Ferrexpo Regulatory News (FXPO)

21 August 2012

FERREXPO plc ('Ferrexpo' or the 'Group')

Interim Results 2012

Ferrexpo, the FTSE 250 iron ore pellet producer, today announces its results for the six months to 30 June 2012.

Michael Abrahams, Non-Executive Chairman, commented:

"Ferrexpo made a good start to 2012, in-line with the Group's expectations against a backdrop of moderating iron ore prices. Operationally, the Group continues to perform well, with production from own ore 4% higher than 1H 2011. The Group continued its planned investment in its modernisation and expansion programme in the first half of 2012 and, with the expected additional output of ore from Ferrexpo Yeristovo Mining, is on target to increase annual production in 2014.

"During the period under review, the iron ore market has been volatile with market prices for iron ore down 20%. Ferrexpo, however, has continued to enjoy solid demand for its pellets with the average pellet price for the period down by only 12%. Lower pricing combined with higher raw material costs has reduced profits from the record level of 2011.

The Group continues on track with its growth projects and is well placed to benefit from its significant investment over the past five years. While the market outlook has deteriorated recently and remains variable, medium term iron ore pricing should remain underpinned by growth in developing markets. In line with its stated strategy, Ferrexpo will continue to exploit its substantial reserves to create sustainable value for shareholders."

Highlights

Operational

Production

§ Production at Ferrexpo Poltava Mining at full capacity representing:

- 4.7 million tonnes of pellets (1H 2011: 4.8 million tonnes)

- 2.1 million tonnes of 65% Fe pellets produced, in line with 1H 2011

§ First ore achieved at Ferrexpo Yeristovo Mining, commercial mining due to start at the beginning of 2013

Marketing

§ 50% of Ferrexpo's products were delivered to customers by logistics systems under its own control

§ Lower market prices partially mitigated through reduced freight rates to seaborne markets and improved performance of own transport infrastructure

§ As a result achieved iron ore prices outperformed the international iron ore price index

Financial

§ Revenue of US$731 million (1H 2011 US$855 million), a decrease of 15%

§ EBITDA of US$240 million (1H 2011: US$401 million), a decrease of 40%

§ Diluted EPS decreased by 50% to 24.7 US cents (1H 2011: 49.7 US cents)

§ Dividend of 3.3 US cents maintained (1H 2011: 3.3 US cents)

§ Group capital expenditure of US$222 million (1H 2011: US$121 million)

§ Strong balance sheet with cash balance of US$716 million as at 30 June 2012 (US$890 million as at 31 December 2011)

§ Major debt facilities expire in 2016 with insignificant debt repayments in 2012 and 2013

§ VAT repayments outstanding increased by US$50 million to US$222 million compared to 31 December 2011

§ Net debt position of US$251 million as at 30 June 2012 (US$80 million as at 31 December 2011)

Notes to Editors:

Ferrexpo is a Swiss headquartered iron ore company with assets in Ukraine. It is principally involved in the production and export of high quality iron ore pellets, which are used in the manufacture of steel. Ferrexpo's resource base is one of the largest iron ore deposits in the world. Its current producing asset, FPM, produced approximately 10 million tonnes of iron ore pellets in 2011 making it the largest exporter of pellets in the CIS. The Group has a diversified customer base supplying steel mills in Austria, Serbia, Slovakia, Czech Republic, Germany and other European states, as well as in China, India, Japan, and other Asian countries. Ferrexpo is listed on the main market of the London Stock Exchange under the ticker FXPO. For further information, please visit www.ferrexpo.com

FERREXPO PLC - INTERIM RESULTS

SIX MONTHS TO 30 JUNE 2012

Introduction

Ferrexpo made a good start to 2012, in-line with the Group's expectations against a backdrop of moderating iron ore prices. Operationally, the Group continues to perform well, with production from own ore 4% higher than 1H 2011. The Group continued its planned investment in its modernisation and expansion programme in the first half of 2012 and, with the expected additional output of ore from Ferrexpo Yeristovo Mining ('FYM'), is on target to increase annual production in 2014.

FYM is in its fourth year of investment and has reached first ore in one area of the pit ahead of the start of commercial ore mining by the beginning of 2013. During 2013, the mine will ramp up output to five million tonnes of ore with an average Fe grade of around 32.2%. Initially, the crude ore will be used to substitute output from the Poltava mine in order to assess the ore's production characteristics and also potentially to enhance pellet production from the existing processing facilities.

Results and Dividend

Iron ore and other commodity prices have declined in 2012 in the face of global market conditions, which are being driven by adverse macro-economic factors. As a consequence, and against the background of a 20% fall in the market price for iron ore in 1H 2012, the average selling price achieved by Ferrexpo for its iron ore pellets decreased by 12%, owing partly to lower freight costs.

In 1H 2012, Ferrexpo sold 4.5 million tonnes of pellets (1H 2011: 4.7 million tonnes), generating revenues of US$731 million. This is 14% lower than the record revenues of US$855 million achieved in 1H 2011 and reflects slightly lower 1H volumes and the lower market prices for iron ore.

In 1H 2012, the Group's average C1 cash costs rose principally as a result of higher Ukraine energy tariffs, oil costs and domestic inflation. These increases continue to be driven by the high price of key inputs which, due to stock holdings, do not yet reflect the trend towards lower market prices. High Ukrainian producer price inflation contrasts with low local CPI figures, and the Ukrainian Hryvnia remained stable against a strengthening US Dollar in the first half of the year. These factors contributed to an increase in C1 cash costs to US$60.4 per tonne compared to US$48.2 per tonne for 1H 2011 and an average annual cost of US$50.7 per tonne for 2011. The recent fall in oil prices is expected to benefit the cost base in the second half of the year, as would any Ukrainian Hryvnia devaluation against the US Dollar.

The combined factors of reduced selling prices and increased C1 cash costs led to lower EBITDA of US$240 million (1H 2011: US$401 million); Group profit after tax decreased by 50% to US$145.6 million (1H 2011: US$294 million). Operating cash flow after interest and tax was US$70 million (1H 2011: US$324 million). Capital expenditure amounted to US$222 million (1H 2011: US$121 million) (see Capital Investment below).

At the period end, Ferrexpo had gross debt and committed undrawn facilities of US$1,038 million, with an average maturity of 3.5 years and cash balances of US$716 million.

The Group's policy is to pay a modest but consistent dividend throughout the economic cycle and return capital to shareholders when appropriate, while maintaining adequate liquidity to develop its significant project pipeline. The key projects, and increased working capital requirements resulting from an increase in the overdue VAT balances, continue to absorb the cash from operations. The Directors recommend an interim dividend of 3.3 US cents per Ordinary Share for payment on 21 September 2012 to shareholders on the register at the close of business on 31 August 2012. The ex-dividend date will be 29 August 2012. The dividend will be paid in UK Pounds Sterling, with an election to receive US Dollars.

Health and Safety

The Group continues to improve its safety standards. In the first six months of the year, there were no fatalities and the lost-time injury rate fell to 0.55 per million man hours from 1.1 in 1H 2011 (FY 2011: 0.77).

Principal Risks

Given the structure of the business with operating assets in Ukraine, which is an emerging democracy, Ferrexpo considers that its interests may suffer if the domestic situation develops in ways that are unhelpful to business and discourage investment. This risk, however, is one that is commonly faced by all mining companies in emerging markets, and the Board believes that Ferrexpo has the expertise to manage it satisfactorily.

The Group faces an on-going legal claim over a shareholding in Ferrexpo Poltava Mining. The case has been running for more than six years in Ukraine, and the Directors believe it still has some way to run. The Board continues to receive legal advice that the case against Ferrexpo has little legal merit under Ukrainian law for legal, technical and practical reasons.

Market Environment

In 2011, iron ore prices reached near-record levels, driven by strong growth in steel production (especially in China, which saw an increase of 56 million tonnes of steel output) and by the continued delay in new iron ore projects bringing volume to the global market, before steel production fell back later in the year. The iron ore CFR China index price ranged from US$193 per tonne to US$117 per tonne in 2011.

In 1H 2012, iron ore prices recovered from the October 2011 low point with the highest index price for China CFR fines in the first six months reported to be US$151 per tonne and the lowest price US$132 per tonne. Since 30 June 2012, the index price for iron ore has fallen further and was US$118 per tonne at the end of July due to continued negative economic sentiment in Europe and concerns around decelerating Chinese steel production.

There are a number of iron ore expansion projects, including Ferrexpo's own FYM, expected to deliver first ore over the next two to three years. It is Ferrexpo's view that additional lower-cost supply will compete with and gradually replace some of the high-cost Chinese iron ore production. As a low-cost producer of high-quality pellets, Ferrexpo is well positioned to meet this challenge. It has logistical advantages over most other international pellet producers and benefits from existing long-term relationships with its customers.

So far this year there has been a tempering of growth in global steel production, coupled with additional iron ore supply in the market. Even so, Ferrexpo has enjoyed solid demand for pellets at prices that are down only 12% as compared to a 20% fall in market prices in the same period. Although these dynamics will tend towards a moderation of iron ore prices for the remainder of the year, the Group's opinion is that continued growth in developing economies, delays in further new iron ore projects and the relatively high cost of production in China should underpin pricing.

Customers

Ferrexpo continues to develop its customer base to ensure that it has a portfolio of contracts with world-class customers. In 1H 2012 it made further progress towards achieving its primary marketing objectives, which are to:

> consolidate index-linked pricing to long-term customers, in line with the leading iron ore producers;

> capitalise on its geographic proximity to major steel markets by using its logistical advantages; and

> strengthen and diversify its customer base.

In the first half, around 50% of Ferrexpo's products were delivered to customers by logistics systems under its own control, and the Group was able to mitigate the effect of the reduced market prices by achieving lower freight rates for seaborne markets and improving the performance of its own transport infrastructure. As a result it was able to enhance its realised prices compared to the movement in the international iron ore price index.

Production

In 1H 2012 Ferrexpo produced 4.7 million tonnes of pellets, (1H 2011: 4.8 million tonnes), of which 4.6 million tonnes were produced from own ore (1H 2011: 4.4 million tonnes). Of the output from own ore, 2.1 million tonnes of pellets were 65% Fe, in line with 1H 2011.

The Group's objective is to produce 100% of its pellet output with a grade of 65% Fe by 2015, so as to maximise revenue and profitability. The growth projects designed to achieve this are progressing well and should be completed by the end of 2014.

Costs

The mining industry as a whole has faced rising costs as a result of increasing commodity prices, high demand for labour and other resources and strong local currencies, particularly those traditionally linked to commodities. As previously reported, in 1Q 2012 average C1 cash costs increased to US$59.4 per tonne which was 17% higher than the average C1 cash cost of production in 2011. This rate of increase moderated in the second quarter, as a result of which the average C1 cash cost of production for 1H 2012 was US$60.4 per tonne (1H 2011: US$48.2 per tonne). Of this increase, 44% can be attributed to energy costs.

The Ukrainian Hryvnia has remained stable against the US Dollar during the period.

The Group continues to manage its cost base through its Business Improvement Programme, which has been running for six years and has achieved cumulative cost savings of US$6.8 per tonne since implementation.

Capital Investment

The Kremenchug Magnetic Anomaly, across which Ferrexpo holds its exclusive licences, is one of the largest iron ore reserves in the world and comprises approximately 20 billion tonnes of resources with an average iron content of 30%. These are contained in a single 50-kilometre long strike divided into 10 deposits, of which three are currently being exploited: Gorishne-Plavninskoye and Lavrikovskoye ('FPM') and Yeristovskoye ('FYM'). Ferrexpo continues to develop this large resource base to increase output, so as to underpin future profit and earnings growth.

Ferrexpo has four major growth projects under way, all of which are progressing well. These projects will expand production to 12 million tonnes per annum from early 2014. In 1H 2012 sustaining and modernisation capital expenditure at FPM was US$57 million which included US$7 million spent on the capacity upgrade project. A further US$19 million was invested in the quality upgrade and US$21 million in the mine life extension. At FYM US$65 million was spent on the development of the mine.

In addition, during the period the Group invested a further US$33 million in logistics and infrastructure, mainly rail cars to reduce cost and improve reliability of delivery to customers, and US$27 million on developing other deposits. Each of the projects and other capital investments are reviewed in detail in the Review of Operations.

Financial Management

The Group has US$1,038 million of drawn and undrawn committed debt facilities, including a US$500 million Eurobond maturing in April 2016 and a five-year fully drawn US$420 million revolving debt facility expiring in August 2016. The Group has minimal debt repayments of around US$5 million for the remainder of 2012 and US$10 million for 2013.

The Group has also secured financing under various import and export credit guarantees, amounting to US$69 million, to fund the major expansion projects. Of these, US$64 million has been guaranteed by Export Import Bank of the United States and US$5 million by Hermes Kreditversicherungs-AG of Germany. There are currently projects under way which are expected to incorporate guarantees from other European and Asian credit agencies. Overall the Group is well funded and the new export credit guaranteed debt facilities have been obtained at favourable rates.

At 30 June 2012, US$966 million had been drawn down and US$72 million remained undrawn. The Group held US$716 million in cash, compared with US$890 million at 31 December 2011. Of the Group's cash, US$614 million was placed with various international financial institutions with a minimum A credit rating, and US$102 million was held within Ukraine to fund immediate operational needs.

Cash Flow

The Group continues to manage its liquidity, applying cash generated from operations and from debt facilities to invest in projects to expand production. During 1H 2012, before working capital and expansionary capital expenditure, and after interest payments (net operating cash flow), the Group generated US$70 million of cash flow. Total investment in projects amounted to US$222 million.

As at 30 June 2012, total Ukrainian VAT owed to the Group amounted to UAH1,850 million (US$231 million), including overdue VAT of US$103 million. Total Ukrainian VAT owed increased by US$60 million compared to December 2011; against which a provision of US$13 million has been made due to the late repayment and associated cost of finance incurred by the Group. Overall VAT contributed to an increase in net debt of US$171 million to US$251 million in the first half of 2012. The Group continues to work with the relevant authorities to resolve this position.

Strategy

The Group's strategy is to continue to develop its large resource base to increase output and underpin future profit and earnings growth. In its 2011 Annual Report, the Group outlined its priorities for achieving sustained growth and long-term shareholder value and will continue to explore ways to enhance returns on investment.

In the period under review Ferrexpo made good progress towards achieving this, through investment in the existing Poltava mine and in the Yeristovskoye deposit. The continuing fall in the accident rate reflects management's progress as it continues to improve safety across the Group.

Work to increase the quality of production output at the existing operations continues. While external factors put costs under pressure, Ferrexpo is committed to being in the lowest quartile of the global pellet cost curve and to enhancing efficiency through its Business Improvement Programme.

Customer service and reliability have been enhanced through the acquisition of 600 rail cars in 1H 2012 as well as further investment in the barge operations on the Danube. The port operation at Yuzhny on the Black Sea is working well and Ferrexpo will soon receive delivery of its own top-off vessel, which will reduce costs and expedite loading of Capesize vessels at Yuzhny. The Group is making good progress in developing its customer base, and in 1H 2012 shipped three trial deliveries to potential new customers in Natural and Growth markets.

Ferrexpo's low balance sheet gearing and cash mean that it has sufficient resources to complete its growth projects, which will ensure long-term value generation for shareholders.

Corporate Governance

The Board is fully compliant with the UK Corporate Governance Code 2010 and remains committed to maintaining high standards of governance throughout the Group.

People

Ferrexpo employs over 9,000 people, the vast majority working at the Group's main operations in Ukraine. It also has logistics operations, marketing and administrative offices around the world, located close to its customer base. It is to the credit of Ferrexpo's employees that they have maintained Ferrexpo's position as a leading exporter of iron ore pellets through attention to operational excellence and dedication to the task at hand, during turbulent times. The Board would like to thank all of them for their personal contribution to Ferrexpo's success.

Outlook

The Group continues on track with its growth projects and is well placed to benefit from its significant investment over the past five years. While the market outlook has deteriorated recently and remains volatile, medium-term iron ore pricing should remain underpinned by growth in developing markets. In line with its stated strategy, Ferrexpo will continue to exploit its substantial reserves to create sustainable value for shareholders.

Michael Abrahams CBE DL Kostyantin Zhevago

Chairman Chief Executive Officer

Review of Operations

Ferrexpo JORC resources:

As of 30 June 2012

Note: Five further deposits are estimated to contain resources of over 14.2bt according to the former Soviet Union ('FSU') classification code. Ferrexpo is currently working together with international consultants to convert these resources to the universally accepted Australasian Joint Ore Reserves Committee ('JORC') standards. These deposits are collectively known as the 'Northern Deposits' and are classified under the names Manuilovskoye, Vasilievskoye, Kharchenkovskoye, Zarudenskoye and Brovarkovskoye.1Resources include 1,476mt of reserves.

Ferrexpo Poltava Mining (FPM)

FPM (the Group's current operating asset) has been in operation for more than 30 years, producing around 9.2 million tonnes of iron ore pellets from own ore per annum, which is expected to grow to 12 million tonnes per annum once the Group's expansion plans are completed in 2014. The mining and processing division, consisting of crushing, concentrating and pelletising facilities, exploits the Gorishne-Plavninskoye and Lavrikovskoye ('GPL') deposit. This is located immediately adjacent to Ferrexpo's rail and port facilities on the Dnieper River. The FPM mine is open cut. Following completion of the mine life extension project, the mine is expected to operate until around 2038.

FPM produced 4.6 million tonnes of pellets from own ore in the first half of the year (1H 2011: 4.4 million tonnes), an increase of 4%. Production of 65% Fe pellets from own ore remained constant at 2.1 million tonnes.

The FPM mine is operating at full capacity, mining approximately 30 million tonnes of crude ore per annum. This is processed into around 9.2 million tonnes of iron ore pellets, depending on ore grade, with an average iron content of 63.5%. FPM's pelletising facility has an installed production capacity of around 12 million tonnes of pellets per annum. In order to use surplus pelletising capacity the Group will purchase, depending on availability and price, third party concentrate from which FPM produced 0.2 million tonnes of pellets in 1H 2012 (1H 2011: 0.4 million tonnes).

The table below highlights FPM's production statistics.

FPM Business Improvement Programme ('BIP')

FPM is reducing costs through its BIP, which has created cumulative savings of US$6.8 per tonne in cash costs since 2005, principally by reducing the input of key raw materials and energy per unit of pellets produced, but also by reducing indirect costs. In 1H 2012, 38 projects were initiated, which will reduce costs by US$5.8 million on an annualised basis, in line with Ferrexpo's goal of 1%-2% cost savings per annum. Projects in progress include:

> modernising the pit dewatering system, which will reduce power consumption;

> improving the truck maintenance programme, which will increase the availability of the fleet;

> modernising the explosives power-driven process which will reduce the consumption of explosives and improve the quality of blasting operations; and

> replacing the gas burner units in the rotary kilns, which will reduce power consumption and optimise the fuel burning process.

FPM Capital Expenditure

Sustaining Capital Expenditure

Ferrexpo continues to invest in maintaining, modernising and upgrading FPM's mining and processing facilities to increase operating efficiency and reduce costs. In addition, there are a number of projects under way to upgrade FPM's facilities so as to establish a processing capability of 35 million tonnes of crude ore per annum. Following the completion of this programme, FPM will be able to process ore from the FYM mine to increase overall pellet output to a targeted 12 million tonnes in 2014.

US$21 million has been spent to date on the upgrade of the processing facilities, including US$7 million so far this year (1H 2011: US$7 million). The engineering work started in 2010 has to date involved the modernisation of certain ore beneficiation sections to increase processing output, reduce energy consumption and significantly improve process control. This is a rolling programme which will be extended to cover the majority of the iron ore beneficiation sections by 2014 when it is planned that the increased capacity will be achieved.

Other sustaining capital expenditure for 1H 2012 was US$50 million (1H 2011: US$56 million), which included new mining equipment and replacement plant.

Development Capital Expenditure

Quality Upgrade Project

This project, which received Board approval at the end of 2010, will increase the iron ore content of all Ferrexpo's pellets to 65% Fe. The project involves the installation of vertical mills for further fine grinding of the ore (to increase the overall iron ore content in the Group's pellet output) as well as upgrades to the beneficiation plant, including the installation of new flotation cells thus recovering more iron ore and improving yield. The vertical mills have been ordered along with the flotation tanks and associated equipment. Eight out of the 10 vertical mills will be delivered in September 2012 with the final two to be delivered in 2013.

The project is on schedule for commissioning by the end of 2014. To date US$22 million has been spent on this project, including US$19 million in 1H 2012 (1H 2011: US$1 million). Total outstanding commitments at the half year end in respect of this project are US$51 million.

Mine Life Extension

The FPM open pit mine has been in operation since 1977 and contains ore beyond the original planned pit limits and depths. The mine life extension project involves new mining works to access additional iron-rich ore by 2014 and to extend the mine life to 2038. The project began in 2011 and is scheduled to be completed by the end of 2018. Expenditure to date is US$61 million, including US$21 million in 1H 2012.

In 1H 2012 approximately 7 million cubic metres (1H 2011: 7 million cubic metres) of overburden were removed in line with budget.

Ferrexpo Yeristovo Mining ('FYM')

Development Capital Expenditure

Phase 1 - Crude Ore

In 1H 2012, first ore at FYM was reached and 37 million cubic metres of overburden was removed, some 87% of the total. Commercial production is expected to start in 2013. Under the current plan, the mine will initially deliver primary crushed ore to the FPM processing facilities, enabling FPM to use its free processing capacity and increase production to 12 million tonnes per annum in 2014.

New equipment due to arrive on site at FYM in 2012 include a CAT grader, CAT 944 front end loader, the largest of its kind in Ukraine, and FYM's first large blast drill. In May 2012 a new CAT 6060 shovel and five more CAT 793D haul trucks went into operation. The shovel is the first and largest of its kind to be in operation at the Ferrexpo sites and can excavate 15 million tonnes of material per year. The works on the permanent mine infrastructure are progressing to plan, with the truck wash building complete and further buildings in the course of construction.

Capital expenditure for the period was US$65 million (1H 2011: US$31 million).

Phase 2 - Concentrator Facility

FYM's development plans involve building a new concentrator facility in order to process the additional crude ore from the FYM mine which, once fully operational, is expected to produce approximately 28 million tonnes of ore per annum. FYM is finalising detailed engineering design for the concentrator, following international best practice, in compliance with local design institute requirements. The Board will consider the plans later in the year.

Phase 3 - Pelletising Facility

In line with Ferrexpo's strategy and depending on market conditions, the third phase of the project will be initiated to construct a 10 million tonne per annum pelletiser. This will be built in the most economically favourable location.

Ferrexpo Belanovo Mining ('FBM')

The Belanovskoye deposit has total JORC resources of 1,702 million tonnes. Drilling works and site preparation activities continue. During the period the Group spent US$27 million (1H 2011: US$1 million) for access and infrastructure. A new CAT RH340 hydraulic face shovel and five CAT 793D haul trucks have been ordered and are scheduled for delivery in 2H 2012 in order to begin stripping works. This equipment is similar to that used at FPM and FYM.

Health and Safety

The Board's Corporate Safety and Social Responsibility Committee monitors the management of the Group's health, safety, environmental and community programmes on a regular basis, in line with industry wide best practice for mining companies. Safety is fundamental to Ferrexpo's success and integral to its culture. Ferrexpo is pleased to report that the lost-time injury rate has declined by 50% compared to the first half of 2011, to 0.55 per million man hours worked.

Marketing

Iron Ore Pricing

Following the trend of other mature traded commodities and asset classes, iron ore pricing is evolving as mechanisms are growing more sophisticated. The first iron ore trading platforms are now operational, backed by major Chinese steel makers and the major iron ore producers.

In 1H 2012, Ferrexpo developed its markets, customer relationships and pricing mechanisms moving its contract pricing further towards index-linked and spot pricing. As a result of this, in 1H 2012 only 40% of its sales volumes were priced under the old quarterly negotiated fixed price contracts as compared to 74% in 1H 2011. The Group is working with its customers to move further towards index-linked pricing in line with the international market, but in the interim, periodic negotiations continue with contracts that remain under the old pricing basis using international pricing trends as a guide.

Market Segments

Ferrexpo has identified three core market segments: Traditional1, Natural2 and Growth3 markets. As its production capacity expands, the Group expects that sales to its Traditional markets will remain constant at around five million tonnes per annum. This is despite expectations of lower economic growth and subdued steel output in these markets. In anticipation of such limitations in Traditional markets, in 2011-2012, Ferrexpo increased its sales volumes to Growth markets and substantially reduced its exposure to the Serbian steel market. Volume sold on spot basis has risen during the transition to increase diversification and index pricing, however, this should return to target levels with the signing of new long term contracts over the next 12 months.

Ferrexpo's sales volumes to its Natural and Growth markets remain robust, and it has secured two new long-term contracts in China and Turkey. As production volumes increase, the Group expects to see further growth in these markets.

As a result of this customer diversification, in 1H 2012, some 53% of sales volumes (1H 2011: 61%) were to Traditional, 7% to Natural (1H 2011: 3%) and 40% to Growth (1H 2011: 36%) markets.

Logistics

Ferrexpo is located centrally in Ukraine on both rail and river networks and continues to build its logistics infrastructure, comprising rail cars, river barges and port facilities on the Black Sea. This will enable it to deliver its products reliably throughout the world. It is Ferrexpo's strategy to develop its logistics capabilities where appropriate, either through ownership of assets or through longer-term contracts with reliable counterparties.

A review of the main logistics activities for 1H 2012 is below:

Rail Transportation

Ferrexpo transports the vast majority of its products to the Ukrainian border by rail, and has in recent years extended its own fleet of rail cars with the aim of becoming self-sufficient at times of high demand.

Ferrexpo currently owns 1,645 rail cars and has placed orders to bring its total fleet to 1,933 units. Following shareholder approval obtained at the 2012 Annual General Meeting, Ferrexpo has an option to purchase up to a further 500 rail cars from its historic supplier, an option which has not yet been exercised.

In 1H 2012 Ferrexpo transported a total of 3,107 thousand tonnes of product to various destinations using own rail cars, including 126 thousand tonnes of third party concentrate and supplies for the production process. The number of rail cars ultimately needed to achieve self-sufficiency will depend on the level of peak monthly shipments, the mix of destinations and the amount of other materials transported (such as third party concentrate). Ferrexpo aims to balance these requirements as it increases its rail fleet in order to ensure an optimum balance between the size of the fleet and transport capability and capital employed.

At present, a quarter of the Group's pellets are transported by rail to the western Ukrainian border for customers in Central and Western Europe. The remaining pellets are transported by rail or barge to the Group's port terminal in Yuzhny on the Black Sea, from where the product is shipped to overseas markets around the world.

River Barging

Ferrexpo is able to deliver product to the port of Reni and Izmail by barge along the River Dnieper which is adjacent to the processing facility and in 1H 2012 shipped 150 thousand tonnes of product in this way to the Ukrainian border. Following transhipment these pellets can be transported via the Danube into Central and Western Europe using its wholly-owned barging company. In 1H 2012 this subsidiary transported 477 thousand tonnes of pellets to customers along the Danube either directly from Ukrainian river ports or via Constanza in Romania. It operated profitably in the first half of the year.

Logistics Capital Investment

In 1H 2012, Ferrexpo invested US$33 million in its logistics infrastructure (1H 2011: US$12 million), of which US$25 million was invested in its rail car fleet and US$2 million in its barging operations.

Port Activities

Ferrexpo owns 49% of the TIS Ruda port at Yuzhny on the Black Sea and has a guaranteed capacity at this ocean port terminal of five million tonnes per annum. In 1H 2012, the Group loaded eight Capesize vessels compared to nine for the full year 2011. It is benefiting from the low freight rates achieved last year and expects to see further freight cost reductions in the second half of 2012.

Ferrexpo has invested US$6.3 million in the first half of the year in a top-loading vessel, which is expected to come in to operation in the fourth quarter. This will enable Ferrexpo to load Capesize vessels using its own facilities further reducing shipping costs.

In 1H 2012, the proportion of sales controlled by Ferrexpo along the supply chain, including sales on CFR or similar basis and pellets transported using its own barges on the Danube, was 50% of sales (50% in 1H 2011). 

Financial Review

Summary Financial Results

1The Group calculates EBITDA as profit from continuing operations before tax and finance plus depreciation and amortisation and non-recurring exceptional items included in other income and other expenses, and the net of gains and losses from disposal of investments, property, plant and equipment.

Revenue

Total revenue decreased by 15% to US$731.3 million for 1H 2012 (1H 2011: US$854.9 million) as a result of lower prices and marginally lower sales volumes of 4.5 million tonnes compared to 4.7 million tonnes in 1H 2011.

The average realised price achieved by the Group for its pellets fell by 12% during the period, reflecting the 20% decrease in international prices offset partly by lower freight rates to seaborne markets and improved performance of logistics infrastructure.

Revenue from other sales amounted to US$45.7 million (1H 2011: US$43.5 million). This included revenue from third party services, such as bunker fuel sales, at the Group's barging operations (acquired in December 2010) as well as sales of gravel.

Cost of Sales

Total cost of sales for 1H 2012 including purchased third party concentrate increased 7% to US$323.3 million compared to the same period last year (1H 2011: US$302.1 million). Cost of sales includes the C1 cash cost of production from own ore which is analysed in the table below.

C1 costs increased by 25% to US$60.4 per tonne compared to the same period in 2011, principally as a result of higher Ukraine energy tariffs and domestic inflation. In the first half of 2012, gas and electricity prices were 43% and 21% higher respectively than in 1H 2011. The cost of diesel fuel was 9% higher.

Personnel, repair and maintenance, and costs of other materials were affected by local CPI inflation. These expenses are principally denominated in local currency. On average Ukrainian producer price inflation was approximately 7% in 1H 20121.

1 Average of January to June 2012, compared with average January to June 2011.

Over half the C1 cash costs are denominated in Ukrainian Hryvnia, which remained broadly stable in the first half of 2012, compared to 1H 2011, at around UAH8.0 to the US Dollar. 

In 1Q 2012 average C1 cash costs increased to US$59.4 per tonne which was 17% higher than the average C1 cash cost of production in 2011. This rate of increase moderated in the second quarter and it is expected that the Group will benefit from the recent fall in oil prices in the second half of the year, as would any Ukrainian Hryvnia devaluation against the US Dollar.

Non C1 Cost of Sales

Other cost of sales amounted to US$47.5 million for the period (1H 2011: US$90.3 million), the reduction resulting from lower tonnages of purchased concentrate.

Gross Margin

As a result of the factors discussed above, the Group's gross margin was 56% in 1H 2012, down from 65%.

Selling and Distribution Expenses

Selling and distribution expenses were US$155.0 million for the first half compared to US$146.2 million in 1H 2011.

Selling and distribution costs to the Ukrainian border increased by US$8.3 million to US$73.9 million in the period (1H 2011: US$65.5 million), equating to US$16.5 per tonne (1H 2011: US$13.8 per tonne). These costs primarily include railway freight to the southern ports at Yuzhny and Izmail and to the western Ukrainian border as well as port charges.

Tariffs for the provision of rail cars increased on average by 35% as compared to 1H 2011, this was partially offset by a discount for volumes transported using the Group's own rail cars which amounted to US$3.9 million.

Beyond the Ukrainian border international freight costs to Growth markets amounted to US$56.0 million (1H 2011: US$53.3 million). These costs relate to the shipping of pellets by ocean vessel to customers in Asia (on a CIF2 or CFR3 basis), and by barge to customers in Serbia (on a DAP4 basis). During 1H 2012, Ferrexpo loaded eight Capesize vessels compared to nine for the full year 2011, benefiting from lower freight rates as compared to Panamax vessels.

2 CIF is defined as delivery including cost, insurance and freight.

3 CFR is defined as delivery including cost and freight.

4 DAP is defined as delivery at place.

EBITDA

EBITDA decreased by 40% to US$240.3 million for the year compared to US$400.7 million for 1H 2011. The decrease was mainly due to a reduction in the DAP/FOB sales price along with increased costs. The EBITDA margin was 33% (1H 2011: 47%).

Finance Income and Expense

Finance income was US$1.4 million (1H 2011: US$1.4 million). Income from interest earned was US$1.4 million (1H 2011: US$1.1 million). This was due to higher average cash balances in 2012 of US$803.0 million compared to US$632.3 million in 1H 2011.

Finance expenses increased to US$46.1 million (1H 2011: US$35.1 million) due to a provision of US$13.2 million recorded against the outstanding Ukrainian VAT balance. This reflects the estimated time value of money on the outstanding balance, which may not be recovered within one year of the period end. The charges on the Group's finance facilities decreased by US$2.2 million. The average gross debt for the period was US$968.6 million (1H 2011: US$643.3 million).

Foreign Exchange Gains and Losses

During the period, the Ukrainian Hryvnia was broadly stable against the US Dollar, recording an average rate of UAH7.988 (1H 2011: UAH7.958). As a result, minimal operating foreign exchange losses of US$0.5 million were recorded (1H 2011: loss of US$0.6 million).

Non-operating foreign exchange gains for the period were US$0.3 million compared to a US$5.4 million gain in 1H 2011.

Income Tax Expense

Profit before tax was US$169.3 million for 1H 2012 compared with US$352.0 million for 1H 2011. The effective income tax rate for the period was 14% compared with 17% for the equivalent period in 2011. The decrease in the tax rate in 1H 2012 resulted from a change in the mix of profits arising in the various jurisdictions in which the Group operates.

Summary of Group Liquidity and Debt

The Group is securely financed, with gross debt and committed undrawn facilities of US$1,038.4 million, representing 68% of shareholders' equity. Of this amount US$500 million is a five-year Eurobond maturing in 2016 and US$420 million is represented by a revolving pre-export finance facility, available for 60 months including a straight line amortisation over the final 24 months. The maturity date is 31 August 2016.

Tied financing has become an increasingly important part of the funding structure of the Group, and Ferrexpo is working together with Export Credit Agencies around the world to fund its development projects. These facilities are typically at competitive rates and of long tenor. This allows the funding which is already in place to be preserved adding financial flexibility. As at 30 June 2012, a total of US$82.5 million had been raised under these government-backed schemes with more in progress. This has proved a successful way to raise finance while preserving Group headroom, and will continue to be used by the Group in future.

As at 30 June 2012, gross facilities of US$1,038.4 million included US$966.4 million that had been drawn and cash in hand amounting to US$715.9 million. The net debt of the Group was US$250.5 million.

Cash Flows 

Net cash flow from operating activities was US$63.1 million (1H 2011: US$324.2 million)

Working capital increased by US$69.7 million, reflecting a higher VAT receivable balance in Ukraine. Total capital investment for 1H 2012 was US$222.0 million compared to US$120.6 million for 1H 2011.

Sustaining and modernisation capital investment was US$59.6 million (1H 2011: US$59.9 million) for the Group, of which US$57.4 million was invested at FPM (1H 2011: US$56.6 million). The remaining was US$2.1 million invested in the Group's barge fleet. A further US$39.7 million (1H 2011: US$20.4 million) was invested in FPM's development projects and capital expenditure at FYM was US$65.1 million (1H 2011: US$31.0 million).

In 1H 2012 US$26.6 million was spent on the Belanovoskoye and other deposits (H1 2011: US$1.2 million). This was for new mining equipment, drilling works and site preparation activities.

Capital investment in logistics was US$31.0 million in 1H 2012 (1H 2011: US$8.1 million), which was primarily related to the acquisition of rail cars.

VAT

In 1H 2012, the amount of VAT, net of provision, owed to the Group increased by US$49.8 million mainly due to a delay in repayment by the Ukraine tax authorities of outstanding amounts from 2010, 2011 and 2012. As a result, although the majority of this VAT is immediately due, it is expected that a large proportion will only be recovered after a significant delay. Therefore, in accordance with accounting standards, a provision of US$13.2 million has been made to reflect the financing costs associated with recovery after one year. Costs associated with late recovery within the year have not been provided for. Overall, it is estimated that US$79.8 million of the Ukrainian VAT owed, net of this provision, will remain outstanding more than one year after the reporting date. Management expects the full gross balance in local currency to be recovered in due course. Full details on Ukrainian VAT receivable are disclosed in note 12 to the accounts.

Directors' Responsibility Statement

The Interim Report complies with the Disclosure and Transparency Rules ('DTR') of the United Kingdom's Financial Services Authority in respect of the requirement to produce a half-yearly financial report. The Interim Report is the responsibility of, and has been approved by, the Directors.

We confirm that to the best of our knowledge:

> the condensed set of financial statements has been prepared in accordance with IAS 34;

> the Interim Management Report includes a fair review of the important events during the first six months and description of the principal risks and uncertainties for the remaining six months of the year, as required by DTR4.2.7R; and

> the Interim Management Report includes a fair review of disclosure of related party transactions and changes therein, as required by DTR 4.2.8R.

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

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

Michael Abrahams CBE DL

Chairman

Chris Mawe

Chief Financial Officer

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 20 August 2012.

Interim Consolidated Statement of Cash Flows

Interim Consolidated Statement of Changes in Equity

For the financial year 2011 and the six months ended 30 June 2012

For the six months ended 30 June 2011

Notes to the Interim Condensed Consolidated Financial Statements

Note 1: Corporate information

Organisation and operation

Ferrexpo plc (the 'Company') is incorporated in the United Kingdom with registered office at 2-4 King Street, London, SW1Y 6QL, UK. Ferrexpo plc and its subsidiaries (the 'Group') operate a mine and processing plant near Kremenchuk in Ukraine, an interest in a port in Odessa and sales and marketing activities in Switzerland, Dubai and Kiev. The Group also owns a logistic group located in Austria which operates a fleet of vessels operating on the Rhine and Danube waterways. 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 Kremenchuk Magnetic Anomaly and are currently being exploited at the Gorishne-Plavninsky and Lavrikovsky deposits. These deposits are being jointly mined as one mining complex.

The majority shareholder of the Group is Fevamotinico S.a.r.l. ('Fevamotinico'), a company 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 51.0% (30 June 2011: 51.0%; 31 December 2011: 51.0%) of Ferrexpo plc's issued share capital. The Group's operations are largely conducted through Ferrexpo plc's principal subsidiary, OJSC Ferrexpo Poltava Mining and logistics for Western Europe are managed through the Helogistics subsidiaries. The Group comprises of Ferrexpo plc and its consolidated subsidiaries as set out below:

1 The Group's interest in these entities is held through Ferrexpo AG.

2 Ferrexpo AG was the holding company of the Group until, as a result of the pre-IPO restructuring, Ferrexpo plc became the holding company on 24 May 2007.

3 The Group's interest in these entities is held through OJSC Ferrexpo Poltava Mining.

4 The Group's interest in this entity is held through both Ferrexpo AG and Ferrexpo Service Limited.

5 The Group's interest in these entities is held through Ferrexpo AG. The Helogistics Holding GmbH and its subsidiaries were acquired in December 2010.

6 Both subsidiaries were incorporated in March 2011. The Group's interest in Ferrexpo Middle East FZE is held by Ferrexpo AG whereas Ferrexpo Singapore PTE Ltd is a subsidiary of Ferrexpo Middle East FZE.

7 The subsidiaries were incorporated in April 2011 and December 2011. The Group's interest is held through Helogistics Holding GmbH.

8 The subsidiaries were incorporated on 14 July 2011.

9 The company was acquired on 1 October 2011.

At 30 June 2012, the Group also holds through OJSC Ferrexpo Poltava Mining an interest of 48.6% (30 June 2011: 48.6%; 31 December 2011: 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

The interim condensed consolidated financial statements for the six months ended 30 June 2012 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 as at 31 December 2011.

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 2011. A copy of the statutory accounts for that year, which were prepared in accordance with International Financial Reporting Standards ('IFRS') issued by the International Accounting Standard Board ('IASB'), as adopted by the European Union as they apply to financial statements of the Group for the year ended 31 December 2011, has been delivered to the Register of Companies. The auditors' report under section 495 of the Companies Act 2006 in relation to those accounts was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Financing and going concern

At the period end, the Group's main debt facilities comprised a US$500 million Eurobond which is due for repayment on 7 April 2016 and a US$420 million revolving pre-export finance facility including a commitment amortisation over a 24 month period from September 2014 to August 2016. The Group is of the view that it can generate sufficient cash flows to fully repay the borrowings as they fall due in compliance with the terms and conditions of the loan facility and Eurobond terms and conditions.

The Group faces several risks to its business and strategy, which are included in the Principle Risks section of the Annual Report and Accounts 2011.

The Directors are of the view that the Group is a going concern and the interim consolidated financial statements have been drawn up on this basis.

Changes in accounting policies

The accounting policies and methods of computation adopted in the preparation of the interim condensed consolidated financial statements are the same as those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2011 except for the adoption of new amendments to IFRSs as of 1 January 2012, noted below:

IAS 12 Income taxes - recovery of underlying assets

The amendment to the standard was issued in December 2010 and became effective for financial years beginning on or after 1 January 2012. The amendment provides an exception to the general principle of measuring deferred taxes for investment properties measured at fair value and introduces a rebuttable presumption that the carrying amount of such assets will be recovered entirely through sale. The adoption of this amended standard did not have an impact on the financial position or performance of the Group.

IFRS 1 First-time adoption of IFRS - severe hyperinflation and removal of fixed dates for first time adopters

The amendments were issued in December 2010 and became effective for annual periods beginning on or after 1 July 2011. The amendments to IFRS 1 provide guidance for entities emerging from severe hyperinflation and replace the date of prospective application of the derecognition of financial assets and liabilities of '1 January 2004' with 'the date of transition to IFRS'. Both amendments did not have an impact on the financial position or performance of the Group.

IFRS 7 Financial instruments: disclosures - transfer of financial assets

The amendment to IFRS became effective for financial years beginning on or after 1 July 2011. The amendment requires the disclosure of information that enables the users of the financial statements to understand the relationship between transferred financial assets that are not derecognised in their entirety and the associated liabilities as well as, in the case of fully derecognised financial assets in which the entity retains continuing involvement, information to evaluate the nature of, and associated risks with continuing involvement in the derecognised financial assets. The application of this amendment did not have impact on the financial statements of the Group.

Seasonality

The Group's operations are not affected by seasonality.

Note 3: Segment information

The Group is managed as a single entity which produces, develops and markets its principal product, iron ore pellets, for sale to the metallurgical industry. While the revenue generated by the Group is analysed, 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.

The 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 EBITDA1 because it believes that EBITDA is a useful measure for evaluating its ability to generate cash and its operating performance.

'C1' costs

'C1' costs represent the cash costs of production of iron ore 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.

Note 4: Revenue

Revenue consisted of the following:

Export sales by geographical destination were as follows:

During the period ended 30 June 2012 sales made to three customers accounted for approximately 48.2% of the revenues from export sales of ore pellets (30 June 2011: 53.8%; 31 December 2011: 50.2%).

Sales made to two customers individually amounted to more than 10% of the revenues from export sales of ore pellets. These are disclosed below:

Note 5: Cost of sales

Cost of sales consisted of the following:

Note 6: Selling and distribution expenses

Selling and distribution expenses consisted of the following:

Note 7: General and administrative expenses

General and administrative expenses consisted of the following:

Note 8: Foreign exchange gains and losses

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.

Note 9: Write-offs and impairment losses

Impairment losses relate to adjustments made against the carrying value of assets where this is higher than the recoverable amount. Write-offs and impairment losses for the six months ended 30 June 2012 consisted of the following:

The impairment of the available-for-sale financial assets is related to the investment in Vostok Ruda LLC.

Note 10: Earnings per share and dividends paid and proposed

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

Diluted earnings per share is 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 included in the calculation of diluted earnings per share.