Ferrexpo Regulatory News (FXPO)

5 August 2020

Ferrexpo plc

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

Ferrexpo delivers increased sales and production volumes, resilient financial performance and strengthened balance sheet in 1H 2020, despite unprecedented global disruption.

Ferrexpo plc today announces its unaudited financial results for the six months ended 30 June 2020.

Financial Highlights

· Pellet production and sales volumes up 5% and 22% respectively

· Revenues of US$776 million (1H 2019: US$787 million) reflecting lower pellet premiums

· Underlying EBITDAA US$352 million (1H 2019: US$372 million)

· EBITDA margin 45% (1H 2019: 47%)

· Profit after tax of US$250 million (1H 2019: US$270 million)

· Interim dividend declared of 6.6 US cents (1H 2019: 6.6 US cents), in addition to an interim dividend of 6.6 US cents per share declared in June 2020

· Net debt A US$174 million (31 December 2019: US$282 million)

· Net debt A to last twelve months' EBITDA ratio down to 0.31x, compared to 0.48x at 31 December 2019

· Capital investment US$96 million (1H 2019: US$114 million)

Steve Lucas, Non-Executive Chairman, said:

"I am pleased to report a positive set of results for the half year, with strong cash generation, higher sales and production, lower C1 costs and debt, and solid EBITDA of US$352 million, all in the context of a pandemic that has disrupted the global economy. That is a testament to our strong management team and the commitment of our entire workforce.

The Company has approached the uncertainty of current global events with caution, destocking throughout the period and has reduced net debt to US$174 million and increased cash to US$169 million as at 30 June 2020. The operations are now benefiting from the refurbishment work completed in 2019 and first half production was the second highest since IPO in 2007. This positive operational and financial performance has enabled the Group to declare an interim dividend to shareholders in June, and in light of the strong liquidity position the Group is pleased to declare today a further interim dividend of 6.6 US cents per share. Ferrexpo has continued its investment for growth in the first half year and aims to double output from the Group's operations in Ukraine over the medium term.

Whilst the ongoing global COVID-19 pandemic has affected demand in most markets, Ferrexpo's operations continue to operate with minimal disruption. The Group has adapted to a changing market environment, and has sold increased volumes to China where demand remains robust. As the market returns to more normal conditions in 2H 2020, we expect to see a recovery in steel demand outside China, which should be constructive for pellet premiums."

Financial Summary:

Health and Safety

· No work related fatalities in 1H 2020 (FY 2019: none)

· Group Lost Time Injury Frequency Rate remains below 1.0x, with a ratio of 0.77x recorded for 1H 2020 (FY 2019: 0.58, 1H 2019: 0.45).

· COVID-19 update: the Group's facilities continue to operate with minimal impact on operations to date, and the Group continues to closely monitor its workforce. The infection rate in the local communities surrounding the Group's operations remains low.

Market Environment

· Average iron ore price (65% Fe) remained above US$100 per tonne.

· The global pellet market faced reduced demand in 1H 2020 due to lower steel production in regions other than China, however, this was partly mitigated by significantly lower pellet supply from Brazil.

· Average realised FOB price decreased 13% compared to record prices seen during 1H 2019. This was primarily due to lower pellet premiums. Realised prices were 7% above the level seen during 2H 2019.

· C3 freight rate fell US$2 per tonne to US$13 per tonne as a result of lower oil prices and a reduction in Brazilian iron ore supply

Operational Highlights

· 5% increase in pellet production compared to 1H 2019

· 22% increase in sales volumes compared to 1H 2019

· Increased spot sales to China in response to reduced pellet demand in traditional markets

· C1 cash cost US$41 per tonne, down 11% compared to 1H 2019, reflecting lower commodity prices and increased production.

· Capital investmentA US$96 million (1H 2019: US$114 million) as pellet line refurbishment programme comes to a close and investment in concentrator expansion is completed

· Two trial cargoes of DR pellets sold in 1H 2020, totaling a combined 185kt

· Plant capacity expected to increase to 12 million tonnes of pellets in 2021

Board of Directors and Corporate Governance

· Appointment of Jim North as Acting CEO and as a Director of the Company

· Non-executive Chairman Steve Lucas to retire ahead of Group's next AGM once an orderly succession process has been put in place

· Process underway to appoint additional Independent Non-executive Directors

Environment, Social and Governance ("ESG")

· Release of Company's Responsible Business Report on Company's website, covering ESG activities in 2019

ALTERNATIVE PERFORMANCE MEASURES

Words with the symbol A are defined in the Alternative Performance Measures section on pages 35 and 36.

Analyst conference call and webcast

Ferrexpo will host an analyst presentation today via audio webcast which will start at 09:00 BST.

To join the webcast, and view the live presentation, please follow this link https://edge.media-server.com/mmc/p/4xohmjag.

If you wish to join this conference call, please see following dial in details and instructions:

1. 10 minutes prior to the start of the call, dial the appropriate Participant Dial-In Number listed in the Conference Dial-In Number section below.

2. Enter the Event Plus Passcode stated below and leave any information requested after the tone. You will be joined automatically to the conference.

Note: Due to regional restrictions some participants may receive Operator assistance when joining this conference call and will not be automatically connected.

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 over 40 years. In 2019, the Group produced 10.5 million tonnes of pellets ranking it as the 3rd largest exporter of pellets to the global steel industry with a market share of approximately 8%. Ferrexpo has a diversified customer base supplying premium steel mills in Austria, Germany, Japan, South Korea, Taiwan, China, Slovakia, the Czech Republic, Turkey, Vietnam and America. Ferrexpo has a premium listing on the main market of the London Stock Exchange under the ticker FXPO. For further information, please visit www.ferrexpo.com

Introduction

Good progress continues to be made in safe working, with no work related fatalities in 1H 2020 (1H 2019: none). The lost time injury frequency rate ("LTIFR") remains below 1.0x (1H 2020: 0.77x, 1H 2019: 0.45x), representing a further improvement compared to the Group's five-year average LTIFR of 1.01x.

The Group continues to operate with minimal impact from the global COVID-19 pandemic, with measures put in place in March 2020 to protect our workforce and insulate the Group's ability to continue production in the event of infections occurring locally at any of our operations. Measures put in place in March include administrative staff working from home, minimising contractor operations and the downsizing of individual teams in operating areas to allow for social distancing and the option to switch teams should one team need to go into isolation. The Group continues to monitor infection rates in all geographic locations in which it operates, and has a mitigation plan in place that is specific for each geographic location.

Pellet production rose 5% in 1H 2020 to 5.6 million tonnes, representing the second highest production volume for the first half since the Group listed in 2007, and the highest first half volume produced since 2016. Despite rising production, Group revenues fell 1% during the period due to lower realised prices, which were the result of lower pellet premiums. For more information, please see section titled Iron Ore Market Review (Iron Ore Pricing). The Group continues to generate strong cash flows and profit after tax in 1H 2020 was US$250 million, a decrease of 8% on 1H 2019 reflecting lower pellet premiums.

1H 2020 showed stable iron ore prices as demand in China remained robust, with the Platts iron ore price (65% Fe) starting the period at US$104 per tonne, and finishing the period US$10 per tonne higher, with an average of US$106 per tonne. 99% of Ferrexpo's pellets sold were pellets grading 65% Fe, or above (1H 2019: 96%).

For 50 years, Ferrexpo has produced iron ore pellets for the global steel sector, as this form of iron ore allows for reduced energy inputs, slag volumes and carbon dioxide emissions. Independent research by CRU suggests that for each tonne of Ferrexpo pellets utilised by steel mills instead of sinter, this reduces the mill's carbon dioxide emissions by 40%. As a result of the favourable characteristics of iron ore pellets over other forms of iron ore such as sinter fines, pellets receive a premium. This pellet premium averaged US$30 per tonne in 1H 2020, falling from US$67 per tonne in 1H 2019 due to changing market dynamics in 2020 relating to the global COVID-19 pandemic. For more information, please see section titled Financial Review.

The Group expects to begin commissioning its latest concentrator expansion in 2H 2020, which will increase its run of mine ore processing capacity by approximately 6 million tonnes per annum, and enable the Company to fully utilise its existing installed pelletiser capacity of 12 million tonnes per annum in 2021. For more information, please see Capital Investment section.

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

Dividends

The Group has reduced gross debt to US$343 million and increased cash to US$169 million. As a result of the strong cash flow and resulting liquidity position, the Group is pleased to announce a further interim dividend of 6.6 US cents per Ordinary Share payable on 26 August 2020 to shareholders on the register at the close of business on 14 August 2020. The ex-dividend date will be 13 August 2020. All dividends are paid in UK Pounds Sterling, with an election to receive in US Dollars.

On 15 June 2020, the Directors declared an interim dividend of 6.6 US cents per Ordinary Share.

Board Membership and Corporate Governance

The Board of Ferrexpo remains committed to maintaining strong levels of corporate governance practices and transparency throughout the Group.

During the period, it was announced following the Company's annual general meeting ("AGM") in May 2020 that Steve Lucas, Chairman of the Board, has decided to retire as Chairman and resign from the Board once an orderly succession process has been put in place. In any event, it is envisaged that Steve will not stand for re-election at the Company's next AGM.

Since the end of the period, it was announced on 6 July 2020, that Chris Mawe, Chief Financial Officer ("CFO"), would vacate his role as a Director of the Company. In addition, the Group announces today that Chris Mawe is stepping down from his role as CFO, with Roman Palyvoda assuming the role of Acting CFO until further notice. As a result, the Board has begun a formal process to identify and appoint a successor.

Jim North, Acting Chief Executive Officer ("Acting CEO"), joined the Board on 6 July 2020. In compliance with the UK Corporate Governance Code, at least half of the Board (excluding the Chairman) are Independent Non-executive Directors.

As noted in the Company's 2019 Annual Report and Accounts, the Nominations Committee is already seeking to make a further appointment of a suitable Independent Non-executive Director to strengthen the Board and relevant Board Committees. An additional process to appoint a further new Independent Non-executive Director and to appoint a new Chairman has commenced and is being led by the Nominations Committee.

FPM Share Transfer Restriction

On 3 June 2020, the Group advised that the restriction placed on the transfer of certain shares in Ferrexpo Poltava Mining ("FPM") held by Ferrexpo AG Switzerland, the sole shareholder in FPM, had been cancelled following an appeal by the Group. On 19 June 2020, the Group advised that a new restriction had been placed on the same shares in FPM that are held by Ferrexpo AG Switzerland. For further information see Note 17 Commitments, contingencies and legal disputes.

Iron Ore Market Review 

Iron Ore Pricing

During 1H 2020, the iron ore price remained relatively stable, despite uncertainty relating to the global COVID-19 pandemic, with the Platts 65% Fe iron ore index rising during the period by 9% to US$114 per tonne as of 30 June 2020, and averaging US$106 per tonne throughout the half year period. This average is in line with the average Platts iron ore price (65% Fe) seen 1H 2019, which averaged US$105 per tonne. Contributing factors behind the relative stability in the iron ore price in 1H 2020 included significant iron ore supply disruptions out of Brazil which counter balanced a reduction in steel production related to the ongoing global COVID-19 pandemic and associated economic slowdown. High grade premiums, defined as the difference between the 62% Fe Index and the 65% Fe Index, and which represent the price paid for the additional ferrum and lower impurities in high grade ores, averaged US$15 per tonne in 1H 2020 (1H 2019: US$14 per tonne).

1H 2019 was notable for record high pellet premiums in addition to strong iron ore prices following a major disruption to the supply of Brazilian iron ore in early 2019. These record pellet premiums tailed off in 2H 2019 as the market rebalanced and steel demand weakened. During 1H 2020, pellet premiums continued to fall gradually throughout the period. Lower freight rates, due to reduced shipping from Brazil and falling global oil prices, offset much of the fall in pellet premiums throughout1H 2020.

Freight

The C3 freight rate, which is principally used as a freight reference in the pricing of the Group's sales contracts, was on average US$13 per tonne in 1H 2020 (1H 2019: US$15 per tonne), reflecting lower iron ore volumes out of Brazil and lower oil prices during the period.

Iron Ore Supply

Based on quarterly data from Ferrexpo's peers, Brazilian iron ore export volumes fell by more than 15% in 1H 2020 compared to 2H 2019 whilst Australian iron ore shipments from the Pilbara, accounting for the majority of seaborne shipments into China, exported similar iron ore volumes in 1H 2020 compared to 2H 2019. However, compared to output from the Pilbara in 1H 2019, which was affected by tropical cyclones, company data suggests that production in 1H 2020 was up by approximately 3% year on year. The supply disruption of Brazilian iron ore has helped support iron ore prices despite reduced steel demand during the COVID-19 pandemic.

Published data by MySteel1 shows that stockpiles of imported iron ore at Chinese ports was c.108 million tonnes at the end of 1H 2020, compared to c.125 million tonnes of iron ore at the start of the period, implying a drawdown of iron ore inventories during 1H 2020 of c.17 million tonnes. This inventory level is equivalent to 37 days of Chinese steel production2 which is historically low and has also served to support iron ore prices during 1H 2020.

Conversely, stocks of imported iron ore pellets at Chinese ports, which are included in the total inventory figures, rose from c.5 million tonnes at the start of 1H 2020 to c.9 million tonnes as of the end of the period3, a significant increase and a record level compared to previous periods. The higher iron ore pellet inventories in China are attributable to increased pellet production by exporters from Canada, Ukraine, Sweden and Russia in 1H 2020, whilst weaker demand for pellets from traditional markets in Europe and Japan that has resulted in increased shipments to the Chinese market. This has resulted in a decrease in the average published Platts CFR China 62% Fe spot pellet premium assessment from US$33 per tonne in 1H 2019 to US$27 per tonne in 1H 2020.

Iron Ore Pellet Supply

Global seaborne pellet supply was up by approximately 4.0 million tonnes in 1H 2020 compared to 1H 20194, with this small overall increase largely attributable to strong operational performance and destocking by pellet exporters in Canada, Sweden, Russia, Chile and Ukraine. However, these gains have been partially counterbalanced by underperformance in Brazilian pellet supply. The increases in output seen from producers during 1H 2020 are not expected to continue into 2H 2020, however, with some producers announcing plans to supply more concentrate and less pellets to the market until pellet premiums recover, whilst supply constraints in Brazil are expected to continue. As the global economy recovers after the COVID-19 pandemic, the Group expects to see higher pellet premiums toward the end of the calendar year.

Iron Ore Pellet Demand

According to the World Steel Association, global crude steel production fell in 1H 2020 by 6% to 873 million tonnes. The year started with the first two months ahead of the corresponding period in 2019, however, each month since March 2020 has seen a 5-15% year on year decline in output. China's steel output, which accounts for approximately 60% of global steel production, achieved record levels of production in May and June, having previously seen a decrease in output in March. The EU and Japan, which account for 8% and 5% of global steel production respectively, have seen steeper declines in steel production in 2Q 2020, with both regions reporting year on year steel output dipping by between 20% and 40% in April, May and June.

Overall, the World Steel Association expects global steel production to contract by 6% in 2020, followed by a 4% recovery to 1,717 million tonnes in 2021, as the global economy recovers from the current COVID-19 crisis.

Regional changes in the global demand for steel are influencing the regional demand for iron ore pellets and pellet premiums. With steel production in China now returning to 2019 levels or above, pellet demand from Chinese steel producers has increased, with global pellet imports up more than 10.0 million tonnes in 1H 2020 to c.17.5 million tonnes. The Group expects that demand for pellets in China will continue to increase over the longer term as pollution controls are implemented across Chinese cities, and Chinese steel mills transition from lower grade, higher impurity sources of iron ore and toward higher grade feed stocks including iron ore pellets.

In 2Q 2020, the World Steel Association reported that steel production in both the EU and Japan was around 30% below the level seen 12 months ago, with pellet demand decreasing by approximately 1.5 million tonnes in the EU in 1H 2020. A similar fall in pellet demand has occurred in Far East Asia (excluding China) and South East Asia combined. Looking ahead, increasing activity in the automotive and construction sectors in the EU and Asia suggests that steel demand is set to increase in 2H 2020. The Group therefore expects that pellet demand from these regions will gradually recover to normal levels over the course of 2H 2020.

In the longer term, the Group expects that tighter emissions controls and regulation, particularly in the EU, will result in additional demand for high grade, low impurity pellets in the future. Independent research by CRU has demonstrated the advantage of lower CO2 emissions from using additional pellets in the blast furnace burden instead of sinter fines, primarily the result of steel producers not required to sinter material before it enters the blast furnace. This research estimates that steel mills produce approximately 40% less CO2 for each tonne of pellet used in place of sinter fines.

1https://www.mysteel.net/article/channel/mysteel-surveys/inventories-and-stockpiles/breed/steel/steel-raw-materials/1.html

2Using CRU estimate of Chinese steel production in 2019 of 977 million tonnes.

3Source: MySteel

4Management estimate

Ferrexpo Pellet Supply

Despite recent weakness in pellet demand in markets other than China and falling pellet premiums, the fundamental arguments for steelmakers to use Ferrexpo's high grade, low impurity iron ore pellets remain, with increasing demand for raw materials that reduce energy input requirements, slag volumes and CO2 emissions in the steelmaking process while also improving the quality of the final product. Increasing environmental awareness in China is of particular significance due to this market consuming an additional 15-20% of the seaborne traded pellet volume in 1H 2020, suggesting that if this demand is maintained, it will provide support to pellet premiums as demand in Europe and the rest of Asia returns.

The Group benefits from having a geographically diverse portfolio of customers, with Ferrexpo's load port in Ukraine well positioned to supply steel producers in Europe, North East Asia, North America, Middle East and China. At current production volumes, the Group is not constrained by logistics and can supply the various markets as required. In 1H 2020, the Group redirected sales towards China, as a result of increased pellet demand in China and weakness in the European market. As a proportion of the sales portfolio, China increased from 25% in 2019 to 66% in 1H 2020. The Group expects that this trend will reverse in 2H 2020, with fewer spot sales and increasing sales under long term contract, as demand in the EU and Japan returns. The Group has also commenced production and trial shipments of direct reduction ("DR") pellets in order to access new markets, with 185kt of DR pellets sold in 1H 2020. DR pellets represent approximately a third of global iron ore pellet demand, and therefore, this market represents an opportunity to further diversify the Group's sales portfolio adding high quality customers in new geographic regions.

Financial Review

Despite the uncertainties in the global steel market caused by the COVID-19 outbreak, the Group realised a strong performance in 1H 2020 driven by higher sales and production volumes, which increased by 22% and 5% respectively, compared to 1H 2019. The revenue and profit after tax was US$776 million and US$250 million compared to US$787 million and US$270 million, respectively, in 1H 2019. Continued strong cash flow generation funded dividend payments of US$58 million and capital investment of US$96 million whilst reducing net debt by US$107 million to US$174 million (31 December 2019: US$281 million).

Revenue

Group revenue decreased by 1% to US$776 million in 1H 2020 (1H 2019: US$787 million) principally due to a lower realised average FOB price in 1H 2020, which was partly offset by a significantly higher pellets sales volume.

Sales volumes for the period increased by 22% to 6.1 million tonnes (1H 2019: 5.0 million tonnes), increasing revenue by US$160 million. Lower realised prices during the period mainly reflected a substantial decrease in premiums paid for iron ore pellets, whereas iron ore fines price was in line with 1H 2019 due to continuing supply issues from Brazil. The lower realised prices in 1H 2020 impacted the revenue by US$190 million.

Headline pricing 1H 2020 vs. 1H 2019

Note: pellet premiums shown in the table above are paid above the 62% Fe iron ore price.

Following the COVID-19 outbreak in the first quarter of 2020, the Chinese economy recovered faster than many other regions and steel production in China maintained relatively high levels for most of the period compared to the rest of the world. This compared to large steel production cuts for the most part of 2Q 2020 in Europe and Japan. As a result, a significant volume of Ferrexpo's seaborne iron ore pellets were redirected from Europe and North East Asia to the Chinese market. This redirection increased the volume of sales to the spot market compared to previous periods. The supply of iron ore fines was affected by disruptions at producers in Brazil supporting the fines prices whereas a lower demand for iron pellets in traditional pellet markets put some pressure on the pellet premiums.

For further information, see section titled Iron Ore Market Review (Iron Ore Pricing).

Lower freight rates during 1H 2020, as the Baltic Dry C3 Index averaged US$12.70 per tonne (1H 2019: US$14.70 per tonne), positively impacted the Group's net revenue. For further information, see section titled Iron Ore Market Review (Iron Ore Pricing).

Costs

C1 Cost of Production A

The Group's average C1 cash cost of production A decreased to US$40.9 per tonne in 1H 2020 compared with US$46.0 per tonne in 1H 2019. The Group's production costs benefited from lower energy prices and continued cost control measures.

The Group's production costs benefited from lower energy prices, mainly prices for diesel fuel and gas and electricity, which account for approximately 33% of the total C1 cash costs. The electricity prices benefited from the liberalisation of the electricity market in Ukraine whereas prices for oil and gas were affected by the drop in prices on the global market during the first half of 2020. Lower electricity prices reduced C1 costs by US$1.1 per tonne while lower diesel fuel and gas prices reduced the C1 cost by US$1.8 per tonne and US$0.9 per tonne, respectively, compared to 1H 2019.

It is expected that the Group's production costs in 2H 2020 remain subject to the Hryvnia exchange rate fluctuations, local inflation commodity input prices.

The table below shows the composition Group's C1 cash cost per tonne:

Please note: figures in table above may not add up to 100% due to rounding.

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

Selling and Distribution Costs

Total selling and distribution costs were US$162 million (1H 2019: US$132 million). The increase was driven by higher international freight costs from CFR sales due to an increased proportion of sales to China. The effect from higher sales volume to China was partially offset by lower freight rates in 1H 2020 compared to 1H 2019. International freight costs totalled US$73 million compared to US$49 million in 1H 2019.

General, Administrative and Other Expenses

General and administrative and other expenses increased to US$50 million compared with US$45 million in 1H 2019. The increase in 1H 2020 is the net effect from higher research and developments and personnel costs in Ukraine and lower audit and professional fees. The total of audit and professional fees in the comparative period was affected by additional costs incurred in respect of the independent review into the Blooming Land Charity. For further information see Note 17 Commitments, contingencies and legal disputes.

Currency

Ferrexpo prepares its consolidated accounts in US Dollars. The functional currency of the Ukrainian operations is the Hryvnia ("UAH") and approximately half of the Group's operating costs are in local currency. In 1H 2020, the Hryvnia depreciated from UAH23.686 per US Dollar on 1 January to UAH26.692 per US Dollar as of 30 June 2020. For further information, see section titled Costs (C1 Cost of Production) above. The total operating forex gains of US$36 million in 1H 2020 predominantly resulted from the conversion of US Dollar denominated assets in Ukraine, compared to a loss of US$16 million in 1H 2019. The local currency depreciated in 1H 2020 compared to the US Dollar, whereas it appreciated in 1H 2019.

Ukrainian Hryvnia vs. US Dollar

Source: National Bank of Ukraine

Underlying EBITDA A

Underlying EBITDA A in 1H 2020 decreased 5% to US$352 million compared to US$372 million in 1H 2019.

The decrease is primarily driven by the lower realised prices due to lower pellet premiums in 1H 2020. This effect was partially offset by a significant higher sales volume. The lower realised prices in 1H 2020 impacted the revenue by US$190 million, which was partially by the effect from the higher sales volume accounting for US$160 million.

Interest

Interest expense declined 49% to US$8 million compared to US$15 million in 1H 2019 due to a lower outstanding debt balance. The average cost of debt for the period ended 30 June 2020 was 5.6% (average 1H 2019: 7.5%). The decrease was primarily due to the repayment of US$173 million Eurobonds with a coupon of 10.375% in April 2019.

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

Tax

The income tax expense for 1H 2020 was US$44 million (1H 2019: US$47 million) based on an expected weighted average tax rate for the full year 2020 of 15.0%. The applied expected tax rate of 15.0% is in line with the one applied for 1H 2019. The Group operates across a number of jurisdictions and its effective tax rate is subject to various factors outside of the Group's controls. This includes the volatility in the global iron ore pellet market and foreign exchange rate movements, primarily between the Ukrainian Hryvnia and the US Dollar.

The effective tax rate of the financial year 2019 was 12.2%, reflecting the appreciation of the Ukrainian Hryvnia against the US Dollar, negatively affecting the profitability of the Group's local subsidiaries.

Further details on taxation are disclosed in Note 8 Taxation and Note 17 Commitments, contingencies and legal disputes of the accounts in respect of ongoing court proceedings.

Profit for the Period

Profit for the period was US$250 million, compared with US$270 million in 1H 2019. The decrease is reflecting the net effect of the lower underlying EBITDA.

Cash Flows

Net cash flow from operating activities was US$258 million (1H 2019: US$256 million). Working capital reflected a net outflow of US$25 million, which is the net effect from higher trade receivables and lower finished goods given the higher volume shipped during the period and lower trade accounts payable.

During 1H 2020, dividend payments totalled US$58 million, compared to US$78 million in 1H 2019. Further dividend payments of US$97 million were declared for payment subsequent to the period end in respect of a final dividend for 2019 of 3.3 US cents following approval at the Group's AGM in May 2020. An interim dividend for 2020 of 6.6 US cents was approved by the Board in June 2020, in addition to an interim dividend of 6.6 US cents approved by the Board on 4 August 2020.

Capital Investment A

Capital expenditure A in 1H 2020 was US$96 million compared to US$114 million in 1H 2019. During the period in 2020, US$13 million was spent on stripping activities for future production growth, US$12 million was invested in the concentrate expansion programme, which is on track for completion by the end of 2020 and is expected to increase pellet production by up to 1.5 million tonnes per annum in 2021, and US$ 17 million was invested in the new press filtration plant. The remaining US$54 million was used for sustaining and other capital investment.

Debt

Ferrexpo continues to have a strong balance sheet with a low level of debt. Net debt to EBITDA A for the last 12 months was 0.31x compared with 0.48x as of 31 December 2019 (0.44x as at 30 June 2019). The Group's gross debt reduced to US$343 million as of 30 June 2020, compared to US$412 million as of 31 December 2019, whereas the available cash balance increased to US$169 million as of 30 June 2020, compared to US$131 million as of 31 December 2019 resulting in a net debt balance of US$174 million as of 30 June 2020 (31 December 2019: US$281 million).

The Group has a US$400 million 2017 PXF facility, of which US$333 million was fully drawn as of 30 June 2020. This facility will amortise over twelve quarters and commenced in 1Q 2020.

Related Party Transactions

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

Operational Review 

Health and Safety

In 1H 2020, there were no fatalities at the Group's operations (FY 2019: none).

The Group's Lost Time Injury Frequency Rate ("LTIFR") in 1H 2020 was 0.77 per million man hours, which represents a continuation of the progress made in safety in 2019, and below the Group's five year trailing average full year LTIFR of 1.01x.

The Company continues to monitor a number of leading and lagging indicators of safety, and not just lost time injuries. Leading indicators of safety includes training hours provided in safety protocols, and safety audits, whilst lagging indicators include injury rates and recording of near miss events. The Company is pleased to report that total injuries fell by 31% in 1H 2020 compared to 2H 2020, and a similar level of decrease was also seen in the number of near miss and significant incidents during the period.

Pellet Production and Pellet Quality

The Company's facilities continue to operate with minimal impact on operations to date, and the Company continues to closely monitor its workforce. The infection rate in the local communities surrounding the Company's operations remains low.

Total 1H 2020 pellet production increased 5% to 5.6 million tonnes (1H 2019: 5.4 million tonnes), with this increase in production attributable to good performance of both the concentrator and pelletiser, with reduced downtime in both areas, completion of the pelletiser refurbishment process in 4Q 2019, which has resulted in higher productivity rates through the pelletiser, and reduced volumes of FPP+ pellets. Following the pelletiser refurbishment process at the end of 2019, the Group has seen pelletiser availabilities increase by approximately five percentage points to 86% in 1H 2020. During the period, Ferrexpo's operations achieved a record monthly production level in its history, with 1,066kt of pellets producing in April, surpassing the previous record set in 2016.

Ferrexpo continues to focus on marketing high quality pellets, which deliver the greatest realised prices and are purchased by more resilient customers. In 1H 2020, 99% of pellets produced were the Company's premium pellet type (65% Fe, "FPP"), or above, with only 98kt of Ferrexpo Basic Pellets produced during the period (1H 2019: 96% FPP, or above). All of the Company's pellets that were produced in 2019 and 1H 2020 were produced from the Company's own ore.

As part of its ongoing programme to upgrade pellet quality, and expand into new markets, the Group sold 185kt of Direct Reduction ("DR") pellets in 1H 2020 as trial shipments to new customers. DR pellets are higher grade, lower impurity pellets that have a higher pellet premium than blast furnace pellets. DR pellets represent approximately a third of the global pellet export market and is a new market for the Group to market its products into.

Pellet Production:

The Group has made good progress in its expansion programme, and intends to commence commissioning of its new concentrator capacity in the second half of 2020. This additional processing capacity will enable the Group to produce excess concentrate and fully utilise the existing installed 12 million tonnes per annum capacity of the pelletiser in 2021.

Capital Investment

A summary of current projects under execution in 1H 2020 is shown in the table below:

Capital Investment for Future Growth

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

Marketing

Ferrexpo's sales volumes for 1H 2020 increased by 22% to 6.1 million tonnes (1H 2019: 5.0 million tonnes).

Ferrexpo benefits from a diversified sales portfolio with leading steel mills throughout the world, while its logistics routes to customers provide a competitive advantage given Ukraine's central geographical location. Ferrexpo's average shipping duration to Asia is 33 days compared to its main pellet-producing competitors in Brazil (39 days shipping time), Canada (54 days) and Sweden (44 days).

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

Sales Volume by Market Regions:

Due the global COVID-19 pandemic, market conditions shifted in 1H 2020, with increased demand for iron ore pellets in China in 2Q 2020. Reduced steel production in the EU and other markets in Asia resulted in increased sales to Chinese customers, with spot sales into this market increasing to 54% in 1H 2020. The Company expects to revert to a lower percentage of spot sales in 2H 2020 as global steel production recovers and market conditions begin to normalise.

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

Update on Risks

The Group considers that the principal risks facing the business, as highlighted on pages 50 to 60 of the 2019 Annual Report and Accounts published in April 2020, remain relevant. In addition to the principal risks disclosed in the 2019 Annual Report and Accounts, the unprecedented situation caused by the COVID-19 outbreak and resulting uncertainties in the global economy requires additional consideration. An update on the Ferrexpo specific COVID-19 situation as well as material developments of key risks during the first half of 2020 is provided below.

Covid-19 outbreak update and considerations

Update on 1H 2020

The safety and wellbeing of our employees is paramount and the Group took appropriate precautions to mitigate the risk of infection from the COVID-19 virus at its mining and processing operations in Ukraine, and also at its other jurisdictions where employees are based. Ferrexpo has followed and will continue to follow the advice from health authorities in its different jurisdictions.

As of the date of approval of these interim condensed consolidated financial statements, the Group's mining and processing operation as well as its major distribution channels have not been affected by the COVID-19 outbreak. Both production and sales volumes exceeded the volumes achieved in the comparative period ended 30 June 2019.

However, there has been an impact on the markets into which the Group sells its products. The COVID-19 outbreak during the first quarter caused a significant reduction in the demand of iron ore from certain steel producers, particularly in Europe and Japan. However, while there were significant steel production cuts for most of the second quarter in these markets, China maintained high levels of steel production for most of the period. As a result, a significant volume of Ferrexpo's seaborne iron ore pellets were redirected from Europe and North East Asia to the Chinese market.

Whilst the iron ore fines price was in line with 1H 2019, there was a steady decrease in the premiums paid for iron ore pellets during the period due to lower demand for iron pellets in the traditional pellet markets in Europe and Japan.

Consideration of significant judgements and material uncertainties

As in the past, the key judgements for the Group's going concern assessment are related to the expected prices for iron ore pellets and their demand in the Group's key markets. The Group has successfully navigated through the first months of the COVID-19 outbreak and remained highly cash generative. However, the Board appreciates that the continued spread of COVID-19 in some countries is likely to have a significant impact on the global economy and its recovery.

Notwithstanding this, as of the date of the approval of these interim condensed consolidated financial statements, the Board considers the risk of 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 to be low, but will continue to monitor future developments. This conclusion is based on the Group's successful response to the first months of the COVID-19 outbreak, its available balance of cash and cash equivalents, its continued high cash generation during this unprecedented period and the debt amortisation profile of its major debt facility. Further, sufficient mitigating factors remain available to the Group, such as working capital measures, the timing of development capital expenditures and shareholder distributions, to address any significant adverse changes.

Stress testing and going concern assessment

The Group operates in an industry with a history of price volatility, and the risk in respect of price realisations is addressed in the Group's going concern assessment. The Group's current going concern assessment is based on its latest long-term model, which was updated in June 2020. As in the past, various sensitivity scenarios which considered lower realised prices, higher production costs and lower production volumes have been tested. In light of the heightened uncertainties in terms of COVID-19, the Group performed additional reverse stress tests in order to address the risk of a more serious demand disruption in the Group's key markets and heightened risk of price volatility.

In assessing the Group's going concern assumption and long-term viability, the Group has considered the balance of cash and cash equivalents available at the date of authorisation of the interim condensed consolidated financial statements, its cash flow projections for the period of the going concern assessment and the available mitigating factors to react to possible adverse changes in the global economy affecting its key markets.

Whilst the Group does currently not have any committed undrawn bank debt facilities, the Board concluded that the Group has sufficient liquidity to meet its present obligations and cover working capital needs for the period to be covered by the going concern assessment. Taking into account the Group's low gearing, the risk of non-compliance with financial covenants is also considered to be low. It is the Directors' view that the Group is resilient to the current uncertainties caused by the COVID-19 outbreak and, as a result, the Group continues to adopt the going concern basis of accounting for the preparation of these interim condensed consolidated financial statements.

Outlook

At this time, it is extremely difficult to predict the development of the COVID-19 pandemic and its impact on the global economy, but it is to be expected that the associated uncertainties will persist for a prolonged period. However, having successfully navigated through the first months of the COVID-19 outbreak, the Group expects to be able to rely on the experience gained and that it will again be able to redirect its pellet sales in order to benefit from favourable demand dynamics in the respective markets. It is expected that the recovery of the steel markets in Europe and Japan will be slower than in China and that the demand of the Chinese steel producers will remain at the level as seen in the first half of 2020. The Group's business model is considered to be sustainable based on its competitive cost position on the iron ore cost curve, which provides additional resilience to adverse changes in the market.

At the time of the announcement of the 2019 results in March 2020, the Board deferred its decision to declare dividends in order to preserve available cash during this unprecedented period of uncertainty. However, following the continued strong cash generation during the second quarter of 2020, the Group resumed its dividend payments. Further dividend payments have been considered in the Group's long-term model during the period covered by the going concern assessment, although these, together with development capital expenditures, are seen as available mitigating factors in case of significant adverse changes in the different markets.

See also the Group's going concern statement on page 22.

Global Steel Demand and Realised Price

The Group's realised price is principally impacted by demand for iron ore which is highly correlated to global demand for steel and steel mill profitability. In 1H 2020, in light of the global COVID-19 pandemic, steel profit margins across the globe fell to the extent that steel producers began to close production facilities and idle blast furnaces. This negatively affected short term demand for iron ore, and introduces additional risk associated with the timing of these facilities restarting.

The iron ore forward curve for 62% Fe iron ore fines is currently in backwardation with delivery in December 2020 at $98 per tonne compared to spot on 31 July 2020 of approximately US$111 per tonne. The expected price fall is due to lower forecast steel demand relating to the global COVID-19 pandemic. For further information, see Iron Ore Market Review (Iron Ore Supply).

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

Pellet Premiums

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

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

Market Mix

In 1H 2020, pellet premiums in China averaged US$27 per tonne compared with the average Platts Atlantic Blast Furnace pellet premium of US$30 per tonne over the 62% Fe index. A temporary change in sales mix with more volume sold under short-term spot contracts and less under long-term contracts could have an impact on the average realised price and the Group profitability.

Freight Rates

The Group's received price is subject to freight market volatility with higher freight rates reducing the Group's realised price returns. In 1H 2020, the Baltic Exchange C3 freight index3 decreased by US$2 per tonne to US$13 per tonne compared to 1H 2019. Freight rates are largely influenced by the price of oil and demand for seagoing vessels from bulk commodity producers. As of 31 July 2020, freight rates had risen 36% to US$18 per tonne compared to the average for 1H 2020. An increase in freight rates will reduce the Group's received price and its profitability.

Committee of Independent Directors' Review of FC Vorskla Cyprus Limited

As disclosed in the 2019 Annual Report & Accounts, the Board has been making enquiries in connection with the sponsorship payments previously made to FC Vorskla Cyprus Limited following the identification of a related party loan made by FC Vorskla Cyprus Limited to Collaton Limited, a related party of the Group. Sponsorship payments have in the past been made by Ferrexpo Middle East FZE to two entities: FC Vorskla Cyprus Limited, a company incorporated in the Republic of Cyprus, and FC "Vorskla" LLC, a company incorporated in Ukraine (together, "FC Vorskla").

The Board's enquiries, which are being led by the Committee of Independent Directors (the "CID"), are ongoing. Together with its third party legal and forensic accountant advisers, the CID has requested information from FC Vorskla and other third parties about the use of the loan proceeds. The CID has received written confirmations from FC "Vorskla" LLC, FC Vorskla Cyprus Limited and Kostyantin Zhevago, a controlling shareholder of Ferrexpo plc who also controls FC Vorskla, detailing the use of the funds in connection with the renovation and construction of certain FC Vorskla stadiums and training grounds in Ukraine. Additionally, the CID has been informed that, on completion of the capital projects, these assets will be subject to a sale and leaseback and the proceeds will then be used to fully repay the loan made by FC Vorskla Cyprus Limited to Collaton Limited.

Once its enquiries are complete, and/or the loan repaid, Ferrexpo will update the market by way of public announcement as appropriate. For further information see Note 19 Related party disclosures.

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

Directors' Responsibility Statement

The Interim Report complies with the Disclosure and Transparency Rules ("DTR") of the United Kingdom's Financial Conduct Authority in respect of the requirement to produce a half-yearly financial report. The preparation of the Interim Report for the six months ended 30 June 2020 in accordance with applicable laws, regulations and accounting standards is the responsibility of, and has been approved by, the Directors.

We confirm that to the best of our knowledge:

· the condensed set of consolidated financial statements has been prepared in accordance with IAS 34 as adopted by the European Union;

· the Interim Management Report includes a fair review of the important events that have occurred during the first six months of the financial year and their impact on the condensed financial statements, and description of the principal risks and uncertainties for the remaining six months of the financial year, as required by DTR4.2.7R; and

· the Interim Management Report includes a fair review of disclosures of material related party transactions that have occurred in the first six months of the financial year and of material changes in the related party transactions described in the 2019 Annual Report, as required by DTR 4.2.8R.

The Directors are also responsible for the maintenance and integrity of the Ferrexpo plc website.

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

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

For and on behalf of the Board

Steve Lucas

Non-executive Chairman

Jim North

Acting Chief Executive Officer

4 August 2020

Independent Review Report to Ferrexpo Plc

Introduction

We have been engaged by Ferrexpo plc (the 'Company) to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 which comprises the Interim Consolidated Income Statement, the Interim Consolidated Statement of Comprehensive Income, the Interim Consolidated Statement of Financial Position, the Interim Consolidated Statement of Cash Flows, the Interim Consolidated Statement of Changes in Equity, and the related Notes 1 to 20. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely for the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed. 

Directors' responsibilities 

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority. 

As disclosed in Note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union. 

Our responsibility 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 

Conclusion 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

4 August 2020

Interim Consolidated Income Statement

Interim Consolidated Statement of Comprehensive Income

Interim Consolidated Statement of Financial Position

The financial statements were approved by the Board of Directors on 4 August 2020.

Interim Consolidated Statement of Cash Flows

Interim Consolidated Statement of Changes in Equity

Notes to the Interim Condensed Consolidated Financial Statements

Note 1: Corporate information

Organisation and operation

Ferrexpo plc (the "Company") is incorporated in England, which is considered to be the country of domicile, with its registered office at 55 St James's Street, London, SW1A 1LA, UK. Ferrexpo plc and its subsidiaries (the "Group") operate two mines and a processing plant near Kremenchug in Ukraine, have 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. The Group's operations are vertically integrated from iron ore mining through to iron ore concentrate and pellet production and subsequent logistics. The Group's mineral properties lie within the Kremenchug Magnetic Anomaly and are currently being extracted at the Gorishne-Plavninske-Lavrykivske ("GPL") and Yerystivske deposits.

The majority shareholder of the Group is Fevamotinico S.a.r.l. ("Fevamotinico"), a company incorporated in Luxembourg. Fevamotinico is ultimately wholly owned by The Minco Trust, of which Kostyantin Zhevago, the Group's previous Chief Executive Officer, is one of the beneficiaries. At the time this report was published, Fevamotinico held 50.3% (31 December 2019: 50.3%; 30 June 2019: 50.3%) of Ferrexpo plc's issued share capital.

The Group's interests in its subsidiaries are held indirectly by the Company, with the exception of Ferrexpo AG, which is directly held. The Group's consolidated subsidiaries are disclosed in the Additional Disclosures of the 2019 Annual Report & Accounts.

At 30 June 2020, the Group also holds through PJSC Ferrexpo Poltava Mining an interest of 49.9% (31 December 2019: 49.9%; 30 June 2019: 49.9%) in TIS Ruda LLC, a Ukrainian port located on the Black Sea. As this is an associate, it is accounted for using the equity method of accounting.

Note 2: Summary of significant accounting policies

Basis of preparation

The interim condensed consolidated financial statements for the six months period ended 30 June 2020 have been prepared in accordance with International Accounting Standard ('IAS') 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all of the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2019.

The interim condensed consolidated financial statements do not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for the full year is based on the statutory accounts for the financial year ended 31 December 2019. A copy of the statutory accounts for that year, which were prepared in accordance with International Financial Reporting Standards ('IFRSs') issued by the International Accounting Standard Board ('IASB'), as adopted by the European Union as they apply to financial statements of the Group for the year ended 31 December 2019, have been delivered to the Registrar of Companies. The auditors' report under section 495 of the Companies Act 2006 in relation to those accounts was unqualified and did not contain a statement under sections 498(2) or 498(3) of the Companies Act 2006.

The comparative period ended 30 June 2019 included in the interim condensed consolidated financial statements has not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on Review of interim financial information and do not include all of the information required for full annual financial statements.

Going concern

The Group has assessed that, taking into account: i) its available cash and cash equivalents available at the date of authorisation of the interim condensed consolidated financial statements; ii) its cash flow projections for the period of management's going concern assessment; and iii) events and conditions beyond the period of management's going concern assessment, it has sufficient liquidity to meet its present obligations and cover working capital needs for the aforementioned period and will remain in compliance with its financial covenants throughout this period. Therefore, the Group continues to adopt the going concern basis of accounting for the preparation of this set of financial statements. See the update on risks on page 12 in respect of the Group's relevant COVID-19 related considerations.

Accounting policies adopted

The accounting policies and methods of computation adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2019 except for the adoption of the new standards that became effective as of 1 January 2020.

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

· Amendments to References to the Conceptual Framework in IFRS standards introduce a new chapter on measurement, guidance on reporting financial performance, improved definitions of an asset and a liability and clarifications in areas such as the roles of stewardship, prudence and measurement uncertainty in financial reporting.

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

New standards, interpretations and amendments not yet adopted 

· Amendments to IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current or Non-current were issued in January 2020 and are effective for the financial year beginning on 1 January 2022 subject to EU endorsement. The amendments clarify that the classification of liabilities as current or non-current should be based on the rights, in existence at the end of the reporting period, to defer settlement by at least twelve months and not on expectations about whether an entity will exercise these rights. Furthermore, the amendments clarify that settlement refers to the transfer to the counterparty of cash, equity instruments, other assets or services. The Group does not expect a material impact on its consolidated financial statements from these amendments.

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

Use of critical estimates and judgements

In the course of preparing financial statements, management has to make estimates and judgements that can have a significant impact on the Group's consolidated financial statements. The most critical accounting estimates include the recoverability of capitalised lean and weathered ore while significant judgements relate to taxation in terms of the tax legislation in Ukraine and the use of payments made in previous years to a related party for the legitimate purposes.

The use of inaccurate assumptions in assessments made for any of these estimates and judgements could result in a significant impact on the Group's financial position and/or financial performance. The detailed description of the critical estimates and judgements is disclosed in the Group's 2019 Annual Report & Accounts.

Seasonality

The Group's operations are not affected by seasonality.

Note 3: Segment information

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

Underlying EBITDA and gross profit

The Group presents the Underlying EBITDA as it is a useful measure for evaluating the Group's ability to generate cash and its operating performance. The Group's full definition of Underlying EBITDA is disclosed in the Glossary on page 37.

Net debt

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

The Group's balance of cash and cash equivalents increased by US$38,206 thousand after debt repayments net of proceeds of US$68,790 thousand during the period ended 30 June 2020 (31 December 2019: US$4,374 thousand; 30 June 2019: US$38,326 thousand). Net debt is an Alternative Performance Measure ("APM"). Further information on the APMs used by the Group, including the definitions, is provided on pages 35 and 36.

Note 4: Revenue

Revenue for the six months period ended 30 June 2020 consisted of the following:

Information on the commodity risk related to provisionally priced sales are provided in Note 16 Financial instruments.

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

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

Note 5: Operating expenses

Operating expenses for the six months period ended 30 June 2020 consisted of the following:

Operating expenses include:

Audit and non-audit services for the comparative year ended 31 December 2019 include US$1,834 thousand relating to audit services provided by the previous audit firm of the Group for the period ended 31 December 2018 (30 June 2019: US$1,810 thousand).

Note 6: Foreign exchange losses and gains

Foreign exchange losses and gains for the six months period ended 30 June 2020 consisted of the following:

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

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

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

Note 7: Net finance expense

Net finance expense for the period ended 30 June 2020 consisted of the following:

Note 8: Taxation

The Group pays corporate profit tax in a number of jurisdictions and its tax rate is influenced by the mix of profits primarily between Ukraine, Switzerland, the United Kingdom and Dubai, as well as the level of non-deductible expenses for tax purposes in each of these jurisdictions. For the period ended 30 June 2020, the income tax expense was based on an expected weighted average tax rate of 15% for the financial year 2020, compared to an effective tax rate of 12.2% for the financial year 2019. The Group's future effective tax rate could be impacted by legislative changes, changes in the statutory tax rates in any of its key jurisdictions and unexpected adverse outcome in relation to the ongoing court proceedings mentioned below.

As disclosed in Note 17 Commitments, contingencies and legal disputes, the Group is involved in an ongoing court proceeding in respect of its cross-border transactions and an unexpected adverse outcome would have an adverse impact on the Group's total income tax expense and its effective tax rate.

Note 9: Earnings per share and dividends paid and proposed

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

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

The basic number of ordinary shares is calculated by subtracting the weighted average of shares held in treasury and employee benefit trust reserves from the total number of ordinary shares in issue.

Dividends proposed and paid

Taking into account relevant thin capitalisation rules and dividend-related covenants for the Group's major bank debt facilities, the remaining available distributable reserves of Ferrexpo plc after taking into account the proposed dividends in the table below is US$46,257 thousand for the remainder of the financial year 2020.

1) Declared on 4 August 2020 and expected to be paid on 26 August 2020

2) Declared on 15 June 2020 and paid on 3 July 2020

3) Declared on 21 April 2020 and paid on 2 July 2020

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

Note 10: Property, plant and equipment

During the six months period ended 30 June 2020, the additions to property, plant and equipment totalled US$109,766 thousand (30 June 2019: US$123,619 thousand; 31 December 2019: US$320,613 thousand) and the net book value of the disposals of property, plant and equipment totalled US$1,023 thousand (30 June 2019: US$1,187 thousand; 31 December 2019: US$5,231 thousand). The total depreciation charge for the period was US$51,971 thousand (30 June 2019: US$40,116 thousand; 31 December 2019: US$91,944 thousand).

The carrying value of property, plant and equipment includes capitalised borrowing costs on qualifying assets of US$46,399 thousand (31 December 2019: US$44,693 thousand; 30 June 2019: US$33,053 thousand).

Note 11: Leases

During the six months period ended 30 June 2020, the additions to the right-of-use assets totalled US$85 thousand (30 June 2019: US$2,114 thousand; 31 December 2019: US$7,222 thousand). The total depreciation charge for the period was US$2,321 thousand (30 June 2019: US$1,795 thousand; 31 December 2019: US$5,265 thousand).

As at 30 June 2020, the carrying amount of the lease liabilities consisted of the following:

The total cash outflow for leases falling under the scope of IFRS 16 Leases during the period ended 30 June 2020 was US$1,330 thousand (31 December 2019: US$5,600 thousand; 30 June 2019: US$3,478 thousand). During the period ended 30 June 2020 US$156 thousand was recognised as an expense in the consolidated income statement in respect of short-term leases with a corresponding impact on the net cash flows from operating activities (31 December 2019: US$425 thousand; 30 June 2019: US$241 thousand). Furthermore, interest expense on lease liabilities in the amount of US$310 thousand was recognised in the consolidated income statement during the period ended 30 June 2020 (31 December 2019: US$630 thousand; 30 June 2019: US$254 thousand).

Note 12: Other taxes recoverable and prepaid

As at 30 June 2020, taxes recoverable and prepaid comprised:

As at 30 June 2020, US$27,499 thousand of the VAT receivable relates to the Group's Ukrainian business operations (31 December 2019: US$35,381 thousand; 30 June 2019: US$33,131 thousand) of which US$34 thousand (31 December 2019: US$809 thousand; 30 June 2019: US$653 thousand) was overdue. Management is of the opinion that the overdue balances will be recovered during the next 12 months in full.

The total VAT receivable balance shown in the table above is net of an allowance of US$1,836 thousand (31 December 2019: US$2,090 thousand; 30 June 2019: US$914 thousand) to reflect the uncertainties in terms of the timing of the recovery of VAT receivable balances.

Note 13: Inventories

As at 30 June 2020, inventories comprised:

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

Inventories classified as non-current comprise lean and weathered ore that are, based on the Group's current processing plans, not planned to be processed within the next twelve months. It is the Group's intention to start processing a portion of the lean and weathered ore in the second half of the financial year 2020. It is however expected that it will take more than 12 months to process the entire stockpile, depending on the Group's future mining activities, processing capabilities and anticipated market conditions.

Note 14: Cash and cash equivalents

As at 30 June 2020, cash and cash equivalents comprised:

The debt repayments net of proceeds during the period ended 30 June 2020 totalled US$68,790 thousand (31 December 2019: US$4,374 thousand; 30 June 2019: US$38,326 thousand) affecting the balance of cash and cash equivalents. Further information on the Group's gross debt is provided in Note 15 Interest-bearing loans and borrowings.

The balance of cash and cash equivalents held in Ukraine amounts to US$32,140 thousand as at 30 June 2020 (31 December 2019: US$28,351 thousand; 30 June 2019: US$25,074 thousand).

Note 17 Commitments, contingencies and legal disputes provides details on the Group's balance of restricted cash and deposits, which has been fully provided for during the financial years 2015 and 2016 as not available to the Group.

Note 15: Interest-bearing loans and borrowings

This note provides information about the contractual terms of the Group's interest-bearing loans and borrowings, which are measured at amortised cost and denominated in US Dollars.

At 30 June 2020 and 31 December 2019, the Group has a syndicated revolving pre-export finance facility, which is fully drawn, with outstanding amounts of US$333,333 thousand and US$400,000 thousand, respectively. As the end of the comparative period ended 30 June 2019, US$360,000 thousand was drawn and US$40,000 thousand was available to the Group. Following a one-year grace period, the facility is amortised in 12 quarterly instalments, commencing on 7 February 2020 and the final repayment due on 6 November 2022.

The aforementioned bank debt facility was guaranteed and secured as follows:

· Ferrexpo AG and Ferrexpo Middle East FZE, which are also joint borrowers, assigned the rights to revenue from certain sales contracts;

· PJSC Ferrexpo Poltava Mining assigned all of its rights of certain export contracts for the sale of pellets to Ferrexpo AG and Ferrexpo Middle East FZE; and

· the Group pledged bank accounts of Ferrexpo AG and Ferrexpo Middle East FZE into which sales proceeds from certain assigned sales contracts are exclusively received.

For the revolving syndicated pre-export finance facility, arrangement fees are presented in prepayments and current assets and other non-current assets based on the maturity of the underlying facility and are amortised on a straight-line basis over the term of the facility.

The table below shows the movements in the interest-bearing loans and borrowings:

Further information on the Group's exposure to interest rate, foreign currency and liquidity risk is provided in Note 27 Financial instruments of the 2019 Annual Report & Accounts.