Last checked at 3 Feb 2009 07:00
3 February 2009
Trading Update and Q4 2008 Production Report
Ferrexpo plc ("Ferrexpo" or the "Group") today issues a trading update following the Group's trading statement released on 29 October 2008, together with its Production Report for the fourth quarter of 2008.
Highlights
2008 - a record year
Operating financial performance ahead of management expectations
Sales in spot market compensated weakness in traditional markets in November and December
December C1 cash costs significantly reduced to US$34.7/t, benefitting from weaker local currency and lower grinding media and fuel costs
Production in line with expectations reflecting Q4 planned reductions
Record output of high quality 65% Fe pellets for the year
Full year 2008 trading
2008 was a record year and ended well giving a full year operating financial performance ahead of management expectations, benefiting from a sharp reduction in costs in December as a result of a weaker local currency, continued falling oil prices and lower costs for grinding media.
In response to a sharp reduction in demand in October, the Group made modest planned reductions in output which has resulted in full year production at 2007 levels. It was however able to sell substantially all of its 2008 production, leveraging on its strong international customer relationships to access the spot market. This partly compensated for much lower volumes in its traditional export and home markets.
Year end net debt was US$220 million. The Group is operating comfortably within its existing facilities.
Sales
As previously announced, in October several of our long term export customers notified the Group of their inability to accept deliveries of all contracted tonnage in 2008, following a rapid decline in steel demand. This followed the suspension of all iron ore pellet purchases by our major Ukrainian long term contract customer.
In November lower demand and de-stocking by steel mills worldwide caused a marked contraction in iron ore spot market activity in China, limiting the Group's ability to obtain alternative buyers for deferred tonnages. As a result the Group planned and implemented an approximately 30% reduction in production in November to reflect this reduced demand.
Spot prices have since firmed and some iron ore purchasing activity resumed in December. The Group responded by increasing production to around 90% of normal levels and was able to supply pellets to existing customers under long term contracts and also sell some tonnage deferred under these contracts on the seaborne spot market.
The table below gives sales tonnages and average achieved prices for 2008. Average achieved prices are given on a DAF/FOB basis across all markets and products, and include both contract and spot sales in each period.
| | Q1 2008 | Q2 2008 | Q3 2008 | Q4 2008 | ||
| | | | | October | November | December |
| Tonnes sold (‘000) | 2,050 | 2,452 | 2,288 | 794 | 537 | 589 |
| | | | | | | |
| Average achieved | | | | 144.7 | 135.3 | 92.5 |
| price (US$/t) | 76.4 | 142.3 | 146.6 | | 126.1 | |
Costs
The Group's cash costs were US$34.7 per tonne in December 2008 compared to US$43.9 for the full year 2008. C1 costs have experienced significant downward pressure due to depreciation of the Ukrainian hryvnia and lower oil and steel related costs.
Full year C1 costs increased progressively through the first three quarters of the year due to Producer Price Index (PPI) inflation of 23%, and rising energy and steel related input costs. Cost pressures began to abate in the fourth quarter in response to slowing economic growth. Management at the Group's operations continue to drive the Group's Business Improvement Programme successfully, resulting in ongoing improvements in efficiency and unit utilisation of key inputs.
The hryvnia exchange rate fell 59.4% over 2008. Approximately 70% of the Group's cash costs including freight are denominated in hryvnia. The depreciating hryvnia, while positive for the Group's costs, will have some negative non-cash effects on the Group's asset values.
The table below shows cash costs per tonne of pellets for 2008.
| | Q1 2008 | Q2 2008 | Q3 2008 | Q4 2008 | ||
| | | | | October | November | December |
| C1 Cash Costs of | | | | 51.1 | 48.4 | 34.7 |
| Production (US$/t) | 39.1 | 42.8 | 49.2 | | 44.6 | |
| | | | | | | |
| DAF/FOB Distribution | | | | | | |
| Costs (US$/t) | 11.8 | 12.8 | 15.5 | | 15.8 | |
Production Report for Q4 2008
| Production in Tonnes '000 | Q4 | Q3 | Change | Q4 | Change | Year | Year | Change |
| 2008 | 2008 | % | 2007 | % | 2008 | 2007 | % | |
| Iron Ore | 6,162.3 | 7,238.6 | (14.9) | 7,182.8 | (14.2) | 27,762.2 | 28,933.8 | (4.0) |
| Concentrate | 2,246.1 | 2,772.8 | (19.0) | 2,663.6 | (15.7) | 10,458.8 | 10,651.6 | (1.8) |
| Pellets from produced own raw materials | 1,838.1 | 2,265.0 | (18.8) | 2,159.8 | (14.9) | 8,607.5 | 8,793.4 | (2.1) |
| 62% Fe | 815.4 | 1,194.0 | (31.7) | 1,191.1 | (31.5) | 4,593.5 | 5,092.5 | (9.8) |
| 65% Fe | 1,022.7 | 1,071.0 | (4.5) | 968.7 | 5.6 | 4,014.0 | 3,700.9 | 8.5 |
| Pellets Total | 1,933.7 | 2,505.1 | (22.8) | 2,190.0 | (11.7) | 9,035.1 | 9,072.3 | (0.4) |
| 62% Fe | 911.0 | 1,434.1 | (36.5) | 1,221.3 | (25.4) | 5,021.1 | 5,371.4 | (6.5) |
| 65% Fe | 1,022.7 | 1,071.0 | (4.5) | 968.7 | 5.6 | 4,014.0 | 3,700.9 | 8.5 |
Following the record operational performance and production levels in the first three quarters of 2008, the Group's strong performance continued into October.
The worsening steel market environment and reduced iron ore demand required a planned decrease of production volumes in November and December decreasing total pellet production in Q4 2008 as a result.
The volume of rich ore mined increased by 3.0% compared to Q4 2007 on lower ore volumes (down 14%), enabling a 5.6% increase in the production of higher grade 65% Fe pellets in Q4 compared to the same period in 2007. High quality pellet production increased by 8.5% over the year. Stripping volumes in 2008 were increased by 14.8%, ensuring access to increased amounts of ore in the future.
Yeristovskoye
As announced previously, the Group has placed its growth projects on hold pending a return to normal market conditions. Limited stripping works at the site of the new Yeristovskoye mine were initiated at a start-up level in December, following the commissioning of the first of the six draglines ordered for the project. A second dragline was commissioned in January. The Group intends to continue its limited stripping operation at Yeristovskoye using these two draglines in order to maintain the value of the project and to limit the impact on its development schedule.
The substantial iron ore resources forming the Group's major growth projects continue to represent significant option value for Ferrexpo. These projects will be revisited by the Board periodically in 2009 in response to developments in the global economic outlook.
Gas dispute between Ukraine and Russia
The dispute relating to the supply of natural gas from Russia and its distribution to and through Ukraine was settled on 19 January. The Group was able to secure supplies of private natural gas production from within Ukraine in January, thereby insulating itself from any disruptions during the dispute. A temporary reduction in gas consumption at the request of government had a small effect on production which will be caught up in February. The Group has now resumed normal consumption of gas. Gas prices including delivery and other charges for our operations from state sources are expected to rise by approximately 20% in 2009, the equivalent of approximately US$2.0 per tonne of production.
Share Purchase from DCM Decometal International Trading GmbH ("DCM")
In December Ferrexpo Poltava Mining ("FPM"), the Group's Ukrainian operating subsidiary, repurchased 12,240,432 of its own shares from DCM for US$11,037,000. As a result of this transaction, the Group now owns 97.3% of the issued share capital of FPM.
Current trading and outlook
Following its strong performance in 2008, the Group has started the new year profitably, albeit trading at lower margins in view of the changed price regime. Management remain confident about trading in 2009 because of the Group's unique competitive advantages, most notably its advantageous location opposite its customers, its strong customer relationships and falling cost base. The Board believes that the Group is well placed to increase market share and continue to trade profitably.
In spite of weak demand from the Group's long term contract customers as downstream inventory de-stocking continues, the resumption of iron ore spot market activity and firmer seaborne spot prices is enabling the Group to continue to maintain its margins.
Michael Abrahams, Chairman of Ferrexpo, said:
"The Board is greatly encouraged by the performance of Ferrexpo in 2008, and particularly during the challenging fourth quarter. Kostyantin Zhevago has firmly grasped the reins of the company and has shown leadership in extremely difficult market conditions. The company has been able to manage its production carefully to achieve low costs while maximising sales volumes and prices. Aggressive cost and capital management initiatives are already bearing fruit and our strong customer relationships and logistical advantages make us confident that we will be able to trade profitably in 2009. At a time of continuing uncertainty in the iron ore market, Ferrexpo remains flexible, resilient and efficient and is well placed to benefit from any upturn."
Next Update
Ferrexpo will issue its 2008 Preliminary Results on 24 March 2009.
For further information, please contact:
| Ferrexpo: | +44 207 389 8304 |
| Gavin Mackay | |
| Finsbury: | +44 207 251 3801 |
| Robin Walker | |
| Alex Simmons |
Notes to Editors:
Ferrexpo is a Swiss headquartered resources Group 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 per annum, most of which is exported to steelmakers around the world. The Group is listed on the main market of the London Stock Exchange under the ticker FXPO. For further information please visit www.ferrexpo.com.