Last checked at 5 Aug 2009 07:00
5 August 2009
Interim Results Statement
Ferrexpo plc, ("Ferrexpo" or the "Group"), Ukraine's leading iron ore pellet exporter, today announces its interim results for the period ended 30 June 2009.
Highlights
Kostyantin Zhevago, Ferrexpo's CEO, commented:
"We are encouraged by Ferrexpo's results for the first half of 2009, which show that we can withstand the most extreme of economic downturns. Despite the iron ore market experiencing severe contraction, Ferrexpo was able to continue to produce almost at last year's levels and remain profitable by increasing sales to China and India, while maintaining sales to our traditional European markets to the extent possible. Importantly, in this difficult economic climate we have continued to strengthen and expand our customer relationships, and as market stability slowly returns the Group is well positioned to continue to increase its market share not only in the Asian growth markets, but also in its traditional European markets."
For further information, please contact:
| Ferrexpo: Gavin Mackay | +44 207 389 8304 |
| Pelham PR: Charles Vivian Evgeniy Chuikov | +44 207 337 1538 |
Notes to editors:
Ferrexpo plc is a Swiss headquartered resources company with assets in Ukraine, principally involved in the production and export of iron ore pellets, used in producing steel. Current output is around 9 million tonnes, approximately 85% of which is exported to steelmakers around the world. The Ferrexpo Group is listed on the main market of the London Stock Exchange under the ticker FXPO. For further information please visit www.ferrexpo.com.
Chairman's Statement
I am pleased to report that Ferrexpo's business has remained resilient in the first six months of 2009. Since late 2008 the market for iron ore and most other commodities has experienced the most severe cyclical downturn in half a century. The Group has performed well despite these challenging conditions, producing creditable financial results underpinned by a very strong operational performance during the period founded on a short term operating strategy to maximise output in order to minimise cash costs, thereby expanding our market reach during highly uncertain times. Ferrexpo remained profitable and cash generative in the first half of 2009.
Results
The Group's results for the first half of 2009 reflect both the strength of our business model and the current weakness in the global steel industry. Low iron ore prices and the failure of an international benchmark price to materialise impacted the Group's revenues, while a strong marketing effort and rigorous cost control enabled us to maintain sales volumes and achieve consistently positive margins. As a result, revenues and profits were lower in the first half of 2009 than they were for the equivalent period last year, but the Group's business remains stable and profitable. Revenues in the period under review were US$301.8 million, 42% below those achieved in the first six months of 2008 (US$519.5 million). EBITDA for the period fell by 73% to US$60.3 million (US$228.0 million) and Group pre-tax profit fell by 81% to US$37.8 million (US$201.4 million).
Market Environment and Marketing
The global economic recession that began in the final quarter of 2008 has had a marked negative effect on the market for iron ore, as a result of the close correlation between steel demand and macroeconomic bellwethers such as the construction and automotive industries. As a result the current iron ore market environment is characterised by low prices and a lack of stable demand visibility, together with a partial decoupling of steel demand reflected in weak markets in Europe and other developed nations offset to some degree by stronger demand in China, as demand there has resumed more quickly under the impetus of extensive government-led economic stimulus programmes.
Marketing and distribution remain critical to our business, and they have given us the flexibility to deal effectively with the current downturn. Despite challenging market conditions, we have successfully continued to execute our stated strategy of leveraging our proximity to our core customers and strong customer relations, enabling the Group to continue to sell its entire production and to respond to lower demand in its Traditional markets by increasing its market share in those regions. We have also been able to substitute sales volumes originally destined for contract customers in Europe with increased spot market sales to China where necessary. The Group's TIS Ruda joint venture port terminal at Yuzhny Port on the Black Sea has been central to the success of these increased Asian sales as it has enabled preferential access to the seaborne market. The Group sold 54% of its total spot and long term sales volumes to China during the first half of the year.
Lower demand for iron ore worldwide has resulted in lower iron ore prices in the current year. In addition, temporary reliance on the seaborne spot market has exposed the Group to shipping freight rates from the Black Sea to China, which increased strongly in the second quarter, placing pressure on the Group's margins for seaborne business and impacting the overall average price achieved by the Group on an FOB basis. The average achieved DAF/FOB price in the first half of 2009 was US$66.5/t, 58% lower than in the equivalent period last year.
Signs of slowly increasing demand from certain of our customers in Europe and Ukraine in the final months of the first half indicate a gradual normalisation of trading for Ferrexpo and the beginning of a return to supplying more product to our long term framework contract customers in our Traditional and Natural markets. This trend is likely to become more pronounced if the pellet price settlements by Vale with some of its customers become accepted as the new international Benchmark price.
Operations
Ferrexpo's producing assets in Ukraine have performed exceptionally well in the first six months of 2009. Early in the year a decision was taken to produce at full capacity coupled with an aggressive marketing plan aimed at selling our entire production to maximise revenue and minimise the effect of our fixed costs. While production volumes in the first two months were lower than planned due primarily to adverse weather conditions, this was largely offset by very high production levels in the four months to 30 June. As a result the volume of pellets produced from our own raw materials decreased slightly during the period to 4.12 million tonnes compared to the first six months of 2008 (4.50 million tonnes). The Group also resumed purchases of third party concentrate in May for the first time this year, and we produced a small amount (15kt) of pellets from this concentrate in that month. We will continue this practice in the second half in order to make use of the excess capacity in our pelletising plant and thereby minimise our costs, provided that we can continue to make a sufficient margin from this business.
Increasing the quality of our product remains a priority for Ferrexpo, particularly given that demand for higher quality 65% Fe pellets is more robust in times of market weakness. The Group produced 2.00 million tonnes of these higher grade pellets during the period, a 4.3% increase compared to the same period last year (1.92 million tonnes).
The cost pressures which the Group faced for much of 2008 have eased significantly. The Business Improvement Programme and other initiatives continue to yield further improvements in efficiencies and productivity, and our policy of producing at full capacity is successfully minimising the effect of our fixed cost base. Ukrainian inflation has fallen, reaching 17.6% by the end of the period, and the Ukrainian Hryvnia has remained relatively stable since December, trading in a band between UAH7.6 and UAH8.0 to the US dollar. These factors resulted in a C1 cash cost of production for the first half of 2009 of US$34.5/t, comparable to that in December 2008 and 16% below the C1 cost in the first half of last year. It is notable that the C1 cost in June was US$33.6/t, indicating a falling cost trend despite recent increases in the oil price.
Investing Activities and Funding
In line with our commitment to financial prudence, the Group's focus remains on cash conservation. Consequently our pipeline of major growth projects remains substantially on hold, and no significant additional capital commitments will be made until such time as the Board believes a sustainable recovery in the global economy can be observed and the group has secured bank facilities which enable it to invest with certainty. The Group's operating cash flow in the first half of 2009 decreased by 67% to US$46.3 million compared to the same period last year (US$140.6 million). Available cash is principally being used to pay down debt and provide working capital headroom.
The current moratorium on significant capital expenditure has provided an opportunity to re-examine the capital cost estimates and execution methodology of our major projects and we expect that costs can be reduced substantially in light of changed economic conditions. These projects to expand output and increase product quality remain a priority for the Group and modest expenditure is being undertaken to preserve the value of investments made to date and ensure readiness for rapid implementation when the time is right. Importantly, we have observed increasing demand for our higher quality 65% Fe pellets over our 62% Fe pellets in the past months, and as a result the next major investment by the Group is likely to be made to improve product quality, once financing becomes available and cash flows increase. We will update the market on any revisions to our investment plans in due course.
Dividend
We have been profitable in the first half albeit at a lower level than last year. The Board believes that trading reached its low point in this period and that we should be trading more profitably in the second half year. The Board therefore has decided in the interests of maintaining a consistent and sustainable dividend to defer the declaration of the interim dividend until October when Ferrexpo's sales prices are likely to have aligned with the emerging international benchmark settlements for iron ore pellets and more normal trading conditions will apply.
People
The Group would not have been able to react so flexibly and quickly to the global economic crisis without the tireless efforts of the management and staff of Ferrexpo. The Board is deeply grateful for their efforts.
Corporate Governance and Social Responsibility
In keeping with our commitment to all our stakeholders, Ferrexpo remains substantially compliant with the UK Combined Code on Corporate Governance. The Group has a balanced and experienced Board dedicated to the highest standards of corporate governance and capable of providing continuing best practice management and strategic guidance to the company.
Corporate Social Responsibility remains the first priority of the management of the Group, and the Corporate Social Responsibility Committee meets regularly to monitor and oversee the ongoing health and safety of the Group's employees, active engagement with local communities and environmental awareness. We are pleased to report that the Group suffered no fatal accidents in the first six months of 2009, and we observe good progress in the implementation of our cultural and behavioural safety change programme.
Principal Risks and Uncertainties
The principal risks and uncertainties facing the Group over the next six months relate to iron ore prices and freight rates. No formal international Benchmark price settlement has yet been reached, and the Group therefore remains exposed to the iron ore spot market and the freight market from the Black Sea to China. While we believe that the outlook for the iron ore market has improved marginally in the last six months, it remains uncertain. The Group will continue to react flexibly to market changes and practice financial prudence in order to mitigate these risks.
Strategy and Outlook
The Group remains focused on cash conservation and market development. The Group will continue aggressive operating cost reduction, and adopt a flexible approach to capital investment until additional funding is available to develop its substantial reserves. We will continue to leverage our strategic location and strong customer relationships to maintain sales and production tonnages and to increase market share in our Traditional and Natural Markets.
While the outlook for the global iron ore market remains uncertain, demand for iron ore in China is proving robust, driven by re-stocking, economic stimulus programmes and continuing urbanisation. A contract price reduction of 48.3% for iron ore pellets has been settled by Vale, the largest producer of iron ore pellets globally, with steel mills in Japan, South Korea and Europe and while Chinese steel mills have not yet ratified these settlements, we believe that they constitute the beginning of a slow normalisation of trade. Ferrexpo remained cash flow positive and profitable throughout the first half of 2009, and continues to take advantage of its strong marketing reputation to offset weaker Traditional and Natural Markets with increased seaborne sales.
In the second half of 2009, we plan to maintain financial prudence and continue to react quickly and adapt to market changes. Our steadfast performance to date highlights the success of this strategy and, coupled with our unique asset base, we are well positioned to continue to trade profitably and to take advantage of an economic recovery.
Michael Abrahams CBE DL
Chairman
OPERATING & FINANCIAL REVIEW
Operating Highlights
Financial Highlights
OPERATING REVIEW
Key Statistics
|
| UOM | 6 months ended 30 June 2009 | 6 months ended 30 June 2008 | % Change | |
| Iron ore mined | 000't | 13,694 | 14,361 | (4.6) | |
| Average Fe content | % | 30.30 | 30.06 | 0.8 | |
| Produced concentrate | 000't | 4,991 | 5,440 | (8.3) | |
| Average Fe content | % | 63.35 | 63.41 | (0.1) | |
| Purchased concentrate | 000't | 17 | 52 | 67.3 | |
| Average Fe content | % | 65.56 | 65.78 | (0.3) | |
| Purchased iron ore | 000't | - | 149 | - | |
| Average Fe content | % | - | 33.01 | - | |
| Total pellet production (BFP) | 000't | 4,139 | 4,596 | (9.9) | |
| From produced concentrate | 000't | 4,123 | 4,504 | (8.4) | |
| - Higher grade | 000't | 2,003 | 1,920 | 4.3 | |
| Average Fe content | % | 64.89 | 65.01 | (0.2) | |
| - Lower grade | 000't | 2,120 | 2,584 | (18.0) | |
| Average Fe content | % | 62.15 | 62.26 | (0.1) | |
| From purchased raw materials | 000't | 15 | 92 | (83.7) | |
| - Lower grade | 000't | 15 | 92 | (83.7) | |
| Average Fe content | % | 62.15 | 62.26 | (0.2) | |
| Pellet sales volume | 000't | 4,194 | 4,517 | (7.2) | |
| Gravel production | 000't | 1,478 | 1,637 | (9.7) | |
Existing Operations
The Group's operating asset, Ferrexpo Poltava Mining ("FPM"), continued to improve its operational performance during the first six months of 2009, responding well to the management strategy to minimise operating costs and to produce at 100% of capacity. Pellet quality improvement was a particular focus during the period.
Severe weather conditions in January and February caused wet concentrate produced by the Group's competitors to freeze in the railcars that were transporting it. This negatively affected the speed at which these railcars could be unloaded, causing congestion and delays in the rail and port network in Ukraine. As a result FPM had to reduce production in the first two months of the year by 25% compared to the same two months in 2008. FPM also received a request by local government to reduce its consumption of natural gas by 25% for approximately two weeks in January, during the gas dispute between Russia and Ukraine. This had no effect on FPM's already reduced production levels. The Group successfully procured private sources of natural gas from within Ukraine during the gas dispute which supplied approximately 62% of its requirement.
FPM produced at 100% of capacity from March to June 2009, but as a consequence of the reduced production in January and February referred to above, overall production numbers for the first half of 2009 were slightly lower than those in the equivalent period in 2008. Ore extraction volumes were 4.6% lower at 13,694kt, and concentrate production was 8.3% lower at 4,991kt. Through selective mining, FPM was able to increase the proportion of richer ore mined (51% versus 48% in the equivalent period last year), which enabled FPM to increase production of higher grade 65% Fe pellets by 4.3% to 2,003kt, thereby maximising the production of a product with more robust demand. Higher quality 65% Fe pellets constituted 48.6% of total production from own produced concentrate in the first half of 2009.
Total pellet production from produced concentrate decreased by 8.4% in the period. The Group purchased some third party concentrate in May and produced 15kt of pellets from this, raising overall pellet production volume for the period to 4,139kt, a decline of 9.9% compared to the first half of 2008. The Group plans to continue to purchase third party concentrate during the remainder of 2009 provided suitable margins can be realised, in order to maximise production and reduce the effect of its fixed cost base.
Stripping volumes increased by 13.4% in the first half of 2009 to 11,986 cubic metres. This high level of stripping was done in order to expose more of FPM's richer ore to enable the production of larger amounts of higher quality 65% Fe pellets. Some stripping associated with the project to expand the GPL mine was also done during the period, with US$2.8 million of stripping costs capitalised.
FPM management continues to drive the Business Improvement Program ("BIP") forward and has again achieved tangible efficiency savings from the operations. The aim of the BIP is to introduce global best practice in efficiency and productivity into the different areas of operation at FPM. BIP savings are increasingly important in the current low price environment as a means of preserving the Group's margins. In the first half of 2009 FPM was able to reduce the consumption per tonne of pellets produced of both energy and raw material inputs by between 1% and 3%.
Inflationary pressures on the Group's costs have eased to some extent. Ukrainian CPI for the twelve months to 30 June 2009 was 17.6%, and Ukrainian PPI was -0.9% over the same period. The Group's costs are principally denominated in Ukrainian Hryvnia. The Hryvnia has remained broadly flat on average since the end of 2008, which demonstrates the importance of increased operating efficiency as a result of the BIP and associated cost savings in managing the Group's overall costs. The Group's policy of maximising production to reduce the effect of its fixed cost base has also yielded results, while increasing oil prices in the second quarter have begun to put upward pressure on energy costs. Government regulated tariffs increased by 6.5% for electricity, 47.6% for gas and remained stable for railway tariffs over the period. Taking into account all of these factors, the Group has been able to maintain its nominal cash costs of pellet production (С1) at the same level as that in December 2008. C1 costs for the six months to 30 June 2009 were US$34.5/t, a decrease of 15% over that in the equivalent period last year (US$40.9/t).
The Group has continued to actively manage its labour costs, introducing further measures to reorganise its key skills and improve productivity and efficiency during the first half of 2009, while avoiding forced redundancies. The number of personnel on the FPM payroll increased slightly over the first six months of the year, with 8,243 people employed at the end of 2008 compared to 8,304 as at 30 June 2009. This includes 51 additional employees hired for the development of the Yeristovskoye deposit. Average salaries in June 2009 were 3% higher than those in December 2008.
Marketing and Distribution
Marketing and distribution remains a key driver of the Group's business, particularly in the current challenging economic climate. Following the collapse of the world steel market in late 2008, demand for blast furnace pellets remained low in the Group's Traditional markets (Eastern and Central Europe). Customers in these regions remained unable to purchase the volumes of Ferrexpo pellets for which they had contracted. The Group was able to leverage its existing extensive range of relationships in China to sell significantly higher volumes of pellets to Chinese steel mills on the seaborne spot market to compensate for this demand weakness in Europe. The Group has six long term framework contracts in China, and is an established seller there. The Group sold 54% of its sales by volume in China in the first half of 2009, as compared to 16% in the first half of the prior year. Total pellet sales in the first six months of 2009 amounted to 4,194kt. Of the sales that did not go to China, 7.7% went to Austria, 4.5% to Turkey, 13.6% to Slovakia, 4.2% to Serbia and 11.8% were sold domestically in Ukraine. It is management's intention to revert to selling 90% of the Group's production under long term framework agreements as soon as economic conditions allow. The Group will also re-focus its marketing efforts on the Traditional and Natural markets as soon as demand recovers in these regions. The Group enjoys a logistics advantage and higher margins by serving these markets.
A lack of visibility in the global iron ore market prevented the settlement of the international Benchmark price for pellets, usually settled as of 1 April each year. As a result, the industry and therefore the Group was significantly exposed to spot prices, which were much lower than the spot and contract prices for iron ore pellets prevailing for much of 2008. The Group was required to meet provisional pricing arrangements with those of its contract customers who were willing to purchase pellets during the period, and these prices reflected the current state of supply and demand. From late 2008, the Group experienced extreme competition from competing suppliers from the CIS region. These suppliers tend to sell on a short term contract basis, and they aggressively pursued sales during the period. Overall, the average achieved price realised by the Group for the six months to 30 June 2009 was US$66.5/t on an FOB basis.
Spot market sales of iron ore pellets to China are made on a CFR or CIF basis, which exposes the seller to shipping freight rates. Freight rates for panamax ships from the Black Sea to China rose strongly during the period under review, reaching as much as US$42/t in June. Spot prices for pellets landed in China grew at a significantly lower rate. As a result of its increased spot sales, the Group was subjected to margin pressure from rising freight rates and this was a major contributing factor to lower realised FOB prices, particularly in the second quarter. Management believes that these freight rates will normalise over time as the panamax fleet returns to the Black Sea and idled ships are returned to service. The Group will also reduce its exposure to the seaborne spot market when feasible, as sales return to the long term sales portfolio composition. To this end, in the second quarter the Group began supplying its major Ukrainian contract customer again, as well as more volumes to certain European customers.
Vale, the world's largest iron ore producer, settled a price for iron ore pellets in June with steel mills in Japan, South Korea and Europe. The settlement called for a 48.3% reduction in the price of pellets on an FOB basis, compared to the international Benchmark price prevailing during the last contract year. In Europe, Vale has settled blast furnace pellet prices with one major mill, also at a 48.3% reduction. Whilst this settlement has yet to be accepted by Chinese steel mills and so does not yet constitute a true global Benchmark, there is evidence from some of the Group's customers that this settlement may prove acceptable to them. A 48.3% reduction would equate to an FOB pellet price for the Group of just over US$70/t, although application of such a benchmark applies predominantly to customers who consume seaborne iron ores.
Iron ore price contraction has caused the suspension of as much as 100 million tonnes of Chinese iron ore production, as local mines have become loss-making, further fuelling Chinese demand for imported iron ore. While this increased demand is positive for Ferrexpo's current marketing efforts, any material rise in the price of iron ore may be dampened to some degree by this iron ore capacity being brought back into service.
Progress continues in the Group's marketing and logistics department in developing a profitable portfolio of customers despite the downturn in iron ore demand. The Group has opened new markets in India and Hungary in 2009. FPM's ability to supply small-lot 'just-in-time' deliveries of iron ore is increasing the 'value-in-use' of the Group's pellets from the perspective of proximate steel mills that are looking to manage inventory levels. This better serves the Group's target customers' needs relative to their other long-haul pellet supply options, and could lead to new customers and increased market share in the months to come.
Logistics remains a key advantage for the Group, and long term positioning in this regard is critical to our customer delivery performance. In particular, TIS Ruda, the Group's joint venture ocean vessel shipping terminal in Yuzhny on the Black Sea has proven invaluable during the current downturn, as it has guaranteed the Group access to the seaborne market and minimised the effect of congestion at the State port on sales. The Group shipped 1,332 kt through the TIS Ruda terminal in the first six months of 2009, and also completed the dredging of additional draft there. The Group continued its programme of railcar purchases, adding 55 new railcars to its existing fleet of 605. These private railcars incur a discounted tariff when used on the Ukrainian state rail network, and demonstrate the Group's continuous efforts to reduce costs and maintain product integrity through the complex delivery paths to customers.
Capital Expenditure and Growth Projects
The Group's major growth projects remain substantially on hold pending a sustainable recovery in economic conditions. Capital expenditure has been limited to some modest expenditure to preserve the investment to date and ensure readiness for recommencing project activity. Total capital expenditure during the first half of 2009 was US$43.2 million, a decrease of 67% over the equivalent period in 2008 (US$131.2 million). Of this, US$12.3 million was sustaining capital expenditure. $14.2 million was spent on the development of the Yeristovskoye mine, and $16.7 million was spent on the project to develop existing GPL mine. Approximately US$100 million was spent on each of these projects in 2008, largely on mining equipment and, in the case of Yeristovskoye, a Definitive Feasibility Study ("DFS"). In order to maintain the value of these investments it was deemed prudent to undertake some modest stripping work. In the case of Yeristovskoye, this entails operating two of the draglines purchased in 2008 together with several CAT 789 trucks. The Group purchased and took delivery of this equipment in 2008, and as a result preliminary capitalised stripping can be done in a flexible and financially prudent manner. No further large capital commitments will be undertaken until markets recover.
The Group is currently re-examining the capital cost estimates for its Yeristovskoye project as well as the GPL quality upgrade projects. The original estimates were performed at the peak of the economic cycle, and management is confident these projects can be executed at a significantly lower capital cost. Alternative methods of developing these projects are also being explored, including the expansion of local procurement initiatives and the division of some projects into smaller sub-projects. Updates on this process will be released when appropriate.
FINANCIAL REVIEW
Summary of Financial Results
| US$ 000 | 6 months to 30 June 2009 | 6 months to 30 June 2008 | % Change |
| Revenue | 301,759 | 519,498 | (42) |
| EBITDA | 60,295 | 228,023 | (74) |
| As % of revenue | 20% | 44% | |
| Profit before taxation | 37,792 | 201,350 | (81) |
| Income tax | 9,084 | 43,692 | (79) |
| Profit for the period | 28,708 | 157,658 | (82) |
| Underlying earnings | 27,848 | 138,355 | (80) |
| Underlying earnings per share | 4.76 | 22.69 | (80) |
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|
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| Earnings per share | 4.88 | 23.20 | (79) |
The revenues of the Group decreased by 42% to US$301.8 million in the period under review compared to the first half of 2008 (US$519.5 million). This was largely due to weak average achieved pellet prices, particularly in the second quarter of the year, as a result of lower demand from the Group's contract customers and higher-than-usual sales to the seaborne spot market. Revenues were also lower partly as a result of lower volumes in the first quarter driven by lower production in January and February.
C1 Cost, defined as cash cost of production, decreased by 23% over the equivalent period last year. Production costs were improved by a sharp fall in the Ukrainian Hryvnia at the end of 2008 which impacted approximately 70% of the Group's cash cost base. Ongoing efficiency improvements and lower prices for fuel and some steel-based inputs also had a positive effect.
The table below sets out the breakdown of the Group's C1 Cost of Sales.
| 6 months to 30 June 2009 | 6 months to 30 June 2008 | |||
| US$ 000 | % of total | US$ 000 | % of total | |
| Materials | 30,090 | 21 | 34,641 | 19 |
| Electricity | 37,667 | 26 | 44,010 | 24 |
| Personnel costs | 20,260 | 14 | 28,199 | 15 |
| Spare parts and consumables | 21,053 | 15 | 26,216 | 14 |
| Fuel | 11,289 | 8 | 22,568 | 12 |
| Gas | 18,626 | 13 | 17,883 | 10 |
| Royalties and levies | 2,004 | 1 | 3,739 | 2 |
| Other | 1,433 | 1 | 7,073 | 4 |
| C1 Cost Of Sales | 142,422 | 100% | 184,329 | 100% |
| C1 Cost per tonne | 34.54 | - | 40.92 | - |
Selling and Distribution costs increased by 13% to US$75.9 million in the first half (H1 2008: US$67.1 million). This was as a result of an abnormal sales mix by destination which increased seaborne freight by US$ 14.0million. In the first six months of 2009 the Group significantly increased the proportion of its sales made to China on the seaborne spot market. These sales were made on a CIF or CFR basis, increasing the seaborne freight component. The Group realised a higher absolute price for its pellets on a CFR basis which is reduced when expressed on a DAF/FOB basis, the measure traditionally used. Absent the effect of these freight costs, the Group's DAF/FOB distribution costs fell by 19% to US$12.1/t.
General and Administrative Expenses in the first half of 2009 fell by 31% compared to those incurred in the first half of 2008, largely as a result of lower non-production personnel costs and a reduction in the use of external consultants.
EBITDA for the first six months of the year fell by 74% to US$60.3 million (H1 2008: US$228.0 million). The Group's EBITDA margin decreased from 44% in the first half of 2008 to 20% in the current period, as a result of lower pellet prices over the period and high freight rates between the Black Sea and China primarily in the second quarter. This was compensated partly by lower costs of production.
The Group's effective tax rate in the half year amounted to 24% as a result of one off non tax deductible expenses in Ukraine (H1 2008: 22%).
These solid results were achieved in a difficult trading environment and have enabled the Group to continue to operate effectively and to repay debt. The Group's net debt as at 30 June 2009 was US$222.3 million, with cash on the balance sheet of US$74.3 million. The Group has repaid US$36.6 million of its principal debt facility in the first half of 2009, but has arranged a long-term leasing arrangement for railway cars in Ukraine of US$20.0 million. The Group's debt to equity ratio (Net Debt divided by Net Debt plus Equity) was 32% as at 30 June 2009 (32% as at 31 December 2008).
Dividend
The Group has been profitable in the first half albeit at a lower level than last year. The Board believes that trading reached its low point in this period and that the Group should be trading more profitably in the second half of the year. The Board therefore has decided in the interests of maintaining a consistent and sustainable dividend to defer the declaration of the interim dividend until October when Ferrexpo's sales prices are likely to have aligned with the emerging international benchmark settlements for iron ore pellets and more normal trading conditions will apply.
INDEPENDENT REVIEW REPORT TO FERREXPO PLC
Introduction
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2009 which comprises consolidated income statement, statement of comprehensive income, consolidated balance sheet, consolidated cash flow statement, consolidated statement of changes in equity and the related notes 1 to 19. 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 to the company in accordance with guidance contained in ISRE 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 and Transparency Rules of the United Kingdom's Financial Services 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 Ireland) 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 2009 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
Ernst & Young LLP
London
4 August 2009
Statement of Directors' responsibilities
The Directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34, Interim Financial Reporting, as adopted by the European Union and that the half-yearly report included a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:
The Directors of Ferrexpo plc are listed in the Ferrexpo Annual Report 2008.
Consolidated income statement
| US$ 000 | Notes | 6 months ended 30.06.09 (unaudited) | 6 months ended 30.06.08 (unaudited) | Year ended 31.12.08 (audited) |
| Revenue | 4 | 301,759 | 519,498 | 1,116,854 |
| Cost of sales | 5 | (159,653) | (207,508) | (434,238) |
| Gross profit |
| 142,106 | 311,990 | 682,616 |
| Selling and distribution expenses | 6 | (75,806) | (67,113) | (152,528) |
| General and administrative expenses | 7 | (22,319) | (32,438) | (67,185) |
| Other income | 6,600 | 2,736 | 6,387 | |
| Other expenses | (5,280) | (5,916) | (38,040) | |
| Operating foreign exchange (loss)/gain | 8 | (817) | - | 29,309 |
| Operating profit from continuing operations before adjusted items |
| 44,484 | 209,259 | 460,559 |
| Write-offs and impairment losses | 9 | (1,870) | (94) | (27,326) |
| Share of gains of associates | 664 | 1,420 | 1,003 | |
| Negative goodwill | - | 5,077 | 35,049 | |
| Initial public offering costs | (372) | (3,897) | (4,120) | |
| Gain on disposal of available-for-sale investment | - | 1,547 | 1,571 | |
| Profit before tax and finance | 42,906 | 213,312 | 466,736 | |
| Finance income | 1,601 | 1,214 | 2,467 | |
| Finance expense | (10,410) | (9,110) | (20,834) | |
| Non-operating foreign exchange gain/(loss) | 8 | 3,695 | (4,066) | (72,788) |
| Profit before tax | 37,792 | 201,350 | 375,581 | |
| Tax | (9,084) | (43,692) | (62,533) | |
| Profit for the period |
| 28,708 | 157,658 | 313,048 |
| Attributable to: | ||||
| Equity shareholders of Ferrexpo plc | 28,529 | 141,449 | 292,436 | |
| Minority interest | 179 | 16,209 | 20,612 | |
| 28,708 | 157,658 | 313,048 | ||
| Earnings per share: | ||||
| Basic (US cents) | 10 | 4.88 | 23.20 | 48.60 |
| Diluted (US cents) | 10 | 4.87 | 23.14 | 48.46 |
Statement of comprehensive income
| US$ 000 | 6 months ended 30.06.09 (unaudited) | 6 months ended 30.06.08 (unaudited) | Year ended 31.12.08 (audited) |
| Profit for the period | 28,708 | 157,658 | 313,048 |
| Exchange differences on translation of foreign operations | 4,449 | 21,499 | (292,074) |
| Net loss on disposal of available-for-sale financial assets | - | (5,977) | (1,571) |
| Income tax | - | 1,040 | - |
| - | (4,937) | (1,571) | |
| Other comprehensive income for the period, net of tax | 4,449 | 16,562 | (293,645) |
| Total comprehensive income for the period, net of tax | 33,157 | 174,220 | 19,403 |
| Attributable to: | |||
| Equity holders of the parent | 32,869 | 155,606 | 20,075 |
| Minority interests | 288 | 18,614 | (672) |
| 33,157 | 174,220 | 19,403 |
Consolidated balance sheet
| US$ 000 | Notes | As at 30.06.09 (unaudited) | As at 30.06.08 (unaudited) | As at 31.12.08 (audited) |
| Assets | ||||
| Property, plant and equipment | 12 | 445,271 | 474,742 | 412,440 |
| Goodwill and other intangible assets | 104,849 | 157,443 | 103,755 | |
| Investments in associates | 19,308 | 19,267 | 18,640 | |
| Available-for-sale financial assets | 2,579 | 35,962 | 4,435 | |
| Other non-current assets | 11,220 | 39,131 | 10,116 | |
| Deferred tax asset | 12,193 | 10,494 | 14,043 | |
| Total non-current assets | 595,420 | 737,039 | 563,429 | |
| Inventories | 60,176 | 75,234 | 61,270 | |
| Trade and other receivables | 44,117 | 78,447 | 58,157 | |
| Prepayments and other current assets | 15,991 | 21,543 | 19,587 | |
| Income taxes recoverable and prepaid | 10,037 | 15 | 5,835 | |
| Other taxes recoverable and prepaid | 56,415 | 45,855 | 57,285 | |
| Available-for-sale financial assets | 655 | 8,768 | 650 | |
| Cash and cash equivalents | 13 | 74,303 | 62,600 | 87,822 |
| Total current assets | 261,694 | 292,462 | 290,606 | |
| Total assets | 857,114 | 1,029,501 | 854,035 | |
| Equity and liabilities | ||||
| Share capital | 14 | 121,628 | 121,628 | 121,628 |
| Share premium | 185,112 | 183,387 | 185,112 | |
| Other reserves | (324,820) | 33,339 | (330,714) | |
| Retained earnings | 478,366 | 338,616 | 470,098 | |
| Equity attributable to equity shareholders of the parent | 460,286 | 676,970 | 446,124 | |
| Minority interest | 12,057 | 60,693 | 11,769 | |
| Total equity | 472,343 | 737,663 | 457,893 | |
| Interest bearing loans and borrowings | 15,16 | 189,959 | 111,386 | 231,373 |
| Trade and other payables | 61 | 1,705 | 570 | |
| Defined benefit pension liability | 14,152 | 16,746 | 12,940 | |
| Provision for site restoration | 1,145 | 1,955 | 1,071 | |
| Deferred tax liability | 5,453 | 4,521 | 5,298 | |
| Total non-current liabilities | 210,770 | 136,313 | 251,252 | |
| Interest bearing loans and borrowings | 15,16 | 105,080 | 73,693 | 74,523 |
| Trade and other payables | 39,359 | 42,849 | 35,033 | |
| Accrued liabilities and deferred income | 10,684 | 15,496 | 14,470 | |
| Shares redemption liability | - | 10,998 | - | |
| Income taxes payable | 8,505 | 11,073 | 14,439 | |
| Other taxes payable | 10,373 | 1,416 | 6,425 | |
| Total current liabilities | 174,001 | 155,525 | 144,890 | |
| Total liabilities |
| 384,771 | 291,838 | 396,142 |
| Total equity and liabilities |
| 857,114 | 1,029,501 | 854,035 |
The financial statements were approved by the Board of directors on 4 August 2009.
Consolidated cash flow statement
| US$ 000 | Notes | 6 months ended 30.06.09 (unaudited) | 6 months ended 30.06.08 (unaudited) | Year ended 31.12.08 (audited) |
| Net cash flows from operating activities | 18 | 46,297 | 140,605 | 370,943 |
| Cash flows from investing activities | ||||
| Purchase of property, plant and equipment | (43,215) | (131,154) | (276,264) | |
| Proceeds from sale of property, plant and equipment | 403 | - | 2,016 | |
| Purchase of intangible assets | (298) | (545) | (1,597) | |
| Purchases of available-for-sale securities | - | - | (266) | |
| Interest received | 1,752 | 493 | 2,472 | |
| Acquisition of minority interest in subsidiaries | - | - | (11,048) | |
| Loans provided to associates | 4,000 | - | (4,000) | |
| Net cash flows used in investing activities | (37,358) | (131,206) | (288,687) | |
| Cash flows from financing activities | ||||
| Proceeds from borrowings and finance | 15 | 27,131 | - | 172,143 |
| Repayment of borrowings and finance | 15 | (37,219) | (22,049) | (69,412) |
| Dividends paid to equity shareholders of the parent | (13,417) | (19,449) | (38,954) | |
| Dividends paid to minority interest | (231) | (232) | (1,186) | |
| Proceeds from issue of share capital to minorities | - | - | 2,123 | |
| Share buy back | - | - | (77,260) | |
| Net cash flows used in financing activities |
| (23,736) | (41,730) | (12,546) |
| Net increase/(decrease) in cash and cash equivalents | (14,797) | (32,331) | 69,710 | |
| Cash and cash equivalents at the beginning of the year | 87,822 | 86,966 | 86,966 | |
| Currency translation differences | 1,278 | 7,965 | (68,854) | |
| Cash and cash equivalents at the end of the year | 13 | 74,303 | 62,600 | 87,822 |
Consolidated statement of changes in equity
| Attributable to equity shareholders of the parent | |||||||||||
| US$ 000 | Issued capital | Share premium | Uniting of interest reserve | Treasury share reserve | Employee Benefit Trust reserve | Net unrealised gains reserve | Translation reserve | Retained earnings | Total capital and reserves | Minority interests | Total equity |
| At 1 January 2008 | 121,628 | 188,566 | 31,780 | - | (20,092) | 2,384 | 186 | 216,616 | 541,068 | 45,854 | 586,922 |
| Profit for the period | - | - | - | - | - | - | - | 141,449 | 141,449 | 16,209 | 157,658 |
| Other comprehensive income | - | - | - | - | - | (4,937) | 19,094 | - | 14,157 | 2,405 | 16,562 |
| Total comprehensive income for the period | - | - | - | - | - | (4,937) | 19,094 | 141,449 | 155,606 | 18,614 | 174,220 |
| Write-off of deferred tax asset on IPO costs | - | (5,179) | - | - | - | - | - | - | (5,179) | - | (5,179) |
| Equity dividends paid to shareholders of Ferrexpo plc | - | - | - | - | - | - | - | (19,449) | (19,449) | - | (19,449) |
| Equity dividends paid by subsidiary undertakings to minority shareholders | - | - | - | - | - | - | - | - | - | (324) | (324) |
| Share based payments | - | - | - | - | 4,924 | - | - | - | 4,924 | - | 4,924 |
| Adjustments relating to the increase in minority interest | - | - | - | - | - | - | - | - | - | (3,451) | (3,451) |
| At 30 June 2008 (unaudited) | 121,628 | 183,387 | 31,780 | - | (15,168) | (2,553) | 19,280 | 338,616 | 676,970 | 60,693 | 737,663 |
| Profit for the period | - | - | - | - | - | - | - | 150,987 | 150,987 | 4,403 | 155,390 |
| Other comprehensive income | - | - | - | - | - | 3,366 | (289,884) | - | (286,518) | (23,689) | (310,207) |
| Total comprehensive income for the period | - | - | - | - | - | 3,366 | (289,884) | 150,987 | (135,531) | (19,286) | (154,817) |
| Deferred tax on transaction costs | - | 1,725 | - | - | - | - | - | - | 1,725 | - | 1,725 |
| Tax effect on employee benefits | - | - | - | - | (317) | - | - | - | (317) | - | (317) |
| Equity dividends paid to shareholders of Ferrexpo plc | - | - | - | - | - | - | - | (19,505) | (19,505) | - | (19,505) |
| Share based payments | - | - | - | - | 42 | - | - | - | 42 | - | 42 |
| Participation of minority shareholders in subsidiary share issue | - | - | - | - | - | - | - | - | - | 1,960 | 1,960 |
| Adjustments relating to the decrease in minority interest | - | - | - | - | - | - | - | - | - | (31,598) | (31,598) |
| Share buy back | - | - | - | (77,260) | - | - | - | - | (77,260) | - | (77,260) |
| At 31 December 2008 (audited) | 121,628 | 185,112 | 31,780 | (77,260) | (15,443) | 813 | (270,604) | 470,098 | 446,124 | 11,769 | 457,893 |
| Profit for the period | - | - | - | - | - | - | - | 28,529 | 28,529 | 179 | 28,708 |
| Other comprehensive income | - | - | - | - | - | - | 4,340 | - | 4,340 | 109 | 4,449 |
| Total comprehensive income for the period | - | - | - | - | - | - | 4,340 | 28,529 | 32,869 | 288 | 33,157 |
| Equity dividends paid to shareholders of Ferrexpo plc | - | - | - | - | - | - | - | (20,261) | (20,261) | - | (20,261) |
| Share based payments | - | - | - | - | 1,554 | - | - | - | 1,554 | - | 1,554 |
| At 30 June 2009 (unaudited) | 121,628 | 185,112 | 31,780 | (77,260) | (13,889) | 813 | (266,264) | 478,366 | 460,286 | 12,057 | 472,343 |
Notes to the Consolidated Financial Information
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 a sales and marketing company in Switzerland, and Kiev. The Group's operations are vertically integrated from iron ore mining through to iron ore concentrate and pellet production. 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 Group's operations are largely conducted through Ferrexpo plc's principal subsidiary, Ferrexpo Poltava GOK Corporation. The Group is comprised of Ferrexpo plc and its consolidated subsidiaries as set out below:
| Equity interest owned | |||||
| Name | Country of incorporation | Principal activity | 30.06.09 % | 30.06.08 % | 31.12.08 % |
| Ferrexpo Poltava GOK Corporation* | Ukraine
| Iron ore mining
| 97.1
| 87.8
| 97.1
|
| Ferrexpo AG** | Switzerland | Sale of iron ore pellets and project development | 100.0 | 100.0 | 100.0 |
| DP Ferrotrans*** | Ukraine |
Trade, transportation services | 97.1 | 87.8 | 97.1 |
| United Energy Company LLC*** | Ukraine | Holding company | 97.1 | 87.8 | 97.1 |
|
Ferrexpo UK Limited* | England | Finance | 100.0 | 100.0 | 100.0 |
| Ferrexpo Services Limited* | Ukraine |
Management services & procurement | 100.0 | 100.0 | 100.0 |
| Ferrexpo Hong Kong Limited* | China | Marketing services | 100.0 | 100.0 | 100.0 |
| Ferrexpo Yeristova GOK LLC*** | Ukraine | Iron ore mining | 98.5 | - | 98.5 |
* The Group's interest in these entities is held through Ferrexpo AG.
** 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.
*** The Group's interest in these entities is held through Ferrexpo Poltava GOK Corporation.
The Group also holds an interest of 48.5% (30 June 2008: 43.8%; 31 December 2008: 48.5%) 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 consolidated financial statements for the six months ended 30 June 2009 have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting. The interim 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. Risks in relation to the facilities and re-financing are contained below.
The interim 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 2008. 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 up to 31 December 2008, has been delivered to the Register of Companies. The auditors' report under section 235 of the Companies Act 1985 in relation to those accounts was unqualified and did not contain a statement under s237(2) or s237(3) of the Companies Act 1985.
Going Concern
At the period end, the Group has a major debt facility of $244,091,000 in place which amortises over the period to 31 December 2010. The Group is of the view that it will be able to generate sufficient cash in the absence of development capital expenditure to fully repay the debt by the end of this period, in compliance with the terms of the facility agreements. The Group is currently engaged in seeking financing to allow it to develop its existing mining operations.
Key risks associated with the financing facilities were included in the Business Review section of the 2008 year end accounts and these risks still apply.
The Directors are therefore of the view that the Group is a going concern and the accounts have been drawn up on this basis.
Changes in accounting policies
The accounting policies adopted in the preparation of the interim consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2008, except for the following:
IFRS 2 Share-based Payment - Vesting Conditions and Cancellations
The Standard has been amended to clarify the definition of vesting conditions and to prescribe the accounting treatment of an award that is effectively cancelled because a non-vesting condition is not satisfied. The adoption of this amendment did not have any impact on the financial position or performance of the Group.
IFRS 8 Operating Segments
This standard requires disclosure of information about the Group's operating segments and replaces the requirement to determine primary (business) and secondary (geographical) reporting segments of the Group. Adoption of this Standard did not have any effect on the financial position or performance of the Group. The Group determined that it only has one operating segment under the new standard. Additional description of the operating segment under IFRS 8 and the segments under IAS 14 Segment Reporting are shown in Note 3.
IAS 1 Revised Presentation of Financial Statements
The revised Standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented as a single line. In addition, the Standard introduces the statement of comprehensive income: it presents all items of recognised income and expense, either in one single statement, or in two linked statements. The Group has elected to present two statements which are contained on pages 2 and 5 to the financial statements.
IAS 23 Borrowing Costs (Revised)
The standard has been revised to require capitalisation of borrowing costs on qualifying assets and the Group has amended its accounting policy accordingly. In accordance with the transitional requirements of the Standard this has been adopted as a prospective change. Therefore, borrowing costs have been capitalised on qualifying assets with a commencement date on or after 1 January 2009. No changes have been made for borrowing costs incurred prior to this date that have been expensed.
IAS 32 Financial Instruments: Presentation and IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation
The standards have been amended to allow a limited scope exception for puttable financial instruments to be classified as equity if they fulfil a number of specified criteria. The adoption of these amendments did not have any impact on the financial position or performance of the Group.
Improvements to IFRSs
In May 2008 the Board issued its first omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard.
The amendments to the following standards below did not have any impact on the accounting policies, financial position or performance of the Group:
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 7 Financial Instruments: Disclosures
IAS 8 Accounting Policies, Change in Accounting Estimates and Error
IAS 10 Events after the Reporting Period
IAS 18 Revenue
IAS 19 Employee Benefits
IAS 20 Accounting for Government Grants and Disclosures of Government Assistance
IAS 27 Consolidated and Separate Financial Statements
IAS 28 Investment in Associates
IAS 34 Interim Financial Reporting
IAS 39 Financial Instruments: Recognition and Measurement
Seasonality
The Group's operations are not affected by seasonality.
Note 3: Segment information
The group is managed as single entity which produces, develops and markets its principal product; iron ore pellets; for sale to the metallurgical industry. Per the requirements of IFRS 8 Operating Segments, the Group presents its results in a single segment which are disclosed in the income statement for the Group.
In the prior period, under the requirements of IAS 14 Segment Reporting, the Group disclosed geographical segments split between Ukraine and Switzerland. This is no longer required.
Note 4: Revenue
Revenue for the six months ended 30 June 2009 consisted of the following:
| US$ 000 | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Revenue from sales of ore pellets: | |||
| Export | 276,266 | 439,753 | 973,420 |
| Ukraine | 24,976 | 75,905 | 134,413 |
|
| 301,242 | 515,658 | 1,107,833 |
| Revenue from services provided | 367 | 680 | 1,229 |
| Revenue from other sales | 150 | 3,160 | 7,792 |
|
| 301,759 | 519,498 | 1,116,854 |
Export sales by geographical destination were as follows:
| US$'000 | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Austria | 24,136 | 115,987 | 298,209 |
| Serbia | 13,826 | 95,295 | 170,972 |
| China | 173,057 | 83,827 | 173,761 |
| Slovakia | 37,320 | 59,154 | 117,093 |
| Czech Republic | 3,465 | 36,116 | 80,746 |
| India | 11,535 | - | - |
| Russia | - | 18,341 | 42,606 |
| Poland | 27 | 11,526 | 31,708 |
| Turkey | 12,263 | 9,833 | 30,649 |
| Bulgaria | - | 9,674 | 12,189 |
| Italy | 59 | - | 10,340 |
| Other | 578 | - | 5,147 |
|
| 276,266 | 439,753 | 973,420 |
Note 5: Cost of sales
Cost of sales for the six months ended 30 June 2009 consisted of the following:
| US$ 000 | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Materials | 30,090 | 52,641 | 98,020 |
| Purchased ore and concentrate | 629 | 8,144 | 47,491 |
| Electricity | 37,667 | 43,717 | 92,021 |
| Personnel costs | 20,260 | 29,640 | 68,781 |
| Spare parts and consumables | 21,053 | 16,922 | 32,034 |
| Depreciation and amortisation | 11,327 | 14,447 | 28,860 |
| Fuel | 11,289 | 23,745 | 41,517 |
| Gas | 18,626 | 18,021 | 34,106 |
| Royalties and levies | 2,004 | 3,806 | 6,764 |
| Stock movement | 3,656 | (5,017) | (19,596) |
| Other | 3,052 | 1,442 | 4,240 |
|
| 159,653 | 207,508 | 434,238 |
Cost of sales is reconciled to "C1" costs in the following manner:
| US$ 000 | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Cost of sales | 159,653 | 207,508 | 434,238 |
| Depreciation and amortisation | (11,327) | (14,447) | (28,860) |
| Purchased ore and concentrate | (629) | (8,144) | (47,491) |
| Processing costs for purchased ore and concentrate | (117) | - | (5,418) |
| Production cost of gravel | (183) | (709) | (375) |
| Stock movement in the period | (3,656) | 5,017 | 19,596 |
| Pension service costs | (914) | (667) | (5,058) |
| Other | (405) | (4,229) | (2,214) |
| C1 cost | 142,422 | 184,329 | 364,418 |
| Own ore produced (tonnes) | 4,123,700 | 4,504,000 | 8,607,500 |
| C1 cash cost per tonne $ | 34.54 | 40.92 | 42.34 |
"C1" costs represent the cash costs of production of own ore divided by production volume of own ore, and excludes non cash costs such as depreciation, amortisation, pension costs and stock movement, costs of purchased ore, concentrate and production cost of gravel and excludes one-off items which are outside the definition of EBITDA.
Note 6: Selling and distribution expenses
Selling and distribution expenses for the six months ended 30 June 2009 consisted of the following:
| US$ 000 | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Railway transportation | 30,590 | 53,467 | 95,477 |
| Other transportation | 39,717 | 8,281 | 43,697 |
| Agent fees | 416 | 972 | 1,656 |
| Custom duties | 422 | 750 | 1,678 |
| Advertising | 1,093 | 967 | 2,395 |
| Personnel cost | 511 | 672 | 1,448 |
| Depreciation | 764 | 422 | 1,406 |
| Other | 2,293 | 1,582 | 4,771 |
|
| 75,806 | 67,113 | 152,528 |
Note 7: General and administrative expenses
General and administrative expenses for the six months ended 30 June 2009 consisted of the following:
| US$ 000 | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Personnel costs | 11,593 | 16,263 | 38,900 |
| Buildings and maintenance | 1,102 | 1,327 | 3,092 |
| Taxes other than income tax and other charges | 1,898 | 2,141 | 4,185 |
| Consulting and other professional fees | 1,548 | 5,565 | 6,684 |
| Depreciation and amortisation | 1,600 | 1,408 | 3,137 |
| Communication | 218 | 228 | 826 |
| Vehicles maintenance and fuel | 362 | 566 | 1,096 |
| Repairs | 326 | 433 | 1,120 |
| Half year review fees | 195 | 363 | 363 |
| Audit fees | 480 | 295 | 985 |
| Non audit fees | 184 | 448 | 899 |
| Security | 744 | 641 | 1,641 |
| Research | 1 | 138 | 352 |
| Other | 2,068 | 2,622 | 3,905 |
|
| 22,319 | 32,438 | 67,185 |
Note 8: Foreign exchange gains and losses
| US$ 000 | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Operating foreign exchange (losses)/gains | (817) | - | 29,309 |
| Non-operating foreign exchange gains/(losses) | 3,695 | (4,066) | (72,788) |
| 2,878 | (4,066) | (43,479) |
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.
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 2009 consisted of the following:
| US$ 000 | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Write-off of inventories | - | - | 941 |
| (Write-up)/Write-off of property, plant and equipment | (31) | - | 21 |
| Impairment of available-for-sale financial assets | 1,901 | 94 | 26,364 |
| 1,870 | 94 | 27,326 |
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.
|
| 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Profit for the year attributable to equity shareholders: | |||
| Basic earnings per share (US cents) | 4.88 | 23.20 | 48.60 |
| Diluted earnings per share (US cents) | 4.87 | 23.14 | 48.46 |
| Underlying earnings for the year: | |||
| Basic earnings per share (US cents) | 4.76 | 22.69 | 57.74 |
| Diluted earnings per share (US cents) | 4.75 | 22.63 | 57.58 |
The calculation of the basic and diluted earnings per share is based on the following data:
| Thousands | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Weighted average number of shares | |||
| Basic number of ordinary shares outstanding | 584,493 | 609,794 | 601,697 |
| Effect of dilutive potential ordinary shares | 1,520 | 1,492 | 1,717 |
| Diluted number of ordinary shares outstanding | 586,013 | 611,286 | 603,414 |
The basic number of ordinary shares is calculated by reducing the total number or ordinary shares in issue by the shares held in treasury.
'Underlying earnings' is an alternative earnings measure, which the directors believe provides a clearer picture of the underlying financial performance of the Group's operations. Underlying earnings is presented before minority interests have been deducted and excludes adjusted items. The calculation of underlying earnings per share is based on the following earnings data:
| US$ 000 | Notes | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Profit attributable to equity holders | 28,529 | 141,449 | 292,436 | |
| Write offs/impairments | 9 | 1,870 | 94 | 27,326 |
| IPO costs | 372 | 3,897 | 4,120 | |
| Negative goodwill generated on rights issue | - | (5,077) | (35,049) | |
| Gain on disposal of available-for-sale investment | - | (1,547) | (1,571) | |
| Non-operating foreign exchange losses | 8 | (3,695) | (438) | 72,788 |
| Tax on adjusted items | 772 | (23) | (12,619) | |
| Underlying earnings | 27,848 | 138,355 | 347,431 |
Adjusted items are those items of financial performance that the Group believes should be separately disclosed on the face of the income statement to assist in the understanding of the underlying financial performance achieved by the Group. Adjusted items that relate to the operating performance of the Group include impairment charges and reversals and other exceptional items. Non-operating adjusted items include gains and losses on disposal of investments and businesses and non-operating foreign exchange gains and losses.
Dividends paid and proposed
| US$000 | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Paid | |||
| Final dividend for 2008: 3.3 US cents per ordinary share1 | 13,417 | - | - |
| Interim dividend for 2008: 3.2 US cents per ordinary share | - | 19,505 | - |
| Final dividend for 2007: 3.2 US cents per ordinary share | - | - | 19,449 |
1 The final dividend for 31 December 2008 was $20,261,000, of which $6,844,000 remains unpaid.
Note 11: EBITDA
The Group calculates EBITDA as profit from continuing operations before tax and finance plus depreciation and amortisation (included in cost of sales, general and administrative expenses and selling and distribution costs) and non-recurring cash items included in other income, non-recurring cash items included in other expenses plus the net gain/(loss) from disposal of subsidiaries and associates. The Group presents EBITDA because it believes that EBITDA is a useful measure for evaluating its ability to generate cash and its operating performance.
| US$'000 | Notes | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Profit before tax and finance | 42,906 | 213,312 | 466,736 | |
| Write-offs and impairment losses | 9 | 1,870 | 94 | 27,326 |
| Gain on disposal of available-for-sale investment | - | (1,547) | (1,571) | |
| Initial public offering costs | 372 | 3,897 | 4,120 | |
| Share based payments | 1,182 | 1,027 | 1,495 | |
| Negative goodwill generated on rights issue | - | (5,077) | (35,049) | |
| Severance payments | - | - | 6,764 | |
| Depreciation and amortisation | 13,965 | 16,317 | 34,125 | |
| EBITDA | 60,295 | 228,023 | 503,946 |
Note 12: Property, plant and equipment
During the six months ended 30 June 2009, the Group acquired property, plant and equipment with a cost of $44,695,000 (30 June 2008: $118,524,000; 31 December 2008: $285,023,000) and disposed of property, plant and equipment with a cost of $2,107,000 (30 June 2008: $1,035,000; 31 December 2008: $3,926,000).
Note 13: Cash and cash equivalents
As at 30 June 2009 the Group held cash and cash equivalents of $73,303,000 (30 June 2008: $62,600,000; 31 December 2008: $87,822,000).
Note 14: Share capital and reserves
The share capital of the Company consists of 613,967,956 ordinary shares of £0.10 each, giving a nominal value of $121,628,000 which is unchanged since the Group's Initial Public Offering in June 2007. This balance includes 25,343,814 shares which are held in treasury, resulting from a share buyback that was undertaken in September 2008.
Note 15: Interest bearing loans and borrowings
During the period ended 30 June 2009, $36,364,000 was repaid on the $335,000,000 bank debt facility (6 months to 30 June 2008: $18,182,000; 12 months to 31 December 2008: $54,545,000).
At the period end none of the facility was unutilised (30 June 2008: $135,000,000; 31 December 2008: $nil).
The term loan and revolving credit facilities are guaranteed and secured.
In January 2009, Ferrexpo Poltava GOK Corporation concluded a sale and financial leaseback transaction relating to rail cars with a facility amount of $19,718,000. During the period ended 30 June 2009 $486,000 of the principal was repaid.
Note 16: Net financial indebtedness
Net financial indebtedness of the Group is shown in the note below:
| US$ 000 | Notes | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Cash and cash equivalents | 13 | 74,303 | 62,600 | 87,822 |
| Current borrowings | 15 | (105,080) | (73,693) | (74,523) |
| Non-current borrowings | 15 | (189,959) | (111,386) | (231,373) |
| Current equipment loans | (1,467) | (2,067) | (1,446) | |
| Non-current equipment loans | (61) | (1,705) | (570) | |
| Net financial indebtedness | (222,264) | (126,251) | (220,090) |
Note 17: Related party disclosure
During the periods presented the Group entered into arm's length transactions with entities under common control of the majority owner of the Group, Kostyantin Zhevago and with other related parties. Management considers that the Group has appropriate procedures in place to identify and properly disclose transactions with the related parties.
The related party transactions undertaken by the Group during the periods presented are summarised below:
| 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 | |||||||
| US$ 000 | Entities under common control | Associated companies | Other related parties | Entities under common control | Associated companies | Other related parties | Entities under common control | Associates companies | Other related parties |
| Iron ore pellet sales | 277 | - | 511 | 519 | - | 1,686 | 853 | - | 2,937 |
| Purchase of materials | 2,219 | - | 5,942 | 9,996 | - | 8,858 | 22,999 | - | 20,293 |
| Purchase of services | 220 | - | 110 | 162 | - | 270 | 477 | - | 426 |
| General and administration expenses | 1,343 | - | 5 | 1,212 | - | 34 | 2,642 | - | 128 |
| Selling and distribution expenses | - | 6,680 | 3,433 | - | 1,736 | 5,347 | - | 3,482 | 11,332 |
| Other expenses | 37 | - | 10 | 6 | - | 6 | 43 | - | 247 |
| Total expenses | 3,819 | 6,680 | 9,500 | 11,376 | 1,736 | 14,515 | 26,161 | 3,482 | 32,426 |
| Finance income | 891 | 197 | - | 141 | 165 | - | 239 | 394 | - |
| Finance costs | (347) | - | - | (378) | - | - | (761) | - | - |
| Net finance income/(costs) | 544 | 197 | - | 237 | 165 | - | (522) | 394 | - |
Finance income and finance costs
The Group has transactional banking arrangements with Finance & Credit Bank in Ukraine which is under the common control of the major shareholder of Ferrexpo PLC. In the table above Finance income relates to interest on deposits, finance costs relate to bank interest and charges.
Sale and purchases of property, plant, equipment and investments
The table below details the transactions of a capital nature which were undertaken between group companies and entities under common control, Associated Companies and other related parties during the periods presented.
| 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 | |||||||
| US$ 000 | Entities under common control | Associated companies | Other related parties | Entities under common control | Associated companies | Other related parties | Entities under common control | Associated companies | Other related parties |
| Sale of investments (i) | - | - | - | 1,849 | - | - | 1,849 | - | - |
| Purchase of investments (iv) | - | - | - | - | - | - | 270 | - | - |
| Purchase of Own Shares (v) | - | - | - | - | - | - | 58,249 | - | - |
| Purchase of Trucks (ii) (vi) | - | - | - | 54 | - | - | 192 | - | 16 |
| Purchase of Plant (vii) | 2,200 | - | - | - | - | - | - | - | - |
I. On 23 May 2008 the Group disposed of a 2.054% share holding in Vostock Ruda, an available-for-sale investment, to entities under common control for a consideration of $1,849,000 resulting in a gain on disposal of $1,571,000 (30 June 2009: $nil).
II. On 25 June 2008, the company acquired a truck from Auto Kraz an entity under common control for $54,000.
III. Following initial stripping operations at Yeristovo, the company disposed of surplus ballast material on the 30th June 2008 for $515,000. This was recorded in revenue as income and is included in other sales in the first table above.
IV. On 16 July 2008 PGOK and Ferrotrans (group subsidiaries) subscribed for additional share capital for consideration of $244,000 and $26,000 respectively in OJSC Stahanov, as part of the rights issue of that company. As at 31 December 2008 the market value of the shares purchased in 2008 was $231,000, the difference was recognised in income statement as an impairment loss. As at 30 June 2009 the total market value of all the OJSC Stahanov shares held by the Group amounted to $376,000 (December 2008 $435,000). The difference was recognised in the income statement as an impairment loss.
V. On the 16 September 2008, Ferrexpo plc repurchased 19,398,814 of its own Ordinary Shares from Kostyantin Zhevago a related party at the market price of £1.673 per share for settlement on 19 September 2008. The gross consideration paid amounted to $58,248,826.
VI. On the 28 November 2008 the Group purchased property, plant and equipment (principally trucks and cranes) as the first instalment of an approved order of $1,067,000 from the entity under common control, Auto Kraz, The consideration for this part delivery was $138,000.
VII. On 31 March 2009, the company acquired a trial filter press from Progress Plant Company, an entity under common control for $2,200,000.
Items IV to VII above represent transactions which are aggregated for the 12 month period to 30 June 2009 for the purposes of class tests under Chapter 11 of the United Kingdom Listing Authority rules.
The outstanding investments/balances with related parties for the periods presented are as follows:
| 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 | |||||||
| US$ 000 | Entities under common control | Associated companies | Other related parties | Entities under common control | Associated companies | Other related parties | Entities under common control | Associated companies | Other related parties |
| Investments available-for-sale | 2,576 | - | - | 35,962 | - | 3 | - | - | - |
| Loans to associates | - | 5,000 | - | - | 9,000 | - | - | 9,000 | - |
| Total non-current assets | 2,576 | 5,000 | - | 35,962 | 9,000 | 3 | - | 9,000 | - |
| Investments available-for-sale | 655 | - | - | 8,768 | - | - | 880 | - | - |
| Trade and other receivables | 1,967 | 43 | 281 | 2,671 | 1,000 | 243 | 1,890 | - | 8 |
| Prepayments and other current assets | 38 | - | 2 | 4 | 68 | 110 | 145 | 6,299 | 581 |
| Short term deposits with banks | - | - | - | - | - | - | 5,000 | - | - |
| Cash and cash equivalents | 35,218 | - | - | 10,740 | - | - | 36,984 | - | - |
| Total current assets | 37,878 | 43 | 283 | 22,183 | 1,068 | 353 | 44,899 | 6,299 | 589 |
| Trade and other payables | 335 | - | 1,548 | 388 | - | 740 | 659 | - | 1,250 |
| Accrued liabilities and deferred income | - | - | - | 367 | - | - | - | - | - |
| Current liabilities | 335 | - | 1,548 | 755 | - | 740 | 659 | - | 1,250 |
As of 30 June 2009, trade and other receivables included outstanding amounts related to the disposal of shares in Vostok Ruda of $1,223,000 (30 June 2008; $1,849,000; 31 December 2008: $1,212,000).
As of 30 June 2009 cash and cash equivalents with Finance & Credit Bank were $35,218,000 (30 June 2008: $10,740,000; 31 December 2008: $36,984,000).
Note 18: Reconciliation of profit before income tax to net cash flow from operating activities
| US$ 000 | 6 months ended 30.06.09 | 6 months ended 30.06.08 | Year ended 31.12.08 |
| Profit before income tax | 37,792 | 201,350 | 375,581 |
| Adjustments for: | |||
| Depreciation of property, plant and equipment and amortisation of intangible assets | 13,965 | 16,317 | 34,125 |
| Interest expense | 8,784 | 7,473 | 18,496 |
| Interest income | (1,601) | (1,214) | (2,467) |
| Share of gains of associates | (664) | (1,420) | (1,003) |
| Movement in allowance for doubtful receivables | (3,646) | 121 | 19,095 |
| Write-off/reversal of payables | - | - | (1,043) |
| (Gain)/loss on disposal of property, plant and equipment | (57) | 677 | 1,280 |
| Assets received free of charge | - | - | (325) |
| Write offs and impairment losses | 1,870 | 94 | 27,325 |
| Site restoration provision | 64 | 243 | 269 |
| Gains on disposal of investments available for sale | - | (1,546) | (1,571) |
| Employee benefits | 1,562 | 1,394 | 7,715 |
| IPO costs | 372 | 3,897 | 4,120 |
| Share based payments | 1,182 | 1,027 | 1,495 |
| Negative goodwill generated on rights issue | - | (5,077) | (35,049) |
| Operating foreign exchange loss/(gain) | 817 | 4,504 | (29,309) |
| Non-operating foreign exchange (gain)/loss | (3,695) | (438) | 72,788 |
| Operating cash flow before working capital changes | 56,745 | 227,402 | 491,522 |
| Changes in working capital:
| |||
| (Increase)/decrease in trade and other receivables | 18,096 | (45,372) | (36,167) |
| (Increase)/decrease in inventories | 1,094 | (18,689) | (5,070) |
| Increase/(decrease) in trade and other accounts payable | (8,107) | 19,391 | 8,094 |
| (Increase)/decrease in other taxes recoverable | 4,817 | 5,747 | (673) |
| Cash generated from operating activities | 72,645 | 188,479 | 457,706 |
| Interest paid | (8,784) | (7,487) | (15,443) |
| Income tax paid | (17,215) | (38,911) | (67,217) |
| Post-employment benefits paid | (349) | (1,476) | (4,103) |
| Net cash flows from operating activities | 46,297 | 140,605 | 370,943 |
Note 19: Commitments and contingencies
Commitments
| US$ 000 | As at 30.06.09 | As at 30.06.08 | As at 31.12.08 |
| Operating lease commitments | 19,548 | 21,776 | 26,505 |
| Capital commitments on purchase of property, plant and equipment | 52,118 | 79,420 | 42,198 |
| Guarantees provided | 335,000 | 316,818 | 335,000 |
Legal
In the ordinary course of business, the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Group.
Tax and other regulatory compliance
Ukrainian legislation and regulations regarding taxation and custom regulations continue to evolve. Legislation and regulations are not always clearly written and are subject to varying interpretations and inconsistent enforcement by local, regional and national authorities, and other Governmental bodies. Instances of inconsistent interpretations are not unusual.
The uncertainty of application and the evolution of Ukrainian tax laws, including those affecting cross border transactions, create a risk of additional tax payments having to be made by the Group, which could have a material effect on the Group's financial position and results of operations. The Group does not believe that these risks are any more significant than those of similar enterprises in Ukraine.
Note 20: Subsequent events
No material adjusting or non-adjusting events have occurred subsequent to the period end.