OREANDA-NEWS. Fitch Ratings has upgraded Ferrexpo plc's (Ferrexpo) Long-Term Issuer Default Rating (IDR) and Ferrexpo Finance Plc's senior unsecured rating to 'CCC' from 'CC'. The Recovery Rating on the senior unsecured rating is 'RR4'. Ferrexpo's Short-term IDR has been affirmed at 'C'.

The upgrade reflects the improvement in Ferrexpo's liquidity position in comparison with our previous expectations due to higher than expected iron ore prices in 1H16 (average USD52/t vs. USD45/t expected by Fitch) and sustainably high pellet premiums (USD25/t). In July, Ferrexpo paid the final amortisation of its USD420m pre-export financing (PXF) from internally generated cash flow.

The group has a further USD350m PXF, which starts to amortise in November 2016 with eight quarterly payments of USD43.8m ending August 2018. We assume that Ferrexpo's FCF will be around USD250m for 2016 and 2017 and as a result the group will be able to fund these debt payments from internally generated cash.

The group's other significant debt instrument is a USD346m Eurobond that matures in two equal instalments in April 2018 and April 2019. We believe Ferrexpo will able to fund the first instalment of USD173.2m through internally generated cash. However, there is high potential downside risk as iron ore prices remain volatile.

Despite its sound operational profile, refinancing risk for the company remains elevated due to its Ukrainian exposure.


Competitive Cost Producer

Ferrexpo's operating cost position sits within the first quartile of the global pellets cost curve. In 1H16, cash costs improved significantly compared with the previous two years, mainly due to currency depreciation dynamics (50% of operating costs are linked to the hryvnia) and a sustained drop in energy prices. These positive dynamics plus operating efficiency gains resulted in a 23% decrease in year-on-year costs in 1H16, reaching USD25.7 per tonne, down from USD33.4 in 1H15. Energy costs now represent around 40% to 50% of total costs, and should contribute to a further reduction in comparative cost levels in 2H16.

Ukrainian Risk Exposure

Ferrexpo's operating base is in Ukraine. In the past two to three years the country has experienced high domestic inflation, combined with significant currency depreciation (85% in 2015 vs. USD and greater than 125% since 2014), and some delays in VAT repayment by the state. However, military conflict in the Donbass region has not directly impacted Ferrexpo's operations and transport infrastructure due to their location in the Poltava region, approximately 425km north of Donetsk. For 2016 our forecasts assume an average rate of around USD/UAH26, which is in line with the 1H16 rate of USD/UAH of 25.47.

Continuing Profitability

Cash costs improvements, together with the pellet premium received over the benchmark 62% iron ore price, have partly offset the 11% drop in top line revenues that followed the fall in iron ore prices in 1H16 compared with 1H15. As a result, Fitch expects Ferrexpo's profitability to remain stable, with an EBITDA margin ranging between 30%-35% (1H16: 35%) in the medium term. Ferrexpo's funds from operations - (FFO) adjusted gross leverage was 3.4x in 2015 (vs. 3.6x in 2014) and will decline in 2017 due to our expectations of a slight EBITDA improvement resulting from momentum iron ore prices recovery in 1H16, as well as debt reduction, both in absolute terms.

Iron Ore Premium Pellet Producer

In 1H16 , 62% iron ore prices averaged USD52 per tonne, down approximately 15% yoy and down 58% since February 2014, reflecting oversupply in the global market and in particular a slowdown in demand from the Chinese steel industry.

However, Fitch expects the demand for premium quality pellets, which are used to make steel, to remain sound. We expect premium pellet supply to be limited in the next couple of years due to the disrupted supply from Samarco and the high capital cost of new pellet plants additions. Ferrexpo compares favourably with its competitors in the premium pellet market. It has long-term contracts with European producers and North East Asian producers. The headline long-term contract pellet premium in the key markets of Western Europe and North East Asia was on average USD31 per tonne in 1H16 compared with an average of USD17 per tonne over the same period in China.


Fitch iron ore price deck: USD45/t in 2016 and 2017, USD50/t in 2018, USD50/t in the long term

USD25/t - USD30/t price premium for pellets

Production volumes: 11.7mt per year iron ore pellets in 2016-2018

USD40m capex in 2016 and 2017

USD/UAH26 in 2016 and USD/UAH28 in 2017


Negative: Future developments that may, individually or collectively, lead to negative rating action include:

Lowering of Ukraine's Country Ceiling.

Material shortfall in pellet premiums or iron ore prices beyond our assumptions without access to alternative sources of liquidity.

Default becoming imminent or inevitable, including a payment default or a debt restructuring in a form we would consider a distressed debt exchange.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

Strengthening of Ferrexpo's liquidity position due to new sources of financing, a sustainable renegotiated debt maturity profile or higher than expected iron ore prices and/or pellet premiums.

An improvement in Ukraine's Country Celling, or sufficient evidence that Ferrexpo should not be constrained by it.


At end July 2016, according to Fitch's estimates the company's cash balance was around USD50m vs. USD158m in short-term debt (USD56m in 2H2016 and USD102m in 1H2017), and USD47m coupon/interest (USD24m in 2H16 and USD23m in 1H17). The USD156m short-term debt is composed of USD136m of quarterly PXF instalments starting in November 2016 and USD20m of other debt.

We forecast that the company will generate approximately USD250m of FCF over the next 12 months (post interest/coupon). This should be just enough to service the company's debt, working capital and capital expenditures for the next 6 to 12 months, but leaving it exposed to further fluctuations in iron ore prices, currency and energy costs.

In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action which is different than the original rating committee outcome.