains in compliance with all relevant conditions in its financing agreements.  In a continuing weak iron ore price environment there is a risk that the Group may not able to comply with some or all financial covenants.

For further information see the Going Concern note on page 36 of the financial statements.

Mitigation

· In 2015 the Group successfully extended the maturity of its 2016 Eurobond to 2018 and 2019 (see Financial Management on page 20).

· The Group intends to maintain an open and constructive dialogue with its existing and potential new lenders, including, if appropriate, regarding refinancing of both its shorter and longer dated debt maturities in order to ensure that the Group has additional headroom, following the repayment of its debt facilities, to withstand a downturn in prices from current levels.

· In 2015, Ferrexpo was the lowest cost pellet producer in the world, according to CRU.

INTEREST RATE RISK

Possible Impact

A portion of the Group's debt facilities are linked to US Dollar LIBOR rates. An increase in interest rates will increase the Group's funding costs. An extension to the Group's maturity profile, as referred to above, could also result in higher interest rates.

Mitigation

· The Group has a mix of debt facilities at fixed and floating interest rates. As of 31 December 2015, the debt facilities subject to fixed interest rates represented approximately 44% of the Group's outstanding debt. The Group's average cost of debt for the year ended 31 December 2015 was 5.97%.

EXPANSION CAPITAL INVESTMENT

Possible Impact

The Group's growth depends on its ability to upgrade existing facilities and develop its iron ore resource base. For any major capital project there is a risk of insufficient controls, cost overruns, shortage of required skills, and unexpected technical problems affecting the time taken to complete the project and the return on the capital invested.

Mitigation

· The Group has established strict procedures to control, monitor and manage this expenditure which is regularly reviewed by the Investment and Executive Committee and the Board.

GOVERNMENT APPROVALS OF EXPANSION

Possible Impact

The Group does not yet have all the governmental approvals required to develop future deposits. Although all approvals that have been applied for have been granted, there is no guarantee that others will be granted in the future.

Mitigation

· Ferrexpo maintains an open and proactive relationship with various governmental authorities and is fully aware of the importance of compliance with local legislation and standards.

· The Group monitors and reviews its commitments under its various mining licences in order to ensure that the conditions contained within the licences are fulfilled or the appropriate waivers obtained. Ferrexpo maintains strict compliance with the Ukrainian mining code and execution of work in accordance with the project design through active engagement of Ukrainian and international legal advisers.

RISKS RELATED TO THE IRON ORE MARKET

GLOBAL MACROECONOMIC GROWTH 

Possible Impact

The demand for steel, and hence iron ore, is driven by global economic growth trends, which in the recent past has been largely determined by Chinese economic growth, and for the past 7 years China has produced more than 45% of the world's steel output. A reduction in world or Chinese GDP growth could impact demand for steel and iron ore. Conversely the supply of iron ore requires long periods of large scale, capital intensive investment. A miss-match between increasing supply of iron ore and lower demand has led to further iron ore price weakness in 2015.

Mitigation

· Ferrexpo's marketing strategy is to supply high quality pellets to established steel mills who produce premium steel products through the commodities cycle.

· Ferrexpo does not sell to commodity steel producers whose demand is likely to fluctuate.

· Pellets are a niche iron ore product that have high capital barriers to entry.

· Due to the characteristics of pellets, demand growth is expected to be strongest compared to other types of iron ore products.

· The Group has a logistics infrastructure which can service regional and seaborne markets. This provides flexibility should a particular region experience a decline in demand.

IRON ORE PRICES AND PELLET PREMIUMS

Possible Impact

Fluctuations in iron ore prices as well as in demand have negatively impacted the financial results of the Group in 2015. The Platts price for 62% Fe fines CFR China declined 40% from US$72 per tonne as of 2 January 2015 to US$43 per tonne as of 31 December 2015. The average price was 42% lower at US$56 per tonne compared to an average of US$97 per tonne in 2014. The average price for the two months ended February 2016 was US$44 per tonne.

Ferrexpo receives a pellet premium in addition to the iron ore fines price. Currently, a substantial portion of the Group's profit is due to this premium the Group receives from its customers. Long-term contract pellet premiums have ranged historically from US$12.40 per tonne to US$61.70 per tonne, while spot market pellet premiums in China have fallen to approximately US$10 per tonne in the past.

The average long-term contract premium paid for pellets in the key markets of Western Europe and North East Asia declined to US$33.6 per tonne in 2015 from US$37.4 per tonne in 2014 while Chinese spot pellet premiums declined on average from US$26.4 per tonne in 2014 to US$22.7 per tonne in 2015. Chinese spot premiums were, however, weaker in the second half of 2015 closing the year at approximately US$11 per tonne. Overall, the pellet premium currently represents a high proportion of the underlying iron ore fines price.

Mitigation

· Ferrexpo is the lowest cost pellet producer in the world according to CRU.

· Over 90% of the Group's sales are based on pellet premiums agreed under long-term contracts.

· Ferrexpo has a well invested modern asset base that does not require high levels of sustaining capex in a low price environment.

· Ferrexpo's competitive cost base has enabled it to produce at full capacity and remain profitable throughout past commodities cycles. It has successfully operated for over 40 years.

· The Group has an established, broad customer base and logistics infrastructure which can service regional and seaborne markets. This provides flexibility should a particular region experience a decline in demand.

C3 FREIGHT

Possible Impact

C3 freight, as published by the Baltic Exchange, represents a transparent index reflecting the market freight rate for ocean transportation of iron ore from the Brazilian port of Tubarao (where Ferrexpo's largest pellet competitors are based) to Qingdao, China. For sales to the Far East, delivery is made on CFR terms with the resulting FOB netback determined by the actual cost of freight. For sales to European and regional markets, the resulting FOB/DAP netback is determined by deducting transparent freight market indices (such as C3) and adding appropriate freight costs for the relevant point of sale.

In times of low oil prices and lower cost time charter rates, the benefit of Ferrexpo's shorter duration trade against C3 are diminished. The high proportion of fixed costs for Ukraine loading and Suez Canal transits mean that the Group's actual freight costs may at times exceed that of C3.

Mitigation

· Global freight rates are heavily influenced by oil prices and market conditions in the shipping industry.

· Ferrexpo has freight and distribution specialists to analyse and price freight competitively on behalf of the Group.

RISKS RELATING TO UKRAINE

POLITICAL AND LEGAL

Possible Impact

The ongoing conflict in Eastern Ukraine and political instability have negatively impacted the economy, notably the banking sector, and relations with the Russian Federation.

The economic recession has also impacted the Government's ability to fund usual social services and could lead to social upheaval and political tension within local communities.

The above factors have had an adverse effect on the Ukrainian financial market. The ability of local companies and financial institutions to obtain funding from the international capital markets has been impacted as a result of decreased appetite for Ukrainian credit exposure. Any continuing or escalating conflict in Eastern Ukraine could have a further adverse effect on the economy.

The current situation in Ukraine could also affect the ability of Ferrexpo to obtain financing or re-financing or the ability of Ferrexpo to use its cash held in Ukraine or the Government's ability to meet its payment obligations to Ferrexpo on amounts due, such as VAT refunds.

Other risks include a weak judicial system that is susceptible to outside influence, and can take an extended period of time for the courts to reach final judgment.

For further details see the Chairman's Statement on page 4 and notes 15, 16 and 18 to the financial statements.

Mitigation

· The Group holds liquidity offshore to ensure smooth operations should the economic weakness of the country disrupt the financial system.

· At the time of writing, Ferrexpo's operations have remained largely unaffected by the current situation within the country.

UKRAINIAN BANKING SECTOR

Possible Impact

From 2008 to October 2015, Moody's maintained a negative outlook on Ukraine's banking sector due to the steep depreciation of the Hryvnia against the US Dollar in 2008, 2014 and 2015 as well as a substantial increase in non-performing loans materially worsening the sector's asset quality, profitability and capital adequacy indicators.

In November 2015, following the improvement in the creditworthiness of the Sovereign following its US$15.3 billion debt restructuring completed in August 2015, Moody's upgraded the outlook for seven Ukrainian banks to stable from negative. Nevertheless Moody's expressed the view that the macro profile for Ukrainian banks remains "Very Weak". This is due to the highly fragile macroeconomic conditions in Ukraine and that the country's adverse operating environment will continue to exert pressure on the Ukrainian banking system.

Since 2014, the Ukrainian banking sector has been subject to a series of stress tests by the National Bank of Ukraine ('NBU'). Throughout 2014 and 2015, the Board of the NBU declared 62 banks insolvent and subsequently revoked their banking licenses and placed the banks into liquidation. As such, the number of operating banks in Ukraine has fallen to 118 as of 31 December 2015 compared to 180 at the start of 2014.

On 17 September 2015, the NBU declared that Bank Finance and Credit JSC ('Bank F&C'), ultimately controlled by Ferrexpo's largest shareholder Kostyantin Zhevago, was insolvent. At the time Ferrexpo held approximately US$175 million in funds at the bank. For further details see the Chairman's Statement on page 4 and Note 16 and 18 to the financial statements.

Mitigation

· The vast majority of the Group's financial transactions and cash flows originate in Ukraine and flow through the banking system. The Group regularly reviews its banking arrangements, and the stability, service and reliability of its providers, in the context of the overall banking sector within the country.

· The Group is developing alternative banking relationships and currently uses Ukrsibbank, a local bank owned by BNP Paribas and the European Bank for Reconstruction and Development, as its main transactional bank.

· Ferrexpo holds funds in Ukraine to fund immediate operational expenditures and scheduled commitments such as debt servicing.

UKRAINIAN CURRENCY

Possible Impact

Fluctuations in the Group's operational currency can impact its profitability and the book value of its assets.

During the year the Hryvnia devalued from UAH15.8 per US Dollar as of 31 December 2014 to UAH24.0 per US Dollar as of 31 December 2015. The average rate during the year was UAH21.9 per US Dollar. Balances at the year-end are converted at the prevailing rate. The devaluation reduced the Group's local costs, net of inflation, by US$125 million during the year, however, it also reduced the net assets of the Group as of 31 December 2015 by US$477 million compared to 31 December 2014 (for further information see Statement of Other Comprehensive Income).

Conversely, if the Hryvnia were to strengthen against the US Dollar this could increase the Group's cost base and impact its ability to remain a low cost operator.

For further detail of the impact of the Hryvnia on the economy please see Ukrainian Banking Sector risk on page 24.

Mitigation

· Historic weakness of the Hryvnia in times of low commodity prices has provided a natural cost hedge during downturns in the commodity cycle.

· All of the Group's revenue is received in US Dollars while over 50% of the Group's costs to deliver a tonne of pellets to border dispatch points are in Hryvnia. Ferrexpo benefits from a devaluation through lower costs, although the benefits may be eroded over time due to inflation.

· The accounting value of the fixed assets in Ukraine reduce due to a devaluation, however, this has no effect on the underlying ability of the assets to generate future cash flows.

UKRAINIAN PRODUCER PRICE INFLATION (PPI)

Possible Impact

As over 50% of the Group's cost to produce and deliver a tonne of pellets to border dispatch points for export are in Hryvnia, the Group is exposed to local cost inflation.

Following the substantial devaluation of the Hryvnia in 2015, PPI increased by 36% compared to 2014. The two areas of greatest cost inflation for the Group were wages (+23% vs. 2014) and electricity tariffs (+41% vs. 2014). All local costs, however, in 2015 were lower in US Dollar terms but this situation could reverse over time due to inflationary, or even hyperinflationary, pressures.

Mitigation

· The Group's BIP has achieved continuing efficiency improvements and cost reductions over many years. Since inception of BIP in 2006, the cash cost of production has reduced by US$6.8 per tonne of pellets. The Group also has a consistent track record of producing at full capacity to achieve maximum overhead absorption and is set to expand production output in 2016.

· It is usual for cost inflation to correspond to rising prices in a commodity cycle. Iron ore is currently in a down cycle as prices are trading at levels last seen in 2003. The current outlook for iron ore prices remains subdued.

· Month-on-month PPI trends in 2015 were more benign e.g. PPI in December 2015 compared to November 2015 was just 0.3%.

UKRAINIAN VAT RECEIVABLE

Possible Impact

As nearly all of the Group's output is exported, Ferrexpo does not receive substantial amounts of VAT on local sales (which could otherwise be offset against VAT incurred on purchases of goods and services). The Ukrainian government refunds the outstanding balance of VAT, although not always on a timely basis and repayment can be dependent on the overall health of the government's finances. See political and legal risk.

The late repayment of VAT results in increased working capital, which must be funded from operating cash flows and debt. As Ukrainian VAT balances are in local currency the balances in US Dollar terms are exposed to the devaluation of the Hryvnia.

As of 31 January 2016, Ferrexpo had received all outstanding VAT repayments for 2015 in full from the government. Full details of the movement on VAT is included in Note 14 to the financial statements.

Mitigation

· The Group maintains an open dialogue with the government and operates to best international standards, ensuring the validity of the VAT claims.

· Where possible, Ferrexpo plans working capital requirements to help ensure sufficient liquidity headroom.

UKRAINIAN TAXES

Possible Impact

As part of an ongoing agreement with the majority of industry players in Ukraine, the tax authorities have been remitting regular VAT refunds in exchange for the pre-payment of corporate profit tax in respect of future periods. This can result in significant amounts of taxation being paid in advance of the profits being earned, which as a result of falling prices, and or increasing costs, changes in tax legislation or financial difficulties experienced by the country, may lead to the Group not recovering or being able to offset these amounts against future profits.

As Ukrainian taxes are paid in local currency the balance in US Dollar terms is exposed to the devaluation of the Hryvnia.

As of 31 December 2015, Ferrexpo's prepaid corporate profit tax balance was US$54million compared to US$73 million as of 31 December 2014. The reduction in the balance was driven by the devaluation of the Hryvnia against the US Dollar during the year.

Mitigation

· The Group takes regular advice on tax matters from Ukraine tax experts and complies with all known requirements. The Group maintains a transparent and open relationship with local, regional and national tax authorities.

· As of 29 February 2016, Ferrexpo had received all outstanding VAT repayments for 2015 from the government. As of December 2015, the Group is no longer required to prepay corporate profit tax ('CPT') in return for VAT refunds. It is estimated that all corporates in Ukraine have an outstanding prepaid CPT balance of at least UAH15 billion (or approximately US$600 million). The government is considering resolving the issue of prepaid CPT through the issue of local currency bonds.

COUNTERPARTY RISK

Possible Impact

The Group operates in Ukraine which has a weak country credit profile as defined by international credit rating agencies. Financial instability of the Group's counterparties, including its major suppliers, the government, local banks which operate in a weak banking sector, can absorb high amounts of working capital, or result in material financial loss.

Counterparty risk could also lead to lower sales volumes, delays in projects and interruption of production or financial loss in the event of a default by counterparties and adversely affect its future financial results.

In 2014, the Group placed an order for 300 rail cars. Due to the ongoing conflict in eastern Ukraine, where the rail cars are manufactured, only 52 rail cars were received by the Group during the financial years 2014 and 2015. The full amount of the prepayment for the rail cars was provided for in the 2014 financial year. As the situation did not improve in 2015 the full amount of US$3.6 million (at 31 December 2015 exchange rates) was fully written off. For further information see Related Party Disclosure note 19.

Poor relations with the Russian Federation can impact the ability of Ukrainian companies to import oil and gas from Russia as well as have a general negative impact on Ukrainian GDP growth.

As a result of the annexation of Crimea by the Russian Federation, certain Russian individuals and organisations were sanctioned by the European Union, the United States and other countries. This could have a negative impact on Ferrexpo if any of these individuals or organisations were customers or suppliers to the Group.

For further details see note 19 of the financial statements.

Mitigation

· The financial strength of all of the Group's counterparties is subject to regular and thorough review. The results of these reviews are used to determine appropriate levels of exposures consistent with benefits obtained, and available alternatives in context of the Group's operations, in order to mitigate the potential risk of financial loss. To date, the Group has not experienced any financial losses from transactions with its counterparties.

· The Group develops its supplier base in order to avoid excessive dependence on any supplier, actively encouraging a diversity of supply where reasonable and practical.

· The Group does not sell any of its product into Russia or have any financial arrangements with Russian banks.

RISKS RELATING TO THE GROUP'S OPERATIONS

MINING AND PROCESSING RISKS AND HAZARDS 

Possible Impact

Mining risks and hazards may result in employee and contractor fatalities as well as material mine or plant shutdowns or periods of reduced production. Such events could damage the Group's reputation and operating results.

Mitigation

· Safety, environmental and operational performance is regularly and rigorously reviewed throughout the organisation including the Chief Operating Officer, the Executive Committee and the Board.

· Through its capital investment programme Ferrexpo has modernised its mining and production facilities which is improving safety, environmental and operational performance.

· All accidents are fully investigated and lessons are drawn and implemented.

· Appropriate safety training is regularly provided to employees.

· Employee remuneration is linked to safety performance.

· Active management of operational risk register to ensure predictable volumes and quality.

ENERGY COSTS

Possible Impact

Energy costs account for a large portion of production costs (approximately 45% in 2015) and are greater for pellets than for other forms of iron. An increase in oil prices and other energy related costs may affect Ferrexpo's production costs disproportionately. Oil prices also heavily influence international freight rates which is likely to impact the net price the Group receives for its pellets (for further information see risk: Logistics and C3 Freight Rates).

Mitigation

The Group continually looks to reduce its energy consumption through the Business Improvement Programme. For example, in 2015 Ferrexpo has been investigating methods to turn waste product into power.

Ukraine is the largest producer of sunflower seeds and in September 2015, Ferrexpo began using sunflower husks as a natural gas replacement for one of the four pelletising lines. It sourced the husks from a local company in the Poltava region and saved over 3 million cubic metres of natural gas providing a cost saving of US$200,000. In December, line number 2 of the pelletiser began to use husks as well. The Group intends to replace up to 30% of its total natural gas consumption in the pelletiser with sunflower husks.

RELIANCE ON STATE MONOPOLIES

Possible Impact

The Group purchases certain goods and services from state-owned enterprises, and changes in the related tariffs affect the Group's cost base. Availability of services can also be limited, which could affect the Group's ability to produce and deliver pellets.

During December 2014, Ferrexpo experienced reductions in the supply of electricity during certain times of the day. This resulted in a small loss of 144 thousand tonnes of pellet production. To date, these disruptions have not continued in 2015 or in 2016.

The supply of gas to Ukraine predominantly comes from Russia. The recent geopolitical tension has increased the risk of disruption to supply.

Other areas of reliance on state monopolies include railway tariffs and availability of rail wagons, supply of gas and electricity and associated tariffs, and mining royalties.

Mitigation

· The factors affecting the Group's future cost structure are closely managed.

· Cost reduction initiatives are planned and reported to the Board.

· Since inception of BIP in 2006, it has reduced the C1 cash cost by US$6.8 per tonne of pellets.

· The Group has purchased its own rail wagons to reduce reliance on state-owned rail cars.

· Ferrexpo has contingency plans in place to purchase natural gas or heavy duty fuel on behalf of a local power station to generate emergency electricity should there be an electricity shortfall (see Political and Legal risk on page 24).

· Ferrexpo is diversifying its natural gas supplier base.

· Recent reforms to the Ukrainian gas sector have increased competition and improved pricing transparency.

· Energy efficiency improvements and lower domestic consumption of gas has reduced Ukraine's reliance on gas imports.

· To date, the Group has not experienced any material supply disruption of key inputs since its IPO in 2007.

· Ferrexpo actively looks to invest in areas to reduce reliance on state monopolies, subject to funding availability.

LOGISTICS

Possible Impact

The Group's logistics capability is dependent on services provided by third parties and state-owned organisations, mainly in relation to rail and port services. Logistical bottlenecks may affect the Group's ability to distribute its products on time, impacting customer relationships.

Mitigation

· The Group continues to maintain, and where appropriate, and subject to funding availability, invest, its logistics capabilities to ensure available capacity to better service its customers, lower costs and reduce reliance on third-party providers. Beside considerable investment in the rail car fleet over recent years, Ferrexpo owns 135 barges operating on the Danube/Rhine River corridor. It also owns a 48.6% interest in the port of TIS Ruda which guarantees the Group independent access to the seaborne markets avoiding reliance on the state port.

Statement of Directors' Responsibilities

Statement by the Directors under the UK Corporate Governance Code

The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with International Financial Reporting Standards ('IFRS') as adopted by the EU. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Parent Company and of their profit or loss for that period. In preparing those financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable and prudent;

· state whether applicable IFRS have been followed, subject to any material departures disclosed and explained in the financial statements; and

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Board considers that the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's performance, business model and strategy.

Responsibility Statement of the Directors in Respect of the Annual Report and Accounts

We confirm on behalf of the Board that to the best of our knowledge:

(a) the financial statements give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and

(b) the Strategic Report and the Directors' Report includes a fair review of the development and performance of the undertakings included in the consolidation as a whole, and the principal risks and uncertainties that they face.

For and on behalf of the Board

Michael Abrahams

Chairman

Christopher Mawe

Chief Financial Officer

9 March 2016

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position

The financial statements were approved by the Board of Directors on 9 March 2016.

Kostyantin Zhevago Christopher Mawe

Chief Executive Officer Chief Financial Officer

Consolidated Statement of Cash Flows

1 The movement in the prior year includes the effect of VAT receivable balance amounting to US$97,067 thousand recovered through VAT bonds. See also note 14.

Consolidated Statement of Changes in Equity

Notes to the Consolidated Financial Statements

Note 1: Corporate information

The financial information for the year ended 31 December 2015 does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The audited statutory accounts for the year ended 31 December 2014 have been delivered to the Registrar of Companies and those for 2015 will be delivered following the Company's annual general meeting convened for Thursday, 19 May 2016.

The auditor's report was unqualified, but included an emphasis of matter paragraph highlighting material uncertainties in respect of the Group's ability to continue as a going concern.

Ferrexpo plc will publish on or around 31 March 2016 its Annual Report and Accounts for the year ended 31 December 2015 on its corporate website www.ferrexpo.com.

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 23 King Street, London, SW1Y 6QL, 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-Plavninskoye and Lavrikovskoye ("GPL") and Yeristovskoye 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% (2014: 50.3%) of Ferrexpo plc's issued share capital.

At 31 December 2015, the Group also holds through OJSC Ferrexpo Poltava Mining an interest of 48.6% (2014: 48.6%) in TIS Ruda, a Ukrainian port located on the Black Sea. As this is an associate, it is accounted for using the equity method of accounting.

Note 2: Summary of significant accounting policies

Basis of preparation

Whilst the preliminary announcement has been prepared in accordance with International Financial Reporting Standards ('IFRS') and International Financial Reporting Interpretation Committee ("IFRIC") interpretations adopted for use by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The Board approved the full financial statements that comply with IFRS on Wednesday, 9 March 2016. The financial statements have been prepared under the historical cost convention as modified by the recording of pension assets and liabilities and the revaluation of certain financial instruments.

During the period ended 31 December 2015, the Ukrainian Hryvnia has devalued by 52% (2014: 97%) compared to the US Dollar; from 15.769 as at 31 December 2014 to 24.001 as at 31 December 2015. As a result of this devaluation, the total equity decreased by US$472,492 thousand as of 31 December 2015 due the exchange differences on translating foreign operations which is reflected in the translation reserve. Further details are provided in the statement of other comprehensive income and note 9.

The Group's principal risks likely to affect its future development, performance and position are set out on pages 21 to 29. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Performance Review on pages 9 to 11.

Going Concern Basis

Over the next year from the approval of the accounts, debt facilities in the amount of US$203,181 thousand fall due for repayment. At certain iron ore pricing levels, without associated cost relief, the Group's operating cash flow generation although positive might not be sufficient to meet these debt amortisations or be sufficient to remain within financial covenants triggering cross default across part or all of its debt facilities.

The Group expects to be able to repay its facilities as they fall due based on current forecasts and remain within its financial covenants and also expects, that if necessary, it would be able to agree amendments to relevant facilities. As a result the accounts have been drawn up on a going concern basis. However, the impact of the volatility in the future level of the iron ore price and operating cost inputs are material uncertainties that may cast significant doubt upon the Group's ability to meet its debt amortisation obligations and to continue as a going concern.

Under these circumstances, and absent appropriate financing, the Group may be unable to continue to realise assets and discharge liabilities in the normal course of business and it will be necessary to restate amounts in the balance sheet to reflect these circumstances which will materially change the amounts and classification of figures contained in the financial statements.

Changes in accounting policies

The accounting policies and methods of computation adopted in the preparation of the consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2014 except for the adoption of new amendments and improvements to IFRSs effective as of 1 January 2015. These new standards and interpretations had no effect on reported results, financial position or disclosure in the financial statements:

Annual Improvements to IFRSs - 2010-2012 Cycle

Annual Improvements to IFRSs - 2011-2013 Cycle

IFRIC 21 Levies

New standards and interpretations not yet adopted

The Group has elected not to early adopt any revised and amended standards, which are not yet mandatory in the EU.

The standards below could have an impact on the consolidated financial statements of the Group.

IFRS 9 Financial instruments

The complete standard has been issued in July 2014 including the requirements previously issued and additional amendments. The new standard replaces IAS 39 and includes a new expected loss impairment model, changes to the classification and measurement requirements of financial assets as well as to hedge accounting. The new standard becomes effective for financial years beginning on or after 1 January 2018. The Group will assess the impact on its consolidated financial statements.

IFRS 15 Revenue from contracts with customers

The new standard was issued in May 2014 and establishes the principles for the disclosure of useful information in the financial statements in respect of contracts with customers. The new standard becomes mandatory for financial years beginning on or after 1 January 2018. The effect from the additional disclosure requirements will be assessed and disclosure will be made once the Group has fully assessed the impact of applying IFRS 15.

IFRS 16 Leases

The new standard was issued in January 2016 replacing 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'). IFRS 16 eliminates the classification of leases as either operating or finance as is required by IAS 17 and, instead, 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 twelve months or less. This new standard applies to annual reporting periods beginning on or after 1 January 2019 subject to EU endorsement. The Group will review its arrangements in place in order to evaluate the potential impact of the new standard.

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.

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 EBITDA, "C1" costs and the net financial indebtedness.

EBITDA

The Group presents EBITDA because it believes that EBITDA is a useful measure for evaluating its ability to generate cash and its operating performance.

 'C1' costs

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

Net financial indebtedness

Net financial indebtedness as defined by the Group comprises cash and cash equivalents, term deposits, interest-bearing loans and borrowings and amounts payable for equipment.

The Group's net financial indebtedness was reduced by the insolvency of the Group's transactional bank in Ukraine resulting in a reduction of the balance of cash and cash equivalents available in Ukraine (see Note 16).

The Group's cash and cash equivalents balance was further reduced by debt repayments of US$393,876 thousand, of which US$153,613 thousand were related to a bond exchange completed in February and July 2015 and were prepaid in respect of the bonds falling due in April 2016 (see note 17).

Disclosure of revenue and non-current assets

The Group does not generate significant revenues from external customers attributable to the United Kingdom, the Company's country of domicile. The information on the revenues from external customers attributed to the individual foreign countries is given in Note 4. The Group does not have any significant non-current assets that are located in the country of domicile of the Company. The vast majority of the non-current assets are located in Ukraine.

Note 4: Revenue

Revenue for the year ended 31 December 2015 consisted of the following:

Export sales of iron ore pellets and concentrate by geographical destination showing separately countries that individually represented more than 10% of export sales in either current or prior year were as follows:

During the year ended 31 December 2015 sales made to three customers accounted for 41.7% of the revenues from export sales of ore pellets (2014: 45.2%).

Sales to customers that individually represented more than 10% of total sales in either current or prior year are as follows:

Note 5: Cost of sales

Cost of sales for the year ended 31 December 2015 consisted of the following:

Note 6: Selling and distribution expenses

Selling and distribution expenses for the year ended 31 December 2015 consisted of the following:

Note 7: General and administrative expenses

General and administrative expenses for the year ended 31 December 2015 consisted of the following:

Auditor remuneration

Auditor remuneration paid in respect of the audit of the financial statements of the Group and its subsidiary companies and for the provision of other services not in connection with the audit is disclosed below:

Non-audit services totalling US$681 thousand (2014:US$247 thousand) in relation to assurance services for liability management activities of the Group have been capitalised as prepaid arrangement fees and are not included in the table above.

Assurance related services in the comparative period include fees paid for services provided in relation to raising of new debt for the Group.

Note 8: Other expenses

Other expenses for the year ended 31 December 2015 consisted of the following:

Information on the Group's community support donations is provided in the CSR paragraph on page 19.

The vast majority of the movements in allowance for doubtful receivables and prepayments in the comparative period ended 31 December 2014 is related to an allowance recorded for prepayments made for 300 rail cars ordered, but not yet fully delivered due to the ongoing conflict in the eastern part of Ukraine. See also Note 19.

Note 9: Foreign exchange gains and losses

Foreign exchange gains and losses for the year ended 31 December 2015 consisted of the following:

During the financial year 2015, the Ukrainian Hryvnia has devalued by approximately 52% (2014.97%) compared to the US dollar from 15.769 as at 31 December 2014 to 24.001 as at the end of this reporting period. This has had a significant impact on the carrying values of property plant and equipment, income taxes recoverable and prepaid (Note 12) and other taxes recoverable and prepaid (Note 14).

Note 10: Write-offs and impairment losses

Write-offs and impairment losses for the year ended 31 December 2015 consisted of the following:

The write-off of receivables and prepayments is predominantly related to the cancellation of contract for equipment ordered and partially prepaid in line with the terms of the contract.

Note 11: Finance income and expense

Finance income and expense for the year ended 31 December 2015 consisted of the following:

Other finance income in the comparative period includes a US$16,497 thousand release of a discount recorded in the prior years to reflect changes in the estimated timing of receipts for VAT in dispute that was previously expected to be recovered over a protracted period of time. Further information is provided in Note 14. This discount was built up in periods prior to the periods disclosed above and recorded as a finance cost.

Note 12: Taxation

The weighted average statutory corporate income tax rate is calculated as the average of the statutory tax rates applicable in the countries, in which the Group operates, weighted by the profits and losses before tax of the subsidiaries in the respective countries, as included in the consolidated financial information. The weighted average statutory corporate income tax rate before special items was 12.4% for the financial year 2015 (2014: 13.6%), which excludes the tax effect of the non-recurring charge related to the restricted cash and deposits balances (see Note 16), which, if included, would have resulted in a negative weighted averaged statutory corporate income tax rate.

The income tax credit of US$6,108 thousand for the financial year 2015 results from a deferred tax credit of US$28,420 thousand relating to the recognition of a deferred tax asset in respect of the allowance for the restricted cash and deposits for which the Group expects that it will become tax deductible in a future period.

A reconciliation between the income tax charged in the accompanying financial information and income before taxes multiplied by the weighted average statutory tax rate for the year ended 31 December 2015 is as follows: