TIDMFXPO
RNS Number : 9891I
Ferrexpo PLC
23 March 2010
23 March 2010
FERREXPO plc
("Ferrexpo" or the "Group")
PRELIMINARY RESULTS
Ferrexpo, the FTSE 250 iron ore producer, today announces its preliminary
results for the year ended 31 December 2009.
HIGHLIGHTS
Financial
· Remained profitable throughout 2009 despite sharp fall in iron ore price
o Average DAF/FOB price decreased to US$66.3/t owing to lower settlement price
and temporary exposure to high freight rates (2008: US$124.6/t)
o Revenue decreased to US$648.7 million (2008: US$1,116.9 million)
o EBITDA decreased to US$138.1 million (2008: US$503.9 million)
o Net cash flow from operating activities of US$76.9 million (2008: US$370.9
million)
o Secured new US$230 million pre-export finance facility; the first successful
refinancing completed by a mining group with assets in the CIS since September
2008
o Interim and final dividend maintained at 3.3 US cents per share
Operational
· Strong operational performance in a challenging economic environment
o Production maintained at full capacity, remained profitable throughout the
downturn
o 7.2% increase in production of 65% Fe pellets in line with long term strategy
o 3.5% increase in sales volumes and 18.6% reduction in production costs
· Utilised marketing flexibility to open new growth markets
o Lower European demand offset by Chinese demand in H1 as well as new markets
in India and Turkey
· Sales mix normalised in Q4
Current trading in January and February 2010
· 90% of sales made under long-term contract
· 63% of sales to customers in Traditional Markets
· Average prices to date slightly ahead of Q4 2009
· Production at similar levels to last year
· Cash costs in line with expectations
Market outlook
· Demand and iron ore pricing strengthening
o Positioned to benefit from market recovery and increase in margins
o Continuing to expand market share
o Growth projects to resume once recovery firmly takes root
Kostyantin Zhevago, Chief Executive Officer, commented:
"Ferrexpo's strong operational performance in 2009 is a testament to the
Company's fundamental strength and our successful marketing strategy that has
allowed us to maintain profitability at a time of a worldwide drop in iron ore
demand.
In the second half of 2009, there were signs of recovery in our key Traditional
Markets and we returned to long-term contract deliveries which increased margins
and rebalanced our sales mix. In 2010, the outlook for iron ore is positive and
we are well placed to capitalise on any growth opportunities.
In the coming year, the Board will focus on resuming development of our growth
projects once a recovery has firmly taken hold, while continuing to add
capability to project execution and consolidating our strengths in best practice
mining and marketing."
Enquiries:
+-------------------------------------+-------------------------------------+
| Ferrexpo: | +44 207 389 8304 |
| | |
+-------------------------------------+-------------------------------------+
| Chris Mawe | |
| Ingrid Boon | |
+-------------------------------------+-------------------------------------+
| | |
+-------------------------------------+-------------------------------------+
| Pelham Bell Pottinger | |
+-------------------------------------+-------------------------------------+
| Charles Vivian | +44 207 337 1538 |
+-------------------------------------+-------------------------------------+
| Evgeniy Chuikov | +44 207 337 1513 |
+-------------------------------------+-------------------------------------+
| James MacFarlane | +44 207 337 1527 |
+-------------------------------------+-------------------------------------+
Ferrexpo will be hosting an analyst presentation on its Preliminary Results
today at 9.30am. The presentation will be available live on the company's
website at www.ferrexpo.com
Chairman's and Chief Executive Officer's review
We are pleased to report that Ferrexpo performed extremely well in 2009 in a
challenging economic environment. Demand visibility for iron ore remained poor
until the final quarter of the year. This was exacerbated by demand from China
and other developing regions remaining strong, while demand from developed
regions only began a slow recovery in the latter half of the year. Consequently,
no formal settlement of the international benchmark price was concluded,
exposing us to spot and provisional market prices for much of the year.
Nonetheless, our flexible and responsive marketing strategy, strong customer
relationships and access to the seaborne market enabled us to continue to
produce and sell at full capacity and remain profitable throughout the year.
In 2009, Ferrexpo demonstrated its fundamental strength and the resilience of
its business model. Following the collapse in demand for iron ore in Europe in
late 2008, a decision was taken to continue to produce at full capacity
throughout 2009 to minimise the effect of our fixed cost base on unit costs and
to offset this demand weakness in our Traditional Markets with increased sales
to China. This strategy proved highly successful given our access to the
seaborne market through our TIS-Ruda joint venture port terminal at Yuzhny Port
on the Black Sea and our established marketing presence and good customer
relationships in China. Our mining operations also responded well to our
strategy for continued high levels of iron ore pellet output, delivering a
strong production performance both in terms of absolute output and, in
particular, the proportion of higher grade 65% Fe pellets produced. Costs were
rigorously controlled by management and our Business Improvement Programme once
again achieved notable success in helping to reduce unit costs and increase
operating efficiency.
Re-stocking by European steel mills in the third quarter of 2009 and a slow
recovery in steel demand in the fourth quarter allowed Ferrexpo to rebalance its
geographic sales mix and to resume supply to its established portfolio of
long-term contract customers. This marketing flexibility and strong operating
performance during the year delivered a solid financial performance enabling the
Group to become the only mining company with assets primarily in the CIS to
refinance its principal debt facility.
2009 Results
Revenues for 2009 declined to US$648.7 million compared with the prior year
(2008: US$1,116.9 million). Earnings before interest, tax, depreciation and
amortisation for the period decreased to US$138.1 million (2008: US$503.9
million), and pre-tax profit was lower at US$80.9 million (2008: US$375.6
million).
The price settlement for iron ore pellets agreed during the summer of 2009
between Vale, the world's largest pellet producer, and its major customers
outside China, reflected a 48.3% decrease in the price of pellets compared with
the 2008/2009 contract settlement. This Vale settlement eventually gained
worldwide acceptance, although it was not formally recognised by the China Iron
and Steel Association as a 'benchmark' price. As a result of this and our strong
customer relationships, 'value-in-use' marketing and our ability to provide
small-lot 'just-in-time' deliveries to our Traditional Market customers, the
Group was able to settle the majority of its contracts at around this level from
the start of the fourth quarter. The lower settlement price and the temporary
exposure to seaborne markets and high freight rates in the earlier part of the
year resulted in Ferrexpo achieving an average Delivered at Frontier/Free on
Board ("DAF/FOB") price for its pellets of US$66.3/t (2008: US$124.6/t).
Importantly, Ferrexpo remained profitable throughout the 2009 downturn and
minimised the reduction in revenues by continuing to increase production of its
65% Fe grade pellets.
Lower production in January and February, resulting from poor weather conditions
impacting our logistics chain, was followed by a ten-month period of record
output. Production of pellets from own ore was in line with the record levels
achieved in 2007 and 2008 and, in line with our strategy, included a higher
ratio of high grade 65% Fe pellets (an increase of 7.2% compared with 2008).
Our mining operations gave another strong performance, increasing production
efficiency and operating at full capacity despite a cash-constrained
environment.
The Group's C1 costs fell by 18.6% to US$34.4 per tonne in 2009 compared with
US$42.3 per tonne in the previous year. The significant cost pressures we faced
for much of 2007 and 2008 were largely absent in 2009. We experienced more
stable prices for state-controlled inputs and lower domestic inflation. A step
change occurred in the Group's C1 costs at the end of 2008, primarily as a
result of the depreciation of the Ukrainian hryvnia and falling oil prices,
following which the December 2008 C1 cost was reduced to US$34.7 per tonne. We
were able to maintain the Group's C1 costs at or below this level for the whole
of 2009 as a result of efficiency improvements which offset cost increases.
Overall our 2009 production and distribution costs ended the year slightly below
their 2008 level. This strict control of our unit costs enabled us to maintain
positive margins throughout 2009 and has provided a good base for 2010.
Cash flow was robust over the year despite the challenging industry conditions.
Net cash flow from operating activities was US$76.9 million. This was after an
increase in working capital of which US$24 million related to an increase in
overdue VAT. This is being closely managed by the Group and it is expected that
VAT refunds will be resumed in 2010, following the expected stabilisation of the
Ukrainian economy.
As previously announced, the Group successfully secured a new pre-export finance
facility of US$230 million. The new facility was drawn down to repay in full the
amount outstanding on the existing loan.
Marketing and logistics
As we reported at the time of our interim results, in the first half of 2009,
54% of our sales were made to China, the majority of these being on a spot
market basis. This high level of spot market activity was necessary to
counteract the weakness in demand in our Traditional Markets, but we remain
committed to our strategy of selling the majority of our production on long-term
contracts to our well established customer base. In line with our strategy, the
Group reverted to selling typical contract volumes to its portfolio of long-term
contract customers when economic conditions permitted, which occurred in the
third quarter. We will retain the flexibility to compensate at short notice any
further reduced demand in our Traditional and Natural Markets with sales in
seaborne markets, where demand has remained more resilient and Ferrexpo has a
well established presence and reputation.
The Group's strong customer relationships have stood it in good stead in the
past twelve months and we remain committed to maintaining our relationships with
our long-standing customers and supporting them during the forthcoming period of
tentative economic recovery. At the same time, we have continued to develop new
global market opportunities and in particular we were able to begin supplying
the north-west Indian region on a spot basis in 2009. We believe that this could
become an important new Growth Market for Ferrexpo in the future. The Group has
good access to seaborne markets through the TIS-Ruda Terminal-Yuzhny, our joint
venture Panamax port terminal on the Black Sea. Going forward we are exploring
the possibility of expanding the TIS-Ruda Terminal to allow for the loading of
larger vessels up to cape size 150,000 tonnes.
Ferrexpo enjoys several unique logistical advantages, the most notable of which
is our proximity to our key customers. Our operations in central Ukraine are
several times closer to our principal European markets than most of our global
competitors and, as a result, we are in many cases the lowest cost supplier to
our customers. The advantage of proximity is enhanced by our location next to a
navigable river and established rail links to our customers. By capitalising on
this proximity to Traditional and Natural Market customers and our ability to
provide them with continuous small-lot iron ore deliveries, we believe we have
increased our share of those markets in 2009 and are well placed to further
consolidate those gains in 2010. The Group remains Ukraine's largest exporter of
iron ore pellets.
Management and people
The Board is deeply grateful for the efforts of our management and staff over
the past year. 2009 has proved to be a particularly difficult period in the
industry and globally and our staff have risen to the challenge admirably.
Ferrexpo has come together as a single entity of great strength and resilience
and our excellent results in the face of adversity would not have been possible
if it were not for the tireless efforts of our people.
As we have previously announced, Mike Salamon and Marek Jelinek of New World
Resources ("NWR") joined the Board as non-executive directors in March and have
been making an invaluable contribution.
Ferrexpo has once again been able to avoid any forced redundancies in 2009
despite the challenging economic climate. We shall continue actively to manage
the size of our workforce over time to maximise productivity, but as one of the
major employers in Ukraine, maintaining the employment of our people is a
priority.
Corporate governance and social responsibility
The Group continues to meet the high standards of corporate governance set by
the Board and we remain committed to continuing compliance with the UK Combined
Code.
The Board's Corporate Safety and Social Responsibility ('CSR') Committee
continues to monitor the management of the Group's health, safety, environmental
and community programmes in line with best practice for mining companies.
Safety-conscious behaviour has become more entrenched in 2009 and we are pleased
to be able to report that there were no production-related fatalities at our
operations this year. While this represents good progress, CSR remains a
priority and we are pursuing further initiatives to ensure a culture of
continuing improvement in this regard.
Growth projects and strategy
While the Board placed all significant capital expenditure on hold in October
2008 in response to the global financial crisis, we are pleased to have
progressed with critical path items which have enabled the Group to maintain a
significant level of control over the schedule of core growth projects. No
material capital commitments were made in 2009 as the Group focused its efforts
on cash conservation and the maximisation of production from its existing
facilities. The Group nonetheless considers its major growth projects to be a
priority and is working to continue their development in the short term in order
to leverage off strengthening iron ore prices going forward. These core
development projects are focused primarily on the increase of output, enhancing
product quality from our existing operations and accessing more of the Group's
substantial ore reserves at the Yeristovskoye deposit with the aim of doubling
production.
In 2009, we took the opportunity to review the scope and capital expenditure
requirements of all these projects and we believe that we are in a position to
reduce substantially the capital required for their development. We also spent
US$4.6 million on overburden removal at the new Yeristovskoye mine, using both
local contractors and equipment already purchased by the Group. Pre-stripping is
a critical path item and this capital was expended in order to preserve the
value of the project and maintain its schedule to the extent possible. It is
notable that this stripping was achieved at a cost less than budgeted for in the
Yersitovskoye feasibility study.
Uniquely among companies in the region, the Group was able to refinance its
principal debt facility at the end of 2009. The new US$230 million pre-export
finance facility was provided by a syndicate of leading global financial
institutions and provides Ferrexpo with a facility which will enable the Group
to invest a higher proportion of its cash flow from operations in its growth
projects. We plan further stripping works at Yeristovskoye and at the expansion
of the existing open pit in 2010 and will accelerate the development of all
projects as soon as market conditions permit.
The outlook for 2010 is considerably more positive than it was for 2009, marked
by increased visibility and strengthening iron ore prices. In 2010 we aim to
increase our cost competitiveness through continuing efficiency improvements,
while leveraging our strategic location and strong customer relationships to
maintain sales and production tonnages and to increase market share in our
Traditional and Natural Markets. Throughout 2010 the Board and management will
continually assess opportunities to accelerate investment into key development
projects, in line with the economic climate. Our operating, financial and risk
management capabilities have been proven during the past twelve months and we
are confident that this strategy will optimise value for the Group while
effectively protecting it from any further market downturn.
Dividend
The Board is of the view that Ferrexpo should pay modest consistent dividends
based on continuing profitability through the economic cycle. The Group has
operations which are cash generative and can both support returns to
shareholders and form a platform to finance the development of its significant
world class undeveloped reserves.
The Board believes that the business has sufficient operational flexibility to
respond to the demands it will face in 2010 and as a result, it is appropriate
to continue with a dividend in line with prior years. The Directors therefore
recommend a final dividend in respect of profits generated for the Group in 2009
of 3.3 US cents per Ordinary Share for payment on 4th June 2010 to shareholders
on the register at the close of business on 30th April 2010. The dividend will
be paid in UK pounds sterling with an election to receive US dollars.
Outlook
In 2009, Ferrexpo produced at full capacity and remained cash flow positive and
profitable even in the face of dramatically weaker demand for iron ore and steel
worldwide. As the iron ore market began to show signs of stabilising in the
second half, visibility increased and Ferrexpo was able to return to long-term
contract pricing. We believe that market conditions will continue to improve
during 2010 with a slow but definite recovery in steel demand now evident in
Europe. Encouragingly, Chinese spot prices for iron ore have stabilised above
the current contract level and the cycle of de-stocking and re-stocking by steel
mills is largely behind us.
The Group has resumed contract sales to its higher-margin Traditional Market
customers, but retains the ability to access the seaborne market to compensate
for any recurring weakness in these markets. The Group is exposed to the
positive outlook for iron ore pricing. In view of higher pricing, we expect
Ferrexpo to continue to trade profitably and to increase margins in the year
ahead.
In 2010 the Board will be focused on increasing margins and resuming development
of our growth projects at a modest level while continuing to add capability to
project execution and consolidating our strengths in best practice mining and
marketing. We believe that growth from developing and industrialising nations
will continue to underpin the strong fundamentals of global steel requirements
as demand in developed nations continues slowly to recover. Ferrexpo is well
placed to take advantage of improvements in the iron ore markets in both the
developed and developing world.
Current trading
Demand is currently very strong in all our markets, In January and February 2010
over 90% of our sales were made under long-term contracts and 63% of sales were
to customers in our Traditional Markets while our average DAF/FOB price to date
has increased. Additionally, we have begun strategic trials with key customers.
The Group produced 1.5 million tonnes of pellets in January and February which
was at similar levels to the prior year. The average C1 cash cost for the first
two months of the year was US$38.7 per tonne inline with our expectations.
Finally, the Group's cash generation has continued to remain robust and it is
expected that the Group will benefit from higher prices and increased volumes in
the remainder of the 2010 financial year.
BUSINESS REVIEW
Summary
Ferrexpo demonstrated a solid and reliable performance in 2009 in spite of the
unprecedented weakness affecting all markets and industries particularly during
the first months of the year. The Group outperformed operationally and was able
to produce and sell at full capacity throughout the global economic crisis from
March 2009. This enabled the Group to manage costs effectively and to remain
profitable throughout the year. Our flexible marketing strategy, strong
operations and fiscal discipline all contributed to a financial performance
which, although down on the prior year, was nonetheless exceptional under the
circumstances.
With the onset of the economic downturn in late 2008, we re-examined the
operational goals of the Group for 2009 with a view to adapting the Company to
an environment of lower iron ore demand and prices and the attendant constraints
on the Company's cash position. The Group exceeded these new ambitious goals,
maintaining production volume while increasing both cost efficiency and product
quality. Despite lower production in January and February as a result of adverse
weather conditions, Ferrexpo produced broadly the same volume of iron ore
pellets in 2009 as in 2008, but at significantly lower cost.
The Group's favourable location, together with its good seaborne access through
the TIS-Ruda Terminal-Yuzhny, our joint venture Panamax port terminal on the
Black Sea, gave us the flexibility in our 2009 marketing activities to out-sell
our competitors in the markets in which we operate. We cemented our status as
the iron ore supplier of choice for our key Traditional and Growth Markets. We
achieved this by managing to increase spot sales to our long-term contract
customers in our Growth Markets during times of weak demand in our Traditional
Markets and ultimately increased our market share in our Traditional Markets
when demand there began to recover. As a result, our brand was successfully
protected during a volatile and difficult market period.
General market uncertainty resulted, for the first time, in the absence of a
formal global international iron ore benchmark price settlement in 2009,
although the pellet price settled between Vale and its larger non-Chinese
customers gained general acceptance by the start of the fourth quarter. At this
point we were able to settle prices with our contract customers at approximately
this implied benchmark level with prices applicable until the end of the first
quarter of 2010. This settlement brought to a close a nine-month period of
higher spot market sales and the associated exposure to seaborne freight rates
and enabled Ferrexpo to resume supplying close to normal volumes to its
portfolio of long-term contract customers.
In 2009, 93% (by volume) of the Group's iron ore products were exported. As a
result of demand weakness in Europe in the first half of the year, approximately
70% of our 2009 sales by volume were made under long-term supply agreements with
iron and steel producers, compared with 88% in 2008. The Group resumed normal
long-term contract-based supply arrangements during the third quarter of 2009
and it remains our strategy to increase the number and duration of such
contracts and continually improve our customer portfolio and build strong
customer relationships. Development of the customer profile continued through
2009, during which the Group began supplying the north-west coast of India, an
important new potential Growth Market. The Group's principal export markets are
Central and Eastern Europe and China. At the end of 2009, approximately 91% of
iron ore pellets were committed under long-term framework contracts with major
customers.
The Group remains focused on the development of its substantial iron ore
resource. Significant capital commitments were placed on hold by the Board in
late 2008 and during 2009 we continued to advance our growth projects at a low
level, spending small amounts of capital to preserve their value while
maintaining prudent cash management. Good progress was made on pre-stripping
works at the new Yeristovskoye mine during the year and the Group has taken the
opportunity afforded by the moratorium on significant capital expenditure to
re-examine the scope and capital costs of all of its major projects. We are of
the view that the capital estimates for the Yeristovskoye project and the plan
to upgrade our product quality at Ferrexpo Poltava Mining ('FPM'), can be
reduced significantly. Meanwhile work has continued on product quality
improvement and market development.
The outlook for 2010 is clearer and more positive than it was for 2009 and the
Group was able to renew the majority of its banking facilities at the end of
2009 during a difficult period for the debt capital markets. The Company has
ambitious development plans, but 2010 will also be a cash-constrained year. As a
result, our primary focus next year will be on maintaining the strong
performance of the Group's existing mining operations, while continuing to
invest in our growth projects at a modest level. The key performance drivers in
2010 will be safety, operating efficiency, product quality and output volume.
FPM, the Group's operating subsidiary, once again demonstrated continuous
improvement in these areas in 2009. The Group will continue with its structured
Business Improvement Program ("BIP") designed to continue these positive trends
by targeting operating costs and optimising capital expenditure and these,
together with the likelihood of a lower local currency, should help to maintain
2010 cash costs of production at approximately 2009 levels.
Strategy
The Group holds the exclusive licences to a world class iron ore resource which
is uniquely positioned close to existing infrastructure and core steel-producing
markets. FPM operations have been producing continuously for several decades and
the Group has established a resilient and flexible marketing model over several
years. Ferrexpo's strategy is to remain flexible, utilising our strategic
location, low cost base and strong customer relationships to maximise the return
on our existing operations whilst accelerating the exploitation of our extensive
undeveloped iron ore reserves.
Our plans in the medium term are to strengthen our existing business through
product quality upgrades and incremental production growth, while continuing to
practise financial prudence and strict cost control. Our priorities are the
development of our resource base while maintaining flexibility throughout the
economic cycle through continuous improvement of our operational, financial and
risk management capabilities.
Operations
The mining operation at Ferrexpo Poltava Mining ("FPM") is well developed and
has produced iron ore on an uninterrupted basis for over 30 years. The mining
and processing operation is situated on a large iron ore deposit located in
Ukraine which is substantially under-exploited.
Our principal business is the mining, processing and sale of iron ore in the
form of pellets, used in the production of steel. The Group owns and operates an
integrated mining and processing facility, comprising an open-cut iron ore mine,
concentrating facility and pelletising plant in the city of Komsomolsk. Our
operations are fully integrated from the mining of ore through to the production
of pellets. All production is converted into pellets in our own facilities.
Third party iron ore concentrate is also converted into pellets to utilise
surplus plant capacity where this provides adequate margins.
The FPM operations are located on the Dnieper River in Ukraine in close
proximity by rail and waterways to our major customers in Central and Eastern
Europe. FPM has access to both the Black Sea for seaborne shipments throughout
the world and to extensive rail networks throughout Europe.
To access further the large and growing market outside Ukraine, Ferrexpo is
actively working to reduce ocean vessel shipping costs and volatility to Growth
Markets via longer-term ocean vessel chartering, and loading of larger vessels
up to cape size 150,000 tonnes. In addition, the marketing of iron ore pellets
for export is managed by the Group's specialist sales and marketing arm, based
in Switzerland with branches in Kiev, Shanghai and (as of December 2009) Hong
Kong.
Operating environment - Ukraine
The Ukrainian economy has been severely affected by the global economic
recession, partly as a result of its reliance on industries such as the steel
sector. The Ukrainian steel industry is relatively high-cost and the majority of
its production is commodity-grade construction steel for export. Ukraine has
thus been more severely affected by the economic downturn than many other
steel-producing nations. The economy of Ukraine shrank by 15% in 2009. Ukraine
was granted a US$16.4 billion International Monetary Fund loan in late 2008 in
response to the significant effects of the global financial crisis on its
economy, of which US$10.4 billion has already been advanced. This loan
prescribes several conditions relating largely to economic policy-setting, some
of which have not been met. As a result there has been a delay in advancing the
final tranche of the loan. We expect this to be resolved in the first quarter of
2010. Following this, there has been some delay in the Company recovering its
VAT payments on a timely basis and this has affected the cash flow of the
business in December 2009 and in the early part of 2010. This is covered further
in the Financial Review.
Ukraine is a socially stable parliamentary presidential republic which was
formerly part of the Soviet Union. The recent elections passed off peacefully
and democratically and it is hoped this will restore some stability to the
country's political structure which in any event tends not to interfere in
Ukrainian business.
The Group benefits from the location of its operations in Ukraine because of a
well-educated and cost-competitive workforce, a depreciating local currency and
the efforts of government to take measures to ensure the survival of its large
mining and metallurgical industry. Being primarily an exporter, Ferrexpo has
minimal exposure to the Ukrainian steel industry. Ukraine is conveniently
situated close to our principal customers in Europe.
The average exchange rate of the Ukrainian local currency (the hryvnia) was
UAH7.7912 to the US Dollar in 2009. Any weakening of the local currency is
likely to have a positive effect on our US dollar cost base.
Ukrainian official domestic Producer Price Index ('PPI') inflation fell to 14.3%
and the Consumer Price Index ('CPI') fell to 12.3% in 2009. Both indices are
likely to increase in 2010.
Market environment
The market environment for iron ore in 2009 was affected by substantially
different demand dynamics between developed and developing regions of the world.
The demand for iron ore pellets is directly linked to steel demand which fell
sharply at the end of 2008 following the onset of the economic crisis. Steel
demand is closely correlated to the global economic cycle as a result of its
dependence on the automotive and construction industries, both of which are
economic bellwethers. In early 2009, however, demand for iron ore and steel
rapidly recovered in certain developing economies, most notably China, as a
period of restocking commenced. The restocking effect in regions such as Europe
and North America occurred later and was more muted commencing only late in the
second quarter.
This decoupling has continued with consumption of iron ore in Asia back at
record levels, while only a fragile recovery is evident in the steel industries
of the developed world. As a result, the market environment in 2009 has varied
for different iron ore producers, largely as a function of market access.
Ferrexpo was able to sell to customers in both developed and developing
countries, with the result that demand was sufficient for us to produce at 100%
of capacity and place all our production volumes into the market. Many of our
competitors were forced to reduce production owing to a lack of market access.
The low levels of demand in much of the world outside China nonetheless resulted
in low prices for iron ore relative to 2008 as well as a lack of price and
demand visibility for much of the year. This visibility improved towards the end
of 2009 and pricing is expected to improve in 2010 as the global economic
recovery continues.
OPERATING REVIEW
Highlights
FPM
· Iron ore pellet production from the Group's own ore in line with last
year at 8.6mt
· 7.2% increase in production of high quality 65% Fe pellets
· Business Improvement Programme - further reductions in the use of raw
materials and energy per unit of output
Yeristovskoye
· Five draglines delivered, assembled and in operation
· 4.0 million cubic metres stripped from the new Yeristovskoye mine -
second bench visible
Marketing
· Sales successfully re-balanced from Europe to China and back - full sales
volumes maintained throughout the year
Production - Operating Statistics
+----+------------------+--------+-------------------+-----------+-------+--------+
| | | | | Change |
+-----------------------+--------+-------------------+-----------+----------------+
| ('000t unless | | 2009 | 2008 | +/- | % |
| otherwise stated) | | | | | |
+-----------------------+--------+-------------------+-----------+-------+--------+
| Iron ore mined | | 28,547 | 27,763 | 784 | 2.8 |
+-----------------------+--------+-------------------+-----------+-------+--------+
| | Fe content | % | 30.3 | 30.2 | | |
+----+------------------+--------+-------------------+-----------+-------+--------+
| Iron ore processed | | 27,720 | 27,582 | 138 | 0.5 |
+-----------------------+--------+-------------------+-----------+-------+--------+
| Concentrate produced | | 10,565 | 10,459 | 106 | 1.0 |
| ('WMS') | | | | | |
+-----------------------+--------+-------------------+-----------+-------+--------+
| | Fe content | % | 63.3 | 63.4 | | |
+----+------------------+--------+-------------------+-----------+-------+--------+
| Floated concentrate | | 6,671 | 6,167 | 504 | 8.2 |
+-----------------------+--------+-------------------+-----------+-------+--------+
| | Higher grade | | 4,675 | 4,375 | 300 | 6.9 |
+----+------------------+--------+-------------------+-----------+-------+--------+
| | Fe content | % | 67.05 | 67.1 | | |
+----+------------------+--------+-------------------+-----------+-------+--------+
| Purchased | | 180 | 386 |(206) |(53.4) |
| concentrate | | | | | |
+-----------------------+--------+-------------------+-----------+-------+--------+
| | Fe content | % | 65.4 | 65.2 | | |
+----+------------------+--------+-------------------+-----------+-------+--------+
| Purchased iron ore | | 0 | 276 |(276) | (100) |
+-----------------------+--------+-------------------+-----------+-------+--------+
| Pellets produced | | 8,609 | 8,608 | 1 | 0.0 |
| from own ore | | | | | |
+-----------------------+--------+-------------------+-----------+-------+--------+
| | Higher grade | | 4,304 | 4,014 | 290 | 7.2 |
+----+------------------+--------+-------------------+-----------+-------+--------+
| | Fe content | % | 64.9 | 65.0 | | |
+----+------------------+--------+-------------------+-----------+-------+--------+
| | Lower grade | | 4,305 | 4,594 |(289) | (6.3) |
+----+------------------+--------+-------------------+-----------+-------+--------+
| | Fe content | % | 62.2 | 62.2 | | |
+----+------------------+--------+-------------------+-----------+-------+--------+
| Pellets produced | | 157 | 427 |(270) |(63.2) |
| from purchased | | | | | |
| concentrate and ore | | | | | |
+-----------------------+--------+-------------------+-----------+-------+--------+
| | Lower grade | | 157 | 427 |(270) |(63.2) |
+----+------------------+--------+-------------------+-----------+-------+--------+
| | Fe content | % | 62.2 | 62.2 | | |
+----+------------------+--------+-------------------+-----------+-------+--------+
| Total pellet | | 8,767 | 9,035 |(268) | (3.0) |
| production | | | | | |
+-----------------------+--------+-------------------+-----------+-------+--------+
| Pellet sales volume | | 9,015 | 8,711 | 304 | 3.5 |
+-----------------------+--------+-------------------+-----------+-------+--------+
| Gravel output | | 2,846 | 2,751 | 95 | 3.5 |
+-----------------------+--------+-------------------+-----------+-------+--------+
| Stripping volume |000'm3 | 23,559 | 20,573 |2,986 | 14.5 |
+----+------------------+--------+-------------------+-----------+-------+--------+
The Group's operations focused primarily on maximising production volumes in
2009, following a strategic decision early in the year to produce at maximum
capacity to minimise unit fixed costs in the low iron ore price environment. At
the same time FPM management continued to drive the improvement of product
quality and operating efficiency which continued throughout the year. As a
result of this decision and focused management effort, FPM produced at full
capacity from March with overall output for the year declining only very
slightly as a result of lower production volumes in January and February 2009
caused by unseasonably adverse weather conditions that affected the logistics
chain.
Most months from March onward yielded record production levels, and pellet
production from own ore was higher than in 2008 by 1,000 tonnes. Total pellet
production fell by 3.0% as a result of a lack of available third party
concentrate at acceptable prices. This incremental pellet production from
purchased raw materials fills our surplus pelletising capacity, but has
historically yielded low margins. 157kt of pellets were produced from purchased
ore and concentrate in 2009 (2008: 427kt).
The Gorishne-Plavninskoye Lavrikovskoye ("GPL") mine produced 28,547mt of iron
ore in 2009, 2.8% more than in the previous year. Our focus on quality
improvement prompted the use of selective mining techniques which increased the
proportion of rich (K22) ore mined by 10.2%. This increased the overall quality
of the ore available to the GPL concentrating plant, thereby increasing its
operational efficiency and ultimately improving pellet quality as measured by
the proportion of higher grade 65% Fe pellets produced.
For the sixth consecutive year FPM was able to increase substantially its
production of higher quality 65% Fe pellets. The production of 65% Fe pellets
from our own ore increased by 7.2% to 4,304kt, and now constitutes 49% of FPM's
total production (44% in 2008). This is consistent with our commitment to
quality enhancement and our 'value in use' marketing strategy and we intend to
continue to increase the proportion of higher quality pellets produced in future
years.
Business Improvement Programme ('BIP')
2009 was another successful year for the ongoing BIP projects. The managers and
employees of FPM have firmly taken leadership of the BIP and continue to build a
culture of continuous improvement at our operations. In addition, in 2009 FPM
engaged Partners in Performance International ("PiP") to assist in the
identification of areas for broader improvement in FPM's operational
performance.
We conducted a wide range of BIP workshops in 2009 designed to entrench the BIP
culture. BIP initiatives contributed to 2-3% of the reductions to operating
costs during the year, resulting in total savings of US$8.7 million. BIP
continues to be a priority for management in respect of both short and long-term
objectives and KPIs, driving FPM continuously towards global best practice
across its operations. For further information see the Financial Review.
Operating costs
Operating costs declined modestly but steadily throughout the year, benefiting
from further depreciation in the local currency and lower local inflation than
in past years. Producing at full capacity allowed the Group to recover its fixed
costs efficiently.
Efficiency gains, driven largely by the various BIP projects, enabled us to
reduce the rates of consumption of energy and raw materials in 2009. The average
number of employees at FPM fell by 5.2% in 2009 through normal turnover driven
by efficiency programmes. Management was able to avoid any forced redundancies
during the year. As of 31 December 2009, 8,204 people were employed by FPM (31
December 2008: 8,243). This number includes 65 temporary workers employed for
the development of Yeristovskoye until the transfer of mining licences from FPM
to Ferrexpo Yeristovskoye Mining ("FYM") is completed.
Growth Projects
Ferrexpo is committed to increasing production from its existing mine, improving
its product quality and commercialising the substantial undeveloped resources
located adjacent to its existing operations. Consequently, the Group's major
growth projects remain a priority and modest progress was made in 2009 even
though large capital commitments were on hold. The focus has been on
re-examining the scope and capital expenditure estimates of all the projects,
and on the pre-stripping works at the new Yeristovskoye mine where progress has
been made this year.
The capital expenditure for these projects was estimated at the peak of the
commodity cycle in 2008 and consequently we expect that capital costs will be
reduced when final commitments to these projects are made. The process of
restating these costs is progressing and planned to be completed in the first
half of 2010.
GPL Projects
Open pit mine expansion
Work on this project was suspended at the end of 2008, and has remained on hold
in 2009 as the Group has focused on maintaining current production from the mine
at minimal C1 costs and progressing stripping at Yeristovskoye. This project
remains a priority for the Group as it enables us to take advantage of currently
under-utilised processing capacity and will increase production of 65% Fe
pellets by approximately 15%. We anticipate a decision on the schedule and the
phasing of this project in conjunction with the Yeristovskoye expansion to be
made in the second quarter of 2010.
GPL Concentrator plant upgrade
A Definitive Feasibility Study ("DFS") for the GPL concentrator plant upgrade
was completed in September 2008. The project was not presented to the Board for
approval owing to the onset of the economic crisis. Significant additional work
has been done this year on optimising the scope and cost of this project and the
Group is currently considering an initial Stage 1 investment that would enable
the production of all 65% Fe pellets. The market will be informed of the revised
scope and cost of this project once the assessment is completed.
This Stage 1 upgrade remains a priority as it will enable all of the Group's
mined ore to be processed into 65% Fe pellets in line with market preference.
The project design will provide for a Stage 2 project for the production of
Direct Reduction ('DR') grade 68% Fe pellets. 65% Fe pellets enjoy more robust
demand, but DR pellets would constitute a new premium product for Ferrexpo which
we could sell into world markets and in particular the Middle East, a nearby
attractive Growth Market.
Yeristovskoye
The Yeristovskoye project remains the Group's primary and most advanced major
growth project. The scope of the project includes the construction of the new
Yeristovskoye mine, a dedicated concentrator plant and potentially also a
dedicated pelletising facility. Following completion of the Yeristovskoye DFS in
September 2008, formal commitment to the project was not sought from the Board
because of the economic climate. However, Board clearance was given to continue
some operational expenditure and small future commitments at a limited level to
enable the value of the project to be maintained and to minimise delays to the
original development schedule. In addition to investing in the DFS, the Group
had already purchased five dragline excavators and the initial mining fleet for
the purposes of pre-stripping at the site of the new mine.
In 2009, the Group took delivery of and commissioned five draglines and four CAT
789 haul trucks, and commenced work on the pre-stripping of the Yeristovskoye
mine. Construction of the Yeristovskoye mine requires a three-year pre-strip
before first ore is reached. It was decided that scaled down stripping works
should proceed at Yeristovskoye in 2009, as stripping is time-consuming and a
major delay would impact the schedule of the entire project significantly. As a
result, the Group spent US$23 million on stripping works, mining fleet and site
facilities construction at Yeristovskoye in 2009 and removed 4.0 million cubic
metres of overburden from the site. The Group also engaged the services of local
small trucking contractors to supplement the CAT fleet for the first phase of
overburden removal and this enabled us to remove overburden at minimal cost.
Significant progress was achieved with the Ukrainian Central Land Authority
(DerzhComZem) approval process for the west and east Yeristovo area land
acquisition programme which is required for ongoing development of the mine.
Stripping will continue at the Yeristovskoye mine in 2010 and first ore can be
achieved in early 2013, subject to full project approval during 2010. Subject to
further reviews in 2010, it is envisaged that a portion of Yeristovskoye ore
will be processed using excess processing capacity at GPL for the first two
years. This will enable the Group to delay commitment to the capital expenditure
for the Yeristovskoye concentrator plant by up to 24 months.
In 2008, the Group established a separate company, Ferrexpo Yeristovskoye Mining
to provide for a separate legal and management structure for the development of
the Yeristovskoye project. FYM is 51% owned by FPM and 49% by Ferrexpo AG. In
December 2009, the Yeristovskoye mining licence formally held by FPM was
re-issued to FYM.
Belanovskoye and Galeschinskoye
Developments are planned at the Belanovskoye and Galeshinskoye deposits which
are less advanced. The Group continues to perform the work at these deposits
required for licence maintenance as well as undertaking further drilling for the
detailed testing of geotechnical conditions and ore quality. All of the Group's
developments will take place on the same ore body that we are currently
exploiting and are situated adjacent to our existing logistics infrastructure.
As a result, these investments represent low risk additions to new iron ore
capacity compared with many other iron ore projects globally.
Strategic Investor Programme
During 2008, we identified several potential strategic investors, but this
programme remains on hold pending completion of the review of our capital
expenditure requirements and improvements to market conditions and asset prices.
Marketing
Marketing performance in 2009
The visible weakness in demand for iron ore in Europe in the final quarter of
2008 continued into the first half of 2009. As a result, while the Group was
able to sell volumes comparable with other years in 2009, our sales mix by
geography reflects a greater proportion of sales to seaborne markets such as
China than has historically been the case. In addition, the Ukrainian steel
industry was more severely affected than those in Western Europe, with the
result that 95% of our output by volume was exported in 2009 (2008: 88%). The
share of pellet sales to Ukrainian customers therefore decreased from 12.0% in
2008 to 8% in 2009. We increased seaborne export sales in response to this
weakness in Europe and Ukraine by actively and carefully selling into the spot
market in Asia to known customers in order to protect the Ferrexpo brand, whilst
increasing shipments to long-term export customers. Domestic Ukrainian sales are
made on an ex-works basis while export sales are usually made on a Delivered at
Frontier ('DAF') or Free on Board ('FOB') basis. The Group reports average
achieved prices on a DAF/FOB basis. It is noteworthy that spot sales are
generally made on a Cost and Freight ("CFR") basis. The higher proportion of
spot sales in the first eight months of 2009 therefore exposed the Group to
freight volatility. Freight rates from the Black Sea to Asia were high relative
to other routes in the second and third quarters of 2009 and this put pressure
on the Group's average achieved DAF/FOB price during that period.
Of the total iron ore exported by the Group in 2009 by value, 39% was sold into
China (2008: 18%). Most of the remainder was sold into the Group's established
markets in Central and Western Europe and Turkey. The Group actively continues
to seek to open new markets and in 2009 we began supplying new customers on the
north-west coast of India on a spot basis. We believe that India will prove to
be an important new Growth Market for the Group. An analysis of sales by market
is contained in note 6 to the accounts.
The following table shows our principal export markets for iron ore pellets for
the years ended 31 December 2009 and 2008 (by volume):
+------------------------+----------+---------+-------------+--------------+
| ('000t) | 2009 | 2008 | Change | |
| | | | +/- | % |
+------------------------+----------+---------+-------------+--------------+
| Traditional Markets | 4,083.0 | 5780.8 | (1,697.8) | (29.4) |
+------------------------+----------+---------+-------------+--------------+
| Natural Markets | 713.3 | | 390.1 | 120.7 |
| | | 323.2 | | |
| | | | | |
+------------------------+----------+---------+-------------+--------------+
| Growth Markets | 3,544.5 | 1,558.4 | 1,986.1 | 127.4 |
| | | | | |
+------------------------+----------+---------+-------------+--------------+
| Total exports | 8,340.8 | 7,662.4 | 678.4 | 8.9 |
| | | | | |
+------------------------+----------+---------+-------------+--------------+
Approximately 70.0% of our 2009 sales by volume were made pursuant to long-term
supply contracts, a lower level of contract sales to the 87.7% seen in 2008.
This was again the result of increased spot selling in the first seven months of
the year in response to continuing demand weakness from European and Ukrainian
contract customers. During the third quarter of 2009, restocking began in Europe
and we began actively shifting back to supplying our portfolio of long-term
contract customers there during this period. Throughout the year our solid
customer relationships have demonstrated their value, first in assisting us to
place additional spot volumes through our long-term contract customers in China
and then later in returning to full contract volumes with our European customers
ahead of competing suppliers. Despite demand weakness in Ukraine and our
Traditional Markets (see market definitions below), our seaborne access,
marketing flexibility and customer relationships resulted in higher overall full
year 2009 sales by volume. We continue to build on our strong track record of
close relationships with all our customers.
The global iron ore market environment in 2009 was affected by low visibility of
both demand and price (see 'Pricing' below). This resulted in a higher
proportion of sales on the spot market, and these sales were made at lower
prices than those under contract. We expect that the proportion of sales that
will be made under long term contracts in 2010 will be higher than in 2009, as
markets have normalised and the Group is already selling at close to normal
levels to its portfolio of long-term contract customers. We remain committed to
the strategy of maintaining a high level of the Group's sales under long-term
contract and to this end we have despatched trial cargoes to prospective new
contract customers in the second half of 2009.
We believe that we have increased our market share in 2009 with our contract
customers in our Traditional Markets as a result of our proximity to these
customers and our long-standing relationships with them. This has been critical
in enabling us to maintain output during the year. Our ability to provide
small-parcel 'just-in-time' deliveries to these customers is an attractive
service to those companies that are engaged in careful inventory management. We
are well positioned to continue this trend of substituting our supply for that
of our competitors in Europe in 2010, and Ferrexpo will continue to sell
aggressively into these markets.
We shall also continue to focus on achieving higher prices through enhanced
pellet quality and a better understanding of our customers' requirements of our
products. This is necessary in order to capture the maximum price relative to
our competitors' delivered cost to the customer on a 'value to the customer'
basis.
Traditional Markets
Our 'Traditional Markets' are those markets that we have supplied historically
and in which we enjoy a competitive advantage based on our location. These
include Austria, Ukraine, Czech Republic, Poland, Slovakia, Romania, Bulgaria
and Russia. The former CIS countries within the Traditional Markets have been
particularly affected by the adverse conditions in global commodities markets,
with Ukraine the worst affected given its steel export focus and relatively high
steel production costs. We believe that continued growth in per capita steel
consumption in many of these markets is likely to resume slowly now that some
stability is returning to the global economy, as most of them are effectively
re-industrialising. Total sales to Traditional Markets in 2009 were 4.1mt, a
decrease of 29% compared with 2008.
Natural Markets
'Natural Markets' are relatively new markets for us in regions where we believe
we have a competitive advantage which is yet to be exploited. This segment
includes Western Europe, Turkey and the Middle East. Turkey has plans to
increase its steel-making capacity significantly and FPM's proximity across the
Black Sea affords an important mutual advantage to both the Group and iron ore
buyers in Turkey. Our long-term supply contract in Turkey is only a year old,
but it was one of the best-performing contracts in 2009. This segment represents
a major target for future sales growth. We are building commercial and technical
relationships in the Middle East as a base for our future planned sales as we
continue to improve product quality.
Growth Markets
'Growth Markets' are those which offer to add new and significant tonnage
expansion potential to our customer portfolio. Currently China is the major
target, although as stated above we have now made progress in opening India as a
new Growth Market. The Group has six long-term contracts in place with Chinese
steel mills. These customers provide a solid base for future sales growth and
were instrumental in the Group's success in placing excess volumes from Europe
in the Chinese spot market in 2009. We have a shorter ocean shipping distance to
these markets than competitor iron ores from Brazil, although ocean freight
rates from the Black Sea have been unusually high in 2009 relative to other
routes as a result of the severe and prolonged economic downturn in Europe. This
resulted in a significant reduction in dry bulk ocean vessels open for trade in
the Atlantic but we expect this situation to normalise. The Ferrexpo Growth
Market region also provides the primary source of demand for spot market
business which has been highly active throughout 2009.
Logistics
Our logistics strategy is to manage as much of the delivery chain to our
customers as possible in order to ensure punctual supply of the contracted
quality of product at a competitive cost. The total scope of our delivery
logistics chain includes rail, trans-shipment (loading and unloading), barge and
ocean vessels.
In 2009, our focus was on maintaining production and ensuring the integrity of
the logistics chain in order to maximise sales volumes in a capital-constrained
environment. Our 49.9%-owned dry bulk minerals Panamax terminal on the Black Sea
(the 'TIS-Ruda Terminal-Yuzhny') has proven an asset critical to our efforts to
increase seaborne sales in the face of Traditional Market demand weakness. Our
access to the TIS-Ruda Terminal-Yuzhny has been a vital differentiator between
Ferrexpo and its competitors in the region which have had to rely on congested
State ports for seaborne access.
During the downturn the Group has followed a strategy of conservative cash
management. In 2009, little expenditure was made on the development of our
logistics capability. The expansion of our delivery chain logistics capability
in order to meet current and future growing customer demands nevertheless
remains a critical contributor to our long-term market shares and margins. We
expect to resume some capital expenditure in this area in 2010. Specifically,
Ferrexpo is actively working to reduce ocean vessel shipping costs and
volatility to Growth Markets via longer-term ocean vessel chartering, and
loading of larger vessels up to cape size 150,000 tonnes.
Pricing
We achieved an average DAF/FOB price for the pellets we sold in 2009 of US$66.3
per tonne, a decrease of 47% over the average achieved price for 2008 (US$124.6
per tonne). The calculation of the average DAF/FOB price includes sales made on
a CFR basis, adjusted for freight. As stated above, high freight rates caused
pressure on the average DAF/FOB price in the third and fourth quarters.
Variations in our achieved price stem from price variations of pellets sold into
different geographical segments, as well as the mix between our 62% Fe pellets
and our 65% Fe pellets (which attract a premium). In a typical year, most of our
export sales are based on annually negotiated prices contained in supplements to
our long-term supply contracts. A proportion of this sales tonnage is linked to
the international seaborne traded iron ore benchmark price ('Benchmark Price')
movement agreed between the major iron ore producers and specific Western
European or Asian steel producers for a given year. However, owing to low demand
visibility in 2009, a Benchmark Price settlement was not globally agreed as
usual in April. As a result, in order to maintain volumes and margins, Ferrexpo
was exposed to an unusually high proportion of spot or provisional prices, as
were almost all iron ore producers during the year. This affected the 2009
average achieved price.
No formal global Benchmark Price was established at all in 2009 as a result of
CISA's (the China Iron and Steel Association) failure to recognise price
settlements made between the major iron ore producers and their non-Chinese
customers during the summer. Price settlements were nonetheless reached outside
China and by early in the second half of the year, these had eventually gained
universal acceptance even with Chinese steel mills. This was partly as a result
of continuing iron ore spot price strength. Vale, the largest iron ore pellet
producer in the world, settled its price for pellets with its customers ex-China
at a level 48.3% below the 2008/2009 contract price. The improving economic
outlook in the third quarter enabled Ferrexpo to agree prices with the majority
of its long-term contract customers at substantially this Vale Benchmark Price
after adjustments for the impact of freight, quality, proximity and logistics.
This coincided with the return to supplying pellets largely in terms of our
normal geographic market mix. These new contract prices apply from the start of
the fourth quarter to the end of the first quarter of 2010, when we expect a new
Benchmark Price to be agreed as is the case in any typical year.
Pellet premium
The iron ore pellet premium is the price paid by purchasers to producers of iron
ore pellets (such as Ferrexpo) in excess of the price of iron ore sinter fines,
to reflect the fact that pellets have undergone further processing which may
create improved 'value in use' for the end users. The Group's pellets are
therefore an intermediate product between raw ore and metallic iron, providing
productivity gains in blast furnaces. Usage of our pellets can lead to reduced
coke consumption in the steelmaking production process, beneficial when this is
in tight supply or relatively highly priced. The pellet premium also reflects
other benefits of using pellets, most notably their advantages in transportation
and increased environmental concerns with sinter production, particularly for
blast furnace operators in the European Union.
Following the Vale price settlements in mid 2009, the iron ore pellet premium in
Europe was 25 US cents per dry metric tonne unit (dmtu), after reaching a record
high of 86 US cents per dmtu in April 2008. Pellets tend to trade at a very
significant premium to iron ore fines only when the industry is in a state of
undersupply as was the case in the first part of 2008. The efficiency gained
through the use of pellets becomes less of a factor when blast furnaces are not
running at full capacity, as was the case in many markets through much of 2009.
Nonetheless, the current level is below the long-term average of approximately
30 US cents per dmtu, and we believe this to be below the marginal cost of
pelletising for some producers. As a result we expect the premium for our
pellets to increase in 2010. This is supported by the fact that good supply
discipline practised by the larger pellet producers in 2009 has, in late 2009,
resulted in a shortage of pellets in some key markets. An increase in the pellet
premium is also likely to be underpinned by the transport and environmental
benefits of using our pellets.
2010 Marketing strategy
Demand in 2010 will depend on the continued growth of steel output in China, a
sustainable recovery by the steel industry in Ukraine and the continuation of
the slow recovery in developed nations. We believe that the re-stocking by steel
mills following the worst months of the crisis is now complete and a fragile
recovery is under way, driving a slow return of global steel output to
sustainable levels. We remain well placed to continue to produce at full
capacity and to supply our key customers because of our proximity to them. We
have made significant progress already in increasing our market share to these
customers, and our return to supplying our portfolio of long-term customers late
in 2009 bodes well for sales in 2010.
Government stimulus packages and 'quantitative easing' are likely to result in
some inflation in 2010, but for Ferrexpo this is likely to be offset to a large
degree by further operational currency weakness. Economic conditions have
reduced costs of production across the industry in 2009 as demand has fallen.
This is a partial reversal of the changes to the cost structure of the iron ore
industry witnessed over the past five years as a result of declining
availability of direct-charge lump ore and the fact that incremental iron ore
can only be supplied by increasingly distant and relatively lower-quality ore
bodies. The cost of the marginal tonne is therefore expected to increase
slightly in 2010.
Industry inventory control has been good given the pressures of the economic
downturn and the recovery in demand in China which was unexpectedly rapid. As a
result, the build-up of inventories which have historically prevented the
recovery of commodity prices once growth conditions resume has been avoided. In
2010, continuing strong demand from China and the slow recovery elsewhere should
give support to stronger iron ore prices.
Our sales strategy in 2010 will be an extension of the highly successful
flexible strategy we practised in 2009. We believe the worst of the downturn in
the global economy is behind us, but we remain prepared to switch sales volumes
between our various markets at short notice to counteract any recurring demand
weakness in any given region. We shall continue to cultivate relationships in
our Growth Markets and to hold available our seaborne market access, seeking to
maximise sales volumes where possible by taking advantage of potential
opportunities for seaborne spot sales while maintaining our strong customer
relationships in our Traditional and Natural Markets. Where possible, we will
use these relationships to increase our market share position in the Traditional
and Natural Markets to capitalise on smaller-lot deliveries to customers. We
believe that, for customers throughout Central Europe, our products represent an
attractive alternative to those of major seaborne suppliers owing to the lower
costs of transporting pellets over a shorter distance from Ukraine, together
with an ability to provide many customers with a continuous small-parcel
delivery chain and in many instances a bespoke logistics solution.
Corporate social responsibility
We are pleased that in 2009, we made good progress in our efforts to transform
the culture at FPM into one of behavioural safety. There were no fatalities at
our operations during the year. We continue to work with Du Pont Safety
Resources as we strive for further improvements across all areas of CSR and
especially safety.
FINANCIAL REVIEW
Highlights
·Revenue of US$648.7 million (2008: US$1,116.9 million) decreased owing to lower
iron ore prices
·EBITDA US$138.1 million (2008: US$503.9 million)
·Principal debt facility refinanced - new pre-export finance facility of US$230
million
·Production from own ore in line with 2008 at 8.6 million tonnes
·Production of premium 65% Fe pellets increased by 7.2%
·Higher priced 65% Fe pellets increased to 49.1% of total sales (2008: 44.6%)
·C1 cash costs of production for the year improved by 18.7% reducing to
US$34.4/t
·Net cash flow from operating activities of US$76.9 million (2008: US$370.9
million)
·Dividend maintained at 3.3 US cents per share
Revenue and sales
The revenue generated by the Group was 41.9% lower than in 2008, with sales
volumes in line with the prior year. Overall revenue decreased by US$468.2
million to US$648.7 million as a result of lower pricing following a sharp
contraction in demand for steel and iron ore in late 2008 and early 2009. The
average DAF/FOB price achieved by the Group for iron ore in 2009 was US$66.3 per
tonne compared with US$124.6 per tonne in the previous calendar year. The Group
nonetheless remained profitable throughout the year, reflecting a strong
operating result and good cost control.
The weaker iron ore demand in our Traditional European markets was offset by
increased sales to China and India, enabling the Group to continue to sell all
its production. Some of these additional sales were made on a spot market basis
which exposed the Group to seaborne freight rate volatility. As a result, the
cost of international freight increased in 2009 by US$22.9 million to US$45.2
million.
Production
The Group maintained production output at full capacity during the year and
increased the proportion of higher priced 65% Fe pellets to 49.1% of total sales
in 2009 compared with 44.6% in 2008. The Group produced 8,609 k/t in 2009
compared with 8,608 k/t in 2008.
Costs and margins
The majority of C1 costs (defined as the cash cost of pellet production per
tonne from own ore, ex-works) are incurred in Ukrainian hryvnia. In 2009, the
average C1 cost decreased from US$42.34 to US$34.44 per tonne, reflecting the
effect of the weaker local currency in 2009 compared with 2008, lower oil prices
and improved efficiency through our Business Improvement Programme ("BIP").
During 2009, Ferrexpo Poltava Mine ("FPM") was involved in 97 projects ranging
from reducing the utilisation of key materials to improvements in IT, internal
power infrastructure, rail operations and maintenance procedures. In total the
BIP yielded savings amounting to US$8.7 million of which US$6.2 million related
to direct mining and processing activities.
Selling and distribution costs
Selling and distribution costs represent the cost of freight to deliver the
goods to agreed sales transfer points within Ukraine. For certain sales, the
Group incurs additional costs to arrange transport and delivery to the
customer's plant which results in higher sales prices to these customers. Owing
to the increased CFR sales to China and India in 2009, referred to above,
increased freight costs for certain deliveries to these destinations were borne
by the Group. This resulted in temporarily higher distribution costs in the
middle part of the year. Domestic freight tariffs, comprised principally of
Ukrainian rail tariffs, benefited from the devaluation of the Ukrainian hryvnia
at the end of 2008. Overall, the selling and distribution costs increased by
US$9.7 million given the higher sales made on a CFR basis compared with the
prior year.
General and administrative expenses
Following a cost reduction programme during the year general and administrative
expenses were reduced by US$24.0 million. This reflected lower head office costs
of US$18.9 million as a result of reorganisation and significantly lower legal
and professional costs owing to reduced project activity.
Other income
Other income reduced from US$6.4 million in 2008 to US$4.1 million in 2009. This
reflected a reduced level of sales of current assets.
Other expenses
Other expenses of a recurring nature reduced by US$4.7 million in 2009 following
cost reduction measures. The total charge decreased by US$34.6 million as the
prior period included doubtful debt expenses amounting to US$18.8 million. These
doubtful debt expenses were not repeated in 2009 following a stabilisation in
markets during the latter part of the year. The prior year also included foreign
exchange differences of US$6.0 million which were not repeated as the Ukrainian
hryvnia to US dollar exchange rate remained stable during the year.
Currency translation
The functional currency of FPM is the Ukrainian hryvnia. Gains and losses on
foreign currency- denominated operating assets that result from exchange rate
movements are recorded in the income statement.
The operating foreign exchange gains decreased from US$29.3 million to US$2.5
million owing to a more stable Ukrainian hryvnia throughout 2009 and
non-operating foreign exchange losses declined from US$72.8 million to US$2.6
million.
Currency movements resulting from the translation of net assets of foreign
operations into US dollars are shown in the consolidated statement of
comprehensive income. In 2009 a loss of US$24.5 million was recorded (2008:
US$332.7 million). This reduced loss reflected a more stable local currency in
2009 which depreciated from UAH7.700 to UAH7.985 to the US dollar (2008:
UAH5.050 to UAH7.700)
Write-offs and impairment losses
The Group holds various investments that are classified as available-for-sale.
The most significant of these is a 9.9% investment in a Ukrainian oil and gas
exploration company, LLC Atol. IFRS requires the Group to value
available-for-sale assets at fair value. This resulted in a total impairment
charge of US$1.9 million for 2009 compared with US$26.4 million for 2008. The
investment is valued at US$2.1 million as at 31 December 2009 (2008: US$4.0
million).
Negative goodwill
During the 2008 financial year, FPM exercised its call option to repurchase 6.2%
of its issued share capital at a cost of US$11.0 million from DCM Decometal
International Trading GmbH ('DCM'). This resulted in an increase in the Group's
ownership of FPM from 90.9% to 97.1% and negative goodwill of US$35.0 million.
These shares, which were originally held in treasury by FPM, were transferred to
Ferrexpo AG (FPM's parent company) in August and November 2009. This resulted in
an increase in the Group's ownership to 97.3% as at 31 December 2009 and
negative goodwill of US$0.5 million.
Finance costs and borrowings
The interest expense on the financial liabilities increased in the year by
US$1.8 million to $16.8 million owing to higher average debt as the Group drew
on available facilities during Q4 2008.
In November 2009, the Group successfully secured a new pre-export finance
facility of US$230 million. The new facility was available from 1 January 2010
and was drawn down to repay in full the amount outstanding on the existing loan.
The new loan matures 36 months from 1 January 2010 and is to be repaid in 24
equal monthly instalments with the first instalment falling due in January 2011.
This transaction is the first successful financing concluded by a metals and
mining company with assets located primarily in the CIS since the beginning of
the global financial crisis in September 2008.
The gross indebtedness of the Group decreased from US$307.9 million at the end
of 2008 to US$269.6 million as of 31 December 2009. At the year-end, the Group
had US$12.0 million of cash (2008: US$87.8 million). In line with its treasury
policy, the Group currently places up to a maximum of 50% of its surplus cash on
deposit within Ukraine in US dollars, depending on market conditions.
Taxation
The Group generates taxable income mainly in Switzerland and Ukraine. The tax
charge to profits in the year was 12.2% compared with 16.6% in 2008. This
reduction was as a result of change in the mix of profits between the Company's
countries of operation in 2009.
Earnings
As a result of the decline in iron ore prices on the international markets
described above, underlying earnings decreased from US$347.4 million in 2008 to
US$74.8 million in 2009. Fully diluted EPS was 12.05 US cents per share in 2009
(2008: 48.46 US cents per share). Fully diluted underlying EPS similarly
decreased to 12.77 US cents per share in 2009 (2008: 57.58 US cents per share).
Repurchased shares in treasury
No share repurchase took place during the 2009 financial year. The shares
repurchased in September 2008 are held in treasury at their acquisition cost of
170 pence per share, equating to US$77.3 million. For the purposes of
comparison, the closing market price at 31 December 2009 was 198 pence per
share.
Statement of financial position and cash flow
Key figures relating to the cash flow of the business and changes in the
statement of financial position are summarised in the table below.
The Group achieved strong operating results in 2009, particularly in light of
the challenging conditions in the international iron ore market. EBITDA
decreased from US$503.9 million in the record 2008 financial year to US$138.1
million in 2009 as a result of lower prices for iron ore. This is reflected in a
decline in the EBITDA margin to 21.3% in 2009 compared with 45.1% in 2008.
Net cash flow from operating activities amounted to US$76.9 million in 2009
(2008: US$370.9 million). Operating cash flow was invested in sustaining and
development projects for the existing operations, as well as into the
Yeristovskoye development project. Total capital expenditure in 2009 amounted to
US$85.8 million (2008: US$276.3 million), of which US$20.5 million was
sustaining capital. Major capital expenditure commitments remain largely on hold
owing to the economic situation, but modest expenditure continued in order to
maintain the value of previous investments and in preparation to accelerate the
implementation of our development projects when conditions improve. Net
financial indebtedness ("NFI") increased from US$220.1 million to US$257.7
million as at 31 December 2009. At the year-end the Group held cash balances of
US$12.0 million (2008: US$87.8 million).
As disclosed in note 12 to the accounts, Ferrexpo has experienced delays in
recovering VAT which it has paid on purchases in Ukraine. As an exporter, the
Group's goods are not subject to VAT and the Group relies on the timely
repayment of VAT to ensure sufficient cash flows.
During the year, the amount of VAT to be recovered from state authorities
increased by US$24.0 million to US$81.3 million. This, offset by lower accounts
receivable, accounted for the increase in working capital at the end of 2009
compared with 2008. No VAT amounts are in dispute.
The amount of VAT to be repaid to the Group not only relates to purchases made
by Ferrexpo Poltava Mining (FPM), but additionally to purchases made by Ferrexpo
Yeristovskoye Mining (FYM). Under Ukrainian law, newly established companies
are unable to reclaim VAT during their first 12 months of operation. FYM was
established in July 2008 and paid approximately US$2 million of VAT in the
period to July 2009 (principally relating to imported CAT equipment). This will
apply to any new subsidiary company that may be established by the Group as its
growth projects are realised.
Year ended Year ended
US$ millions
31.12.09
31.12.08
____________________________________________________________________
_______________
EBITDA
138.1 503.9
Working capital movements
(12.5) (33.8)
Net financial payments
(19.2) (15.4)
Income tax paid
(18.9) (67.2)
Movement in provisions and other non-cash items
(10.6)
(16.6)
______________________________________________________________________
_____________
Net cash flow from operating activities
76.9 370.9
Sustaining capital expenditure
(20.5)
(70.6)
______________________________________________________________________
_____________
Free cash flow
56.4 300.3
(Paid for)/received from: expansionary projects
(65.7) (205.8)
Purchase of available for sale investments
- (0.3)
Loans to associates
6.5 (4.0)
Distributions including to minorities and share repurchases
(36.6) (126.3)
Other receipts
2.1 2.5
Currency translation differences
(0.3) (68.9)
Movement in net debt
(37.6) (102.5)
_______________________________________________________________________________
____
Statement of Directors' Responsibility
We confirm on behalf of the board that to the best of our knowledge;
· The consolidated financial statements, prepared in accordance with IFRS as
issued by the International Accounting Standards Board, IFRS as adopted by the
European Union and in accordance with the provision of the Companies Act 2006,
give a true and fair view of the assets, liabilities, financial position and
profit of the group; and
· The management report, which is incorporated in the directors' report,
includes a fair review of the development and performance of the business and
the position of the group, together with a description of the principal risk and
uncertainties.
For and on behalf of the Board
Michael Abrahams CBE DL
Chairman
Chris Mawe
Chief Financial Officer
ACCOUNTS
Consolidated income statement
+----------------------------------+-------+-----------+-----------+
| US$ 000 |Notes | Audited | Year |
| | | Year | ended |
| | | ended | 31.12.08 |
| | | 31.12.09 | |
+----------------------------------+-------+-----------+-----------+
| Revenue | 4 | 648,667 | 1,116,854 |
+----------------------------------+-------+-----------+-----------+
| Cost of sales | 5 | (341,067) | (434,238) |
+----------------------------------+-------+-----------+-----------+
| Gross profit | | 307,600 | 682,616 |
+----------------------------------+-------+-----------+-----------+
| Selling and distribution | | (162,266) | (152,528) |
| expenses | | | |
+----------------------------------+-------+-----------+-----------+
| General and administrative | 6 | (43,161) | (67,185) |
| expenses | | | |
+----------------------------------+-------+-----------+-----------+
| Other income | | 4,102 | 6,387 |
+----------------------------------+-------+-----------+-----------+
| Other expenses | 7 | (3,418) | (38,040) |
+----------------------------------+-------+-----------+-----------+
| Operating foreign exchange gains | | 2,534 | 29,309 |
+----------------------------------+-------+-----------+-----------+
| Operating profit from continuing | | 105,391 | 460,559 |
| operations before adjusted items | | | |
+----------------------------------+-------+-----------+-----------+
| Write-offs and impairment losses | | (2,757) | (27,326) |
| | | | |
+----------------------------------+-------+-----------+-----------+
| Share of profit of associates | | 1,304 | 1,003 |
+----------------------------------+-------+-----------+-----------+
| Negative goodwill | | 503 | 35,049 |
+----------------------------------+-------+-----------+-----------+
| Initial public offering costs | | (427) | (4,120) |
+----------------------------------+-------+-----------+-----------+
| Gain on disposal of property, | | 213 | - |
| plant and equipment | | | |
+----------------------------------+-------+-----------+-----------+
| Gain on disposal of | | - | 1,571 |
| available-for-sale investment | | | |
+----------------------------------+-------+-----------+-----------+
| Profit before tax and finance | | 104,227 | 466,736 |
| from continuing operations | | | |
+----------------------------------+-------+-----------+-----------+
| Finance income | 8 | 2,893 | 2,467 |
+----------------------------------+-------+-----------+-----------+
| Finance expense | 8 | (23,718) | (20,834) |
+----------------------------------+-------+-----------+-----------+
| Non-operating foreign exchange | | (2,552) | (72,788) |
| loss | | | |
+----------------------------------+-------+-----------+-----------+
| Profit before tax | | 80,850 | 375,581 |
+----------------------------------+-------+-----------+-----------+
| Income tax expense | 9 | (9,852) | (62,533) |
+----------------------------------+-------+-----------+-----------+
| Profit for the year from | | 70,998 | 313,048 |
| continuing operations | | | |
+----------------------------------+-------+-----------+-----------+
| Attributable to: | | | |
+----------------------------------+-------+-----------+-----------+
| Equity shareholders of Ferrexpo | | 70,627 | 292,436 |
| plc | | | |
+----------------------------------+-------+-----------+-----------+
| Minority interests | | 371 | 20,612 |
+----------------------------------+-------+-----------+-----------+
| | | 70,998 | 313,048 |
+----------------------------------+-------+-----------+-----------+
| | | | |
+----------------------------------+-------+-----------+-----------+
| Earnings per share: | | | |
+----------------------------------+-------+-----------+-----------+
| Basic (US cents) | 10 | 12.08 | 48.60 |
+----------------------------------+-------+-----------+-----------+
| Diluted (US cents) | 10 | 12.05 | 48.46 |
+----------------------------------+-------+-----------+-----------+
Consolidated statement of comprehensive income
+----------------------------------------+----------+-----------+
| US$ 000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+----------------------------------------+----------+-----------+
| Profit for the period | 70,998 | 313,048 |
+----------------------------------------+----------+-----------+
| | | |
+----------------------------------------+----------+-----------+
| Exchange differences on translating | | |
| foreign operations | | |
+----------------------------------------+----------+-----------+
| Exchange differences arising during | (20,842) | (210,616) |
| the year | | |
+----------------------------------------+----------+-----------+
| Exchange differences arising on | (3,697) | (122,068) |
| hedging of foreign operations | | |
+----------------------------------------+----------+-----------+
| | | |
+----------------------------------------+----------+-----------+
| Available-for-sale investments | | |
+----------------------------------------+----------+-----------+
| Gain arising on revaluation during | 400 | |
| the year | | |
+----------------------------------------+----------+-----------+
| Net loss on disposal of | | (1,789) |
| available-for-sale financial assets | | |
+----------------------------------------+----------+-----------+
| | | |
+----------------------------------------+----------+-----------+
| Change in deferred taxes on | - | (3,454) |
| transaction costs | | |
+----------------------------------------+----------+-----------+
| | | |
+----------------------------------------+----------+-----------+
| Tax impact on employee benefits | - | (317) |
+----------------------------------------+----------+-----------+
| | | |
+----------------------------------------+----------+-----------+
| Income tax effect | 2,895 | 40,805 |
+----------------------------------------+----------+-----------+
| | | |
+----------------------------------------+----------+-----------+
| Other comprehensive income for the | (21,244) | (297,439) |
| period, net of tax | | |
+----------------------------------------+----------+-----------+
| | | |
+----------------------------------------+----------+-----------+
| Total comprehensive income for the | 49,754 | 15,609 |
| period, net of tax | | |
+----------------------------------------+----------+-----------+
| | | |
+----------------------------------------+----------+-----------+
| Total comprehensive income | | |
| attributable to: | | |
+----------------------------------------+----------+-----------+
| Equity shareholders of Ferrexpo plc | 49,633 | 16,304 |
+----------------------------------------+----------+-----------+
| Minority interests | 121 | (695) |
+----------------------------------------+----------+-----------+
| | 49,754 | 15,609 |
+----------------------------------------+----------+-----------+
Consolidated statement of financial position
+----------------------------------+-------+-----------+-----------+
| US$ 000 | Notes | Audited | As at |
| | | | 31.12.08 |
| | | As at | |
| | | 31.12.09 | |
+----------------------------------+-------+-----------+-----------+
| Assets | | | |
+----------------------------------+-------+-----------+-----------+
| Property, plant and equipment | | 452,100 | 412,440 |
+----------------------------------+-------+-----------+-----------+
| Goodwill and other intangible | | 100,354 | 103,755 |
| assets | | | |
+----------------------------------+-------+-----------+-----------+
| Investments in associates | | 19,915 | 18,640 |
+----------------------------------+-------+-----------+-----------+
| Available-for-sale financial | | 2,917 | 4,435 |
| assets | | | |
+----------------------------------+-------+-----------+-----------+
| Other non-current assets | | 9,824 | 10,116 |
+----------------------------------+-------+-----------+-----------+
| Deferred tax asset | | 13,673 | 14,043 |
+----------------------------------+-------+-----------+-----------+
| Total non-current assets | | 598,783 | 563,429 |
+----------------------------------+-------+-----------+-----------+
| Inventories | | 59,636 | 61,270 |
+----------------------------------+-------+-----------+-----------+
| Trade and other receivables | | 38,117 | 59,636 |
+----------------------------------+-------+-----------+-----------+
| Prepayments and other current | | 19,394 | 18,108 |
| assets | | | |
+----------------------------------+-------+-----------+-----------+
| Income taxes recoverable and | | 9,741 | 5,835 |
| prepaid | | | |
+----------------------------------+-------+-----------+-----------+
| Other taxes recoverable and | 12 | 81,284 | 57,285 |
| prepaid | | | |
+----------------------------------+-------+-----------+-----------+
| Available-for-sale financial | | 626 | 650 |
| assets | | | |
+----------------------------------+-------+-----------+-----------+
| Cash and cash equivalents | 13 | 11,991 | 87,822 |
+----------------------------------+-------+-----------+-----------+
| Total current assets | | 220,789 | 290,606 |
+----------------------------------+-------+-----------+-----------+
| | | | |
+----------------------------------+-------+-----------+-----------+
| Total assets | | 819,572 | 854,035 |
+----------------------------------+-------+-----------+-----------+
| | | | |
+----------------------------------+-------+-----------+-----------+
| Equity and liabilities | | | |
+----------------------------------+-------+-----------+-----------+
| Issued capital | | 121,628 | 121,628 |
+----------------------------------+-------+-----------+-----------+
| Share premium | | 185,112 | 185,112 |
+----------------------------------+-------+-----------+-----------+
| Other reserves | | (347,858) | (330,714) |
+----------------------------------+-------+-----------+-----------+
| Retained earnings | | 501,175 | 470,098 |
+----------------------------------+-------+-----------+-----------+
| Equity attributable to equity | | 460,057 | 446,124 |
| shareholders of Ferrexpo plc | | | |
+----------------------------------+-------+-----------+-----------+
| Minority interests | | 11,387 | 11,769 |
+----------------------------------+-------+-----------+-----------+
| Total equity | | 471,444 | 457,893 |
+----------------------------------+-------+-----------+-----------+
| Interest bearing loans and | 13 | 18,143 | 231,373 |
| borrowings | | | |
+----------------------------------+-------+-----------+-----------+
| Trade and other payables | | - | 570 |
+----------------------------------+-------+-----------+-----------+
| Defined benefit pension | | 14,529 | 12,940 |
| liability | | | |
+----------------------------------+-------+-----------+-----------+
| Provision for site restoration | | 1,268 | 1,071 |
+----------------------------------+-------+-----------+-----------+
| Deferred tax liability | | 3,739 | 5,298 |
+----------------------------------+-------+-----------+-----------+
| Total non-current liabilities | | 37,679 | 251,252 |
+----------------------------------+-------+-----------+-----------+
| Interest bearing loans and | 13 | 251,379 | 74,523 |
| borrowings | | | |
+----------------------------------+-------+-----------+-----------+
| Trade and other payables | | 27,926 | 35,033 |
+----------------------------------+-------+-----------+-----------+
| Accrued liabilities and deferred | | 12,146 | 14,470 |
| income | | | |
+----------------------------------+-------+-----------+-----------+
| Income taxes payable | | 11,105 | 14,439 |
+----------------------------------+-------+-----------+-----------+
| Other taxes payable | | 7,893 | 6,425 |
+----------------------------------+-------+-----------+-----------+
| Total current liabilities | | 310,449 | 144,890 |
+----------------------------------+-------+-----------+-----------+
| | | | |
+----------------------------------+-------+-----------+-----------+
| Total liabilities | | 348,128 | 396,142 |
+----------------------------------+-------+-----------+-----------+
| | | | |
+----------------------------------+-------+-----------+-----------+
| Total equity and liabilities | | 819,572 | 854,035 |
+----------------------------------+-------+-----------+-----------+
The financial statements were approved by the Board of directors on 22 March
2010.
Kostyantin Zhevago
Christopher Mawe
Chief Executive Officer
Chief Financial Officer
Consolidated statement of cash flows
+----------------------------------+-------+----------+-----------+
| US$ 000 | Notes | Audited | Year |
| | | Year | ended |
| | | ended | 31.12.08 |
| | | 31.12.09 | |
+----------------------------------+-------+----------+-----------+
| Net cash flows from operating | 14 | 76,869 | 370,943 |
| activities | | | |
+----------------------------------+-------+----------+-----------+
| Cash flows from investing | | | |
| activities | | | |
+----------------------------------+-------+----------+-----------+
| Purchase of property, plant and | | (85,823) | (276,264) |
| equipment | | | |
+----------------------------------+-------+----------+-----------+
| Proceeds from sale of property, | | 213 | 2,016 |
| plant and equipment | | | |
+----------------------------------+-------+----------+-----------+
| Purchase of intangible assets | | (598) | (1,597) |
+----------------------------------+-------+----------+-----------+
| Purchases of available-for-sale | | - | (266) |
| financial assets | | | |
+----------------------------------+-------+----------+-----------+
| Interest received | | 2,104 | 2,472 |
+----------------------------------+-------+----------+-----------+
| Proceeds from loans to | | 6,450 | (4,000) |
| associates/(provided) | | | |
+----------------------------------+-------+----------+-----------+
| Net cash flows used in investing | | (77,654) | (277,639) |
| activities | | | |
+----------------------------------+-------+----------+-----------+
| Cash flows from financing | | | |
| activities | | | |
+----------------------------------+-------+----------+-----------+
| Proceeds from borrowings and | | 35,637 | 172,143 |
| finance | | | |
+----------------------------------+-------+----------+-----------+
| Repayment of borrowings and | | (73,168) | (69,412) |
| finance | | | |
+----------------------------------+-------+----------+-----------+
| Dividends paid to equity | | (36,325) | (38,954) |
| shareholders of Ferrexpo plc | | | |
+----------------------------------+-------+----------+-----------+
| Dividends paid to | | (234) | (1,186) |
| non-controlling shareholders | | | |
+----------------------------------+-------+----------+-----------+
| Proceeds from issue of share | | - | 2,123 |
| capital to minority interests | | | |
+----------------------------------+-------+----------+-----------+
| Acquisition of non-controlling | | - | (11,048) |
| interest in subsidiaries | | | |
+----------------------------------+-------+----------+-----------+
| Share buy back | | - | (77,260) |
+----------------------------------+-------+----------+-----------+
| Net cash flows used in financing | | (74,090) | (23,594) |
| activities | | | |
+----------------------------------+-------+----------+-----------+
| Net increase/(decrease) in cash | | (74,875) | 69,710 |
| and cash equivalents | | | |
+----------------------------------+-------+----------+-----------+
| Cash and cash equivalents at the | | 87,822 | 86,966 |
| beginning of the year | | | |
+----------------------------------+-------+----------+-----------+
| Currency translation differences | | (956) | (68,854) |
+----------------------------------+-------+----------+-----------+
| Cash and cash equivalents at the | | 11,991 | 87,822 |
| end of the year | | | |
+----------------------------------+-------+----------+-----------+
Consolidated statement of changes in equity
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| | Attributable to equity shareholders of Ferrexpo plc |
+-----------------+------------------------------------------------------------------------------------------------------------------------------+
| US$ | Issued | Share | Uniting |Treasury |Employee | Net |Translation |Retained | Total | Minority | Total |
| 000 |capital |premium | of | share | benefit |unrealised | reserve |earnings | capital |interests | equity |
| | | |interest | reserve | trust | gains | | | and | | |
| | | | reserve | | reserve | reserve | | | reserves | | |
| | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| At 1 | 121,628 | 188,566 | 31,780 | - | (20,092) | 2,384 | 186 | 216,616 | 541,068 | 45,854 | 586,922 |
| January | | | | | | | | | | | |
| 2008 | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Profit | - | - | - | - | - | - | - | 292,436 | 292,436 | 20,612 | 313,048 |
| for | | | | | | | | | | | |
| the | | | | | | | | | | | |
| period | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Other | - | (3,454) | - | - | (317) | (1,571) | (270,790) | - | (276,132) | (21,307) | (297,439) |
| comprehensive | | | | | | | | | | | |
| income | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Total | - | (3,454) | - | - | (317) | (1,571) | (270,790) | 292,436 | 16,304 | (695) | 15,609 |
| comprehensive | | | | | | | | | | | |
| income for | | | | | | | | | | | |
| the period | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Equity | - | - | - | - | - | - | - | (38,954) | (38,954) | - | (38,954) |
| dividends | | | | | | | | | | | |
| paid to | | | | | | | | | | | |
| shareholders | | | | | | | | | | | |
| of Ferrexpo | | | | | | | | | | | |
| plc | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Equity | - | - | - | - | - | - | - | - | - | (301) | (301) |
| dividends | | | | | | | | | | | |
| paid by | | | | | | | | | | | |
| subsidiary | | | | | | | | | | | |
| undertakings | | | | | | | | | | | |
| to | | | | | | | | | | | |
| non-controlling | | | | | | | | | | | |
| shareholders | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Share | - | - | - | - | 4,966 | - | - | - | 4,966 | - | 4,966 |
| based | | | | | | | | | | | |
| payments | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Participation | - | - | - | - | - | - | - | - | - | 1,960 | 1,960 |
| of | | | | | | | | | | | |
| non-controlling | | | | | | | | | | | |
| shareholders in | | | | | | | | | | | |
| subsidiary | | | | | | | | | | | |
| share issue | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Adjustments | - | - | - | - | - | - | - | - | - | (35,049) | (35,049) |
| relating to | | | | | | | | | | | |
| the | | | | | | | | | | | |
| decrease in | | | | | | | | | | | |
| minority | | | | | | | | | | | |
| interests | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Share | - | - | - | (77,260) | - | - | - | - | (77,260) | - | (77,260) |
| buy | | | | | | | | | | | |
| back | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| At 31 | 121,628 | 185,112 | 31,780 | (77,260) | (15,443) | 813 | (270,604) | 470,098 | 446,124 | 11,769 | 457,893 |
| December | | | | | | | | | | | |
| 2008 | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Profit | - | - | - | - | - | - | - | 70,627 | 70,627 | 371 | 70,998 |
| for | | | | | | | | | | | |
| the | | | | | | | | | | | |
| period | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Other | - | - | - | - | - | 301 | (21,295) | - | (20,994) | (250) | (21,244) |
| comprehensive | | | | | | | | | | | |
| income | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Total | - | - | - | - | - | 301 | (21,295) | 70,627 | 49,633 | 121 | 49,754 |
| comprehensive | | | | | | | | | | | |
| income for | | | | | | | | | | | |
| the period | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Equity | - | - | - | - | | - | - | (39,550) | (39,550) | - | (39,550) |
| dividends | | | | | | | | | | | |
| paid to | | | | | | | | | | | |
| shareholders | | | | | | | | | | | |
| of Ferrexpo | | | | | | | | | | | |
| plc | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Share | - | - | - | - | 3,850 | - | - | - | 3,850 | - | 3,850 |
| based | | | | | | | | | | | |
| payments | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| Adjustments | - | - | - | - | - | - | - | - | - | (503) | (503) |
| relating to | | | | | | | | | | | |
| the | | | | | | | | | | | |
| decrease in | | | | | | | | | | | |
| minority | | | | | | | | | | | |
| interests | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
| At 31 | 121,628 | 185,112 | 31,780 | (77,260) | (11,593) | 1,114 | (291,899) | 501,175 | 460,057 | 11,387 | 471,444 |
| December | | | | | | | | | | | |
| 2009 | | | | | | | | | | | |
+-----------------+---------+---------+----------+----------+----------+------------+-------------+----------+-----------+-----------+-----------+
Notes to the Consolidated Financial Information
Note 1: General information
The financial information for the year ended 31 December 2009 does not
constitute statutory accounts as defined in section 435 of the Companies Act
2006. The audited statutory accounts for the year ended 31 December 2008 have
been delivered to the Registrar of Companies and those for 2009 will be
delivered following the Company's annual general meeting convened for Thursday,
27 May 2010.
The auditor has reported on the statutory accounts for year ended 31 December
2009. The auditor's report was unqualified.
Note 2: Summary of significant accounting policies
International Financial Reporting Interpretations Committee (IFRIC)
Whilst the preliminary announcement has been prepared in accordance with
International Financial Reporting Standards ('IFRS') and International Financial
Reporting Interpretation Committee ("IFRIC") interpretations adopted for use by
the European Union and with those parts of the Companies Act 2006 applicable to
companies reporting under IFRS, this announcement does not itself contain
sufficient information to comply with IFRS. The Board approved the full
financial statements that comply with IFRS on Tuesday, 23 March 2010. The
financial statements have been prepared under the historical cost convention as
modified by the recording of pension assets and liabilities and the revaluation
of certain financial instruments.
The accounting policies applied are consistent with those adopted and disclosed
in the Group's annual financial statements for the year ended 31 December 2008
except for the following.
The Group has adopted the following new and amended IFRS and IFRIC
interpretations as of 1 January 2009.
International Financial Reporting Interpretations Committee (IFRIC)
Effective date
· IFRS 8 Operating Segments (new)
1 January 2009
· IAS 1 Presentation of Financial Statements (revised)
1 January 2009
· IAS 23 Borrowing Costs (revised)
1 January 2009
Adoption of these standards did not have any effect on the financial performance
or position of the Group.
Changes occurring as a result of improvements to IFRSs
In May 2008 and April 2008, the IASB issued an 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 Group
has adopted the following amendments to standards that were applicable to the
Group:
* IFRS 7 Financial instruments: Disclosures
* IFRS 2 Share-based Payment - Vesting Conditions and Cancellations
* IAS 32 Financial Instruments: Presentation and IAS 1 Puttable
Financial Instruments and Obligations Arising on Liquidation
* IAS 39 Financial Instruments: Recognition and Measurement -
Eligible Hedged Items
* IFRIC 16 Hedges of a Net Investment in a Foreign Operation
The Group amended its accounting policies where applicable; however, the
adoption of the above standards did not have an impact upon the financial
position or performance of the Group.
The Group has elected not to adopt early the following revised and amended
standards:
* IFRS 3 Business combinations (revised)
* IAS 27 Consolidated and separate financial statements (revised)
* IAS 7 Statement of cash flows (amendments)
* IAS 28 Investments in associates (revised)
Seasonality
The Group's operations are not affected by seasonality.
Note 3: Segment information
The Group is managed as a single entity which produces, develops and markets its
principal product - iron ore pellets - for sale to the metallurgical industry.
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 year ended 31 December 2009 consisted of the following:
+----------------------------------------+----------+-----------+
| US$ 000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+----------------------------------------+----------+-----------+
| Revenue from sales of ore pellets: | | |
+----------------------------------------+----------+-----------+
| Export | 612,829 | 973,420 |
+----------------------------------------+----------+-----------+
| Ukraine | 34,483 | 134,413 |
+----------------------------------------+----------+-----------+
| | 647,312 | 1,107,833 |
+----------------------------------------+----------+-----------+
| | | |
+----------------------------------------+----------+-----------+
| Revenue from services provided | 790 | 1,229 |
+----------------------------------------+----------+-----------+
| Revenue from other sales | 565 | 7,792 |
+----------------------------------------+----------+-----------+
| Total | 648,667 | 1,116,854 |
+----------------------------------------+----------+-----------+
Export sales by geographical destination were as follows:
+----------------------------------------+----------+----------+
| US$'000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+----------------------------------------+----------+----------+
| China | 241,882 | 173,761 |
+----------------------------------------+----------+----------+
| Austria | 105,690 | 298,209 |
+----------------------------------------+----------+----------+
| Serbia | 84,193 | 170,972 |
+----------------------------------------+----------+----------+
| Slovakia | 77,537 | 117,093 |
+----------------------------------------+----------+----------+
| Turkey | 39,272 | 30,649 |
+----------------------------------------+----------+----------+
| Czech Republic | 21,293 | 80,746 |
+----------------------------------------+----------+----------+
| India | 21,225 | - |
+----------------------------------------+----------+----------+
| Hungary | 6,539 | - |
+----------------------------------------+----------+----------+
| Germany | 5,573 | - |
+----------------------------------------+----------+----------+
| Japan | 5,027 | 34 |
+----------------------------------------+----------+----------+
| Russia | - | 42,606 |
+----------------------------------------+----------+----------+
| Poland | - | 31,708 |
+----------------------------------------+----------+----------+
| Bulgaria | - | 12,189 |
+----------------------------------------+----------+----------+
| Italy | - | 10,340 |
+----------------------------------------+----------+----------+
| Other | 4,598 | 5,113 |
+----------------------------------------+----------+----------+
| Total | 612,829 | 973,420 |
+----------------------------------------+----------+----------+
During the year ended 31 December 2009 sales made to three customers accounted
for 51.9% of the sales revenue (2008: 52.5%).
Sales made to two customers individually amounted to more than 10% of the total
sales. These are disclosed below:
+----------------------------------------+----------+----------+
| US$'000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+----------------------------------------+----------+----------+
| Customer A | 161,730 | 288,065 |
+----------------------------------------+----------+----------+
| Customer B | 105,690 | 298,209 |
+----------------------------------------+----------+----------+
Note 5: Cost of sales
Cost of sales for the year ended 31 December 2009 consisted of the following:
+----------------------------------------+----------+----------+
| US$ 000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+----------------------------------------+----------+----------+
| Materials | 60,607 | 79,321 |
+----------------------------------------+----------+----------+
| Purchased ore and concentrate | 8,914 | 47,491 |
+----------------------------------------+----------+----------+
| Electricity | 81,438 | 92,021 |
+----------------------------------------+----------+----------+
| Personnel costs | 41,670 | 68,781 |
+----------------------------------------+----------+----------+
| Spare parts and consumables | 13,007 | 17,613 |
+----------------------------------------+----------+----------+
| Depreciation and amortisation | 23,370 | 28,860 |
+----------------------------------------+----------+----------+
| Fuel | 23,969 | 41,517 |
+----------------------------------------+----------+----------+
| Gas | 28,744 | 34,106 |
+----------------------------------------+----------+----------+
| Repairs and maintenance | 38,503 | 33,120 |
+----------------------------------------+----------+----------+
| Royalties and levies | 6,484 | 6,764 |
+----------------------------------------+----------+----------+
| Stock movement | 10,543 | (19,596) |
+----------------------------------------+----------+----------+
| Other | 3,818 | 4,240 |
+----------------------------------------+----------+----------+
| Total | 341,067 | 434,238 |
+----------------------------------------+----------+----------+
Cost of sales is reconciled to "C1" costs in the following manner:
+----------------------------------------+-----------+-----------+
| US$ 000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+----------------------------------------+-----------+-----------+
| Cost of sales | 341,067 | 434,238 |
+----------------------------------------+-----------+-----------+
| | | |
+----------------------------------------+-----------+-----------+
| Depreciation and amortisation | (23,370) | (28,860) |
+----------------------------------------+-----------+-----------+
| Purchased ore and concentrate | (8,914) | (47,491) |
+----------------------------------------+-----------+-----------+
| Processing costs for purchased ore and | (1,206) | (5,418) |
| concentrate | | |
+----------------------------------------+-----------+-----------+
| Production cost of gravel | (357) | (375) |
+----------------------------------------+-----------+-----------+
| Stock movement in the period | (10,543) | 19,596 |
+----------------------------------------+-----------+-----------+
| Pension service costs | (1,857) | (5,058) |
+----------------------------------------+-----------+-----------+
| Other | 1,662 | (2,214) |
+----------------------------------------+-----------+-----------+
| | | |
+----------------------------------------+-----------+-----------+
| C1 cost | 296,482 | 364,418 |
+----------------------------------------+-----------+-----------+
| | | |
+----------------------------------------+-----------+-----------+
| Own ore produced (tonnes) | 8,609,200 | 8,607,500 |
+----------------------------------------+-----------+-----------+
| C1 cash cost per tonne $ | 34.44 | 42.34 |
+----------------------------------------+-----------+-----------+
"C1" costs represent the cash costs of production of iron pellets from own ore
divided by production volume of own ore, and excludes non-cash costs such as
depreciation, pension costs and stock movements, costs of purchased ore,
concentrate and production cost of gravel and excludes one-off items which are
outside the definition of EBITDA.
Note 6: General and administrative expenses
General and administrative expenses for the year ended 31 December 2009
consisted of the following:
+----------------------------------------+----------+----------+
| US$ 000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+----------------------------------------+----------+----------+
| Personnel costs | 23,933 | 38,900 |
+----------------------------------------+----------+----------+
| Buildings and maintenance | 2,391 | 3,092 |
+----------------------------------------+----------+----------+
| Taxes other than income tax and other | 3,930 | 4,185 |
| charges | | |
+----------------------------------------+----------+----------+
| Consulting and other professional fees | 2,731 | 7,000 |
+----------------------------------------+----------+----------+
| Depreciation and amortisation | 2,534 | 3,137 |
+----------------------------------------+----------+----------+
| Communication | 529 | 826 |
+----------------------------------------+----------+----------+
| Vehicles maintenance and fuel | 854 | 1,096 |
+----------------------------------------+----------+----------+
| Repairs | 1,041 | 1,120 |
+----------------------------------------+----------+----------+
| Audit fees | 1,112 | 1,348 |
+----------------------------------------+----------+----------+
| Non audit | 184 | 1,153 |
+----------------------------------------+----------+----------+
| Security | 1,659 | 1,641 |
+----------------------------------------+----------+----------+
| Research | 1 | 352 |
+----------------------------------------+----------+----------+
| Other | 2,262 | 3,335 |
+----------------------------------------+----------+----------+
| Total | 43,161 | 67,185 |
+----------------------------------------+----------+----------+
Note 7: Other expenses
Other expenses for the year ended 31 December 2009 consisted of the following:
+----------------------------------------+----------+----------+
| US$ 000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+----------------------------------------+----------+----------+
| Charitable donations | 4,043 | 6,081 |
+----------------------------------------+----------+----------+
| Doubtful debts expense | (5,199) | 18,755 |
+----------------------------------------+----------+----------+
| Loss on disposal of plant, property | 1,121 | 1,280 |
| and equipment | | |
+----------------------------------------+----------+----------+
| Other personnel costs | 830 | 1,056 |
+----------------------------------------+----------+----------+
| Foreign exchange difference arising on | - | 5,992 |
| consolidation | | |
+----------------------------------------+----------+----------+
| Other | 2,623 | 4,876 |
+----------------------------------------+----------+----------+
| Total | 3,418 | 38,040 |
+----------------------------------------+----------+----------+
The allowance for doubtful debts relates to receivables from certain customers
in Russia and other former CIS countries. Following a stabilisation in the
markets during the latter part of the financial year the recorded allowance has
been partially released.
Note 8: Finance income and expense
Finance income and expenses for the year ended 31 December 2009 consisted of the
following:
+----------------------------------------+----------+----------+
| US$ 000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+----------------------------------------+----------+----------+
| Finance income | | |
+----------------------------------------+----------+----------+
| Interest income | 1,894 | 1,448 |
+----------------------------------------+----------+----------+
| Other finance revenue | 999 | 1,019 |
+----------------------------------------+----------+----------+
| Total | 2,893 | 2,467 |
+----------------------------------------+----------+----------+
| Finance expense | | |
+----------------------------------------+----------+----------+
| Interest expense on financial | (16,805) | (15,002) |
| liabilities measured at amortised cost | | |
+----------------------------------------+----------+----------+
| Interest on defined benefit plans | (2,967) | (1,776) |
+----------------------------------------+----------+----------+
| Bank charges | (535) | (336) |
+----------------------------------------+----------+----------+
| Other finance costs | (3,411) | (3,720) |
+----------------------------------------+----------+----------+
| Total | (23,718) | (20,834) |
+----------------------------------------+----------+----------+
| | | |
+----------------------------------------+----------+----------+
| Net finance expense | (20,825) | (18,367) |
+----------------------------------------+----------+----------+
Other finance costs include the unwinding of the discount on the site
restoration provision, discounting of the share redemption liability and other
costs.
Note 9: Income tax expense
The income tax expense for the year ended 31 December 2009 consisted of the
following:
+----------------------------------------+----------+----------+
| US$ 000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+----------------------------------------+----------+----------+
| Current income tax | 10,162 | 79,016 |
+----------------------------------------+----------+----------+
| Deferred income tax | (310) | (16,483) |
+----------------------------------------+----------+----------+
| | | |
+----------------------------------------+----------+----------+
| Income tax expense | 9,852 | 62,533 |
+----------------------------------------+----------+----------+
The effective income tax rate differs from the corporate income tax rates. The
weighted average statutory rate was 13.0% for 2009 (2008: 18.2%). This is
calculated as the average of the statutory tax rates applicable in the countries
in which the Group operates, weighted by the profit/(loss) before tax of the
subsidiaries in the respective countries, as included in the consolidated
financial information. The effective tax rate is 12.2% (2008: 16.6%).
The changes in the weighted average income tax rate are largely due to a change
in the profit/(loss) before tax in the various jurisdictions in which the Group
operates.
A reconciliation between the income tax charged in the accompanying financial
information and income before taxes multiplied by the weighted average statutory
tax rate for the year ended 31 December 2009 is as follows:
+----------------------------------------+----------+----------+
| US$ 000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+----------------------------------------+----------+----------+
| Profit before tax | 80,850 | 375,581 |
+----------------------------------------+----------+----------+
| | | |
+----------------------------------------+----------+----------+
| Notional tax computed at the weighted | 10,526 | 68,496 |
| average statutory tax rate of 13.0% | | |
| (2008: 18.2%) | | |
+----------------------------------------+----------+----------+
| De-recognition of deferred tax asset | 135 | 4,359 |
+----------------------------------------+----------+----------+
| Inflation related indexation of fixed | (1,792) | (12,456) |
| assets for tax | | |
+----------------------------------------+----------+----------+
| Expenses not deductible for tax | 3,359 | 9,669 |
| purposes | | |
+----------------------------------------+----------+----------+
| Tax exempted income | (942) | - |
+----------------------------------------+----------+----------+
| Tax effect on asset impairment and | - | (7,849) |
| negative goodwill | | |
+----------------------------------------+----------+----------+
| Non recognition of deferred taxes on | 780 | - |
| current year losses | | |
+----------------------------------------+----------+----------+
| Tax related to prior years | (2,497) | (286) |
+----------------------------------------+----------+----------+
| Other | 283 | 600 |
+----------------------------------------+----------+----------+
| Income tax expense | 9,852 | 62,533 |
+----------------------------------------+----------+----------+
Note 10: Earnings per share and dividends paid and proposed
Basic earnings per share (EPS) is calculated by dividing the net profit for the
year attributable to ordinary equity shareholders of Ferrexpo plc by the
weighted average number of ordinary shares.
+-----------------------------------------+----------+----------+
| | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+-----------------------------------------+----------+----------+
| Profit for the year attributable to | | |
| equity shareholders: | | |
+-----------------------------------------+----------+----------+
| | | |
+-----------------------------------------+----------+----------+
| Basic earnings per share (US cents) | 12.08 | 48.60 |
+-----------------------------------------+----------+----------+
| Diluted earnings per share (US cents) | 12.05 | 48.46 |
+-----------------------------------------+----------+----------+
| | | |
+-----------------------------------------+----------+----------+
| Underlying earnings for the year: | | |
+-----------------------------------------+----------+----------+
| | | |
+-----------------------------------------+----------+----------+
| Basic earnings per share (US cents) | 12.80 | 57.74 |
+-----------------------------------------+----------+----------+
| Diluted earnings per share (US cents) | 12.77 | 57.58 |
+-----------------------------------------+----------+----------+
The calculation of the basic and diluted earnings per share is based on the
following data:
+-----------------------------------------+----------+----------+
| Thousands | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+-----------------------------------------+----------+----------+
| | | |
+-----------------------------------------+----------+----------+
| Weighted average number of shares | | |
+-----------------------------------------+----------+----------+
| Basic number of ordinary shares | 584,652 | 601,697 |
| outstanding | | |
+-----------------------------------------+----------+----------+
| Effect of dilutive potential ordinary | 1,361 | 1,717 |
| shares | | |
+-----------------------------------------+----------+----------+
| Diluted number of ordinary shares | 586,013 | 603,414 |
| outstanding | | |
+-----------------------------------------+----------+----------+
The basic number of ordinary shares is calculated by reducing the total number
or ordinary shares in issue by the shares held in treasury.
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.
'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 after minority
interests and excludes adjusted items. The calculation of underlying earnings
per share is based on the following earnings data:
+----------------------------------+------+----------+----------+
| US$ 000 | | Audited | Year |
| | | Year | ended |
| | | ended | 31.12.08 |
| | | 31.12.09 | |
+----------------------------------+------+----------+----------+
| Profit attributable to equity | | 70,627 | 292,436 |
| holders | | | |
+----------------------------------+------+----------+----------+
| | | | |
+----------------------------------+------+----------+----------+
| Write offs/impairments | | 2,757 | 27,326 |
+----------------------------------+------+----------+----------+
| IPO costs | | 427 | 4,120 |
+----------------------------------+------+----------+----------+
| Negative goodwill generated on | | (503) | (35,049) |
| rights issue | | | |
+----------------------------------+------+----------+----------+
| Gain on disposal of | | - | (1,571) |
| available-for-sale investment | | | |
+----------------------------------+------+----------+----------+
| Gain on disposal of property, | | (213) | - |
| plant and equipment | | | |
+----------------------------------+------+----------+----------+
| Non-operating foreign exchange | | 2,551 | 72,788 |
| losses | | | |
+----------------------------------+------+----------+----------+
| Tax on adjusted items | | (823) | (12,619) |
+----------------------------------+------+----------+----------+
| | | | |
+----------------------------------+------+----------+----------+
| Underlying earnings | | 74,823 | 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 | Audited |
| | Year |
| | ended |
| | 31.12.09 |
+----------------------------------------+----------+
| Dividends proposed | |
+----------------------------------------+----------+
| Final dividend for 2009: 3.3 US cents | 19,289 |
| per ordinary share | |
+----------------------------------------+----------+
| Total | 19,289 |
+----------------------------------------+----------+
| Dividends paid during the period | |
+----------------------------------------+----------+
| Interim dividend for 2009: 3.3 US | 19,289 |
| cents per ordinary share | |
+----------------------------------------+----------+
| Final dividend for 2008: 3.3 US cents | 20,261 |
| per ordinary share | |
+----------------------------------------+----------+
| Total | 39,550 |
+----------------------------------------+----------+
+----------------------------------------+----------+
| US$ 000 | Year |
| | ended |
| | 31.12.08 |
+----------------------------------------+----------+
| Dividends proposed | |
+----------------------------------------+----------+
| Final dividend for 2008: 3.3 US cents | 20,000 |
| per ordinary share | |
+----------------------------------------+----------+
| Total | |
+----------------------------------------+----------+
| Dividends paid during the period | |
+----------------------------------------+----------+
| Interim dividend for 2008: 3.2 US | 19,505 |
| cents per ordinary share | |
+----------------------------------------+----------+
| Final dividend for 2007: 3.2 US cents | 19,449 |
| per ordinary share | |
+----------------------------------------+----------+
| Total | 38,954 |
+----------------------------------------+----------+
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,
administrative expenses and selling and distribution costs) and non-recurring
cash items included in other income and other expenses plus the net of gains and
losses from disposal of investments and property, plant and equipment. 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$'000 | | Audited | Year |
| | | Year | ended |
| | | ended | 31.12.08 |
| | | 31.12.09 | |
+----------------------------------+------+----------+----------+
| Profit before tax and finance | | 104,227 | 466,736 |
+----------------------------------+------+----------+----------+
| | | | |
+----------------------------------+------+----------+----------+
| Write-offs and impairment losses | | 2,757 | 27,326 |
+----------------------------------+------+----------+----------+
| Gain on disposal of property, | | (213) | - |
| plant and equipment | | | |
+----------------------------------+------+----------+----------+
| Gain on disposal of | | - | (1,571) |
| available-for-sale investment | | | |
+----------------------------------+------+----------+----------+
| Initial public offering costs | | 427 | 4,120 |
+----------------------------------+------+----------+----------+
| Share based payments | | 3,423 | 1,495 |
+----------------------------------+------+----------+----------+
| Negative goodwill generated on | | (503) | (35,049) |
| rights issue | | | |
+----------------------------------+------+----------+----------+
| Severance payments | | - | 6,764 |
+----------------------------------+------+----------+----------+
| Depreciation and amortisation | | 28,018 | 34,125 |
+----------------------------------+------+----------+----------+
| EBITDA | | 138,137 | 503,946 |
+----------------------------------+------+----------+----------+
The severance payments disclosed above relate to the amounts paid to the former
CEO and the Director of Business Development upon their resignation in the prior
year.
Note 12: Taxes recoverable and prepaid
As at 31 December 2009 taxes recoverable and prepaid comprised:
+-----------------------------------------+----------+----------+
| US$ 000 | Audited | As |
| | As at | at |
| | 31.12.09 | 31.12.08 |
+-----------------------------------------+----------+----------+
| VAT receivable | 81,269 | 57,244 |
+-----------------------------------------+----------+----------+
| Other taxes prepaid | 15 | 41 |
+-----------------------------------------+----------+----------+
| Other taxes recoverable and prepaid | 81,284 | 57,285 |
+-----------------------------------------+----------+----------+
The VAT receivable is as a result of zero rated VAT exports made from Ukraine
which is recoverable under Ukrainian tax legislation.
During the year the VAT receivable increased from US$57,243,752 to US$81,268,909
mainly related to Ferrexpo Poltava Mining. As an exporter, Ferrexpo Poltava
Mining, the group's principal subsidiary, does not have substantial amounts of
VAT received on sales which can be offset against VAT paid for purchases of
goods and services. It therefore relies heavily on the government for refunds.
VAT on trading items is due to be repaid three months after it is incurred.
However, owing to slow repayments, VAT amounting to nine months of trading was
outstanding at the end of the year with none of the amounts being in dispute. It
is expected that VAT refunds will resume in 2010.
Note 13: Net financial indebtedness
+----------------------------------+-----+-----------+-----------+
| US$ 000 | | Audited | Year |
| | | Year | ended |
| | | ended | 31.12.08 |
| | | 31.12.09 | |
+----------------------------------+-----+-----------+-----------+
| | | | |
+----------------------------------+-----+-----------+-----------+
| Cash and cash equivalents | | 11,991 | 87,822 |
+----------------------------------+-----+-----------+-----------+
| | | | |
+----------------------------------+-----+-----------+-----------+
| Current borrowings | | (251,379) | (74,523) |
+----------------------------------+-----+-----------+-----------+
| Non-current borrowings | | (18,143) | (231,373) |
+----------------------------------+-----+-----------+-----------+
| | | | |
+----------------------------------+-----+-----------+-----------+
| Current commodity loans | | (124) | (1,446) |
+----------------------------------+-----+-----------+-----------+
| Non-current commodity loans | | - | (570) |
+----------------------------------+-----+-----------+-----------+
| | | | |
+----------------------------------+-----+-----------+-----------+
| Net financial indebtedness | | (257,655) | (220,090) |
+----------------------------------+-----+-----------+-----------+
Net financial indebtedness as defined by the Group comprises cash and cash
equivalents, term deposits, interest bearing loans and borrowings and amounts
payable for equipment.
On 8 January 2010, the remaining outstanding balance of US$207,727,272 of the
pre-export finance facility was repaid in full. Further information in respect
of the refinancing of the pre-export finance facility in 2010 is disclosed in
note 16.
Note 14: Reconciliation of profit before tax to net cash flow from operating
activities
+------------------------------------------+----------+----------+
| US$ 000 | Audited | Year |
| | Year | ended |
| | ended | 31.12.08 |
| | 31.12.09 | |
+------------------------------------------+----------+----------+
| Profit before tax | 80,850 | 375,581 |
+------------------------------------------+----------+----------+
| Adjustments for: | | |
+------------------------------------------+----------+----------+
| Depreciation of property, plant and | 28,018 | 34,125 |
| equipment and amortisation of intangible | | |
| assets | | |
+------------------------------------------+----------+----------+
| Interest expense | 20,622 | 18,496 |
+------------------------------------------+----------+----------+
| Interest income | (2,893) | (2,467) |
+------------------------------------------+----------+----------+
| Share of income of associates | (1,304) | (1,003) |
+------------------------------------------+----------+----------+
| Movement in allowance for doubtful | (5,199) | 19,095 |
| receivables | | |
+------------------------------------------+----------+----------+
| Write-off/reversal of payables | - | (1,043) |
+------------------------------------------+----------+----------+
| (Profit)/loss on disposal of property, | (213) | 1,280 |
| plant and equipment | | |
+------------------------------------------+----------+----------+
| Assets received free of charge | - | (325) |
+------------------------------------------+----------+----------+
| Write-offs and impairment losses | 2,757 | 27,325 |
+------------------------------------------+----------+----------+
| Site restoration provision | 159 | 269 |
+------------------------------------------+----------+----------+
| Gains on disposal of available-for-sale | - | (1,571) |
| financial assets | | |
+------------------------------------------+----------+----------+
| Employee benefits | 5,474 | 7,715 |
+------------------------------------------+----------+----------+
| IPO costs | 427 | 4,120 |
+------------------------------------------+----------+----------+
| Share based payments | 3,423 | 1,495 |
+------------------------------------------+----------+----------+
| Negative goodwill generated on rights | (503) | (35,049) |
| issue | | |
+------------------------------------------+----------+----------+
| Operating foreign exchange gains | (2,534) | (29,309) |
+------------------------------------------+----------+----------+
| Non-operating foreign exchange losses | 2,552 | 72,788 |
+------------------------------------------+----------+----------+
| Operating cash flow before working | 131,636 | 491,522 |
| capital changes | | |
+------------------------------------------+----------+----------+
| | | |
+------------------------------------------+----------+----------+
| Changes in working capital: | | |
+------------------------------------------+----------+----------+
| Decrease/(increase) in trade and other | 14,961 | (36,167) |
| receivables | | |
+------------------------------------------+----------+----------+
| Decrease/(increase) in inventories | 1,777 | (5,070) |
+------------------------------------------+----------+----------+
| (Decrease)/Increase in trade and other | (6,474) | 8,094 |
| accounts payable | | |
+------------------------------------------+----------+----------+
| (Increase)/decrease in other taxes | (24,038) | (673) |
| recoverable and prepaid | | |
+------------------------------------------+----------+----------+
| Cash generated from operating activities | 117,862 | 457,706 |
+------------------------------------------+----------+----------+
| | | |
+------------------------------------------+----------+----------+
| Interest paid | (19,197) | (15,443) |
+------------------------------------------+----------+----------+
| Income tax paid | (18,899) | (67,217) |
+------------------------------------------+----------+----------+
| Post-employment benefits paid | (2,897) | (4,103) |
+------------------------------------------+----------+----------+
| Net cash flows from operating activities | 76,869 | 370,943 |
+------------------------------------------+----------+----------+
Note 15: Related party disclosures
There have been no significant changes in the Group's material related party
transactions that would require specific disclosure in the 2009 preliminary
results announcement.
Note 16: Subsequent events
No material adjusting or non-adjusting events have occurred subsequent to the
year-end other than the proposed dividend disclosed in note 10 and the
refinancing of the Group described below.
The Company entered into a new 3 year bank debt term facility on 27 November
2009 for US$230 million. This pre-export finance facility was drawn in full on 8
January 2010 and was used for refinancing the existing pre-export finance
facility. The facility matures 36 months from 1 January 2010 and is to be repaid
in 24 equal monthly instalments with the first instalment falling due in January
2011.
GLOSSARY
AGM
The annual general meeting of the Company to be held on Thursday 27 May 2010
Benchmark Price
International seaborne traded iron ore benchmark price agreed between the major
iron ore producers and specific West European or British steel producers for a
given year
BIP
Business improvement programme
Board
The board of directors of the Company
Cape size
Cape size vessels are typically above 150,000 long tons deadweight. Ships in
this class include oil tankers, supertankers and bulk carriers transporting
coal, ore, and other commodity raw materials
Capital Employed
The aggregate of equity attributable to shareholders, minority interests and
borrowings
CFR
Delivery including cost and freight
C1 Costs
Cash costs per ton of pellets, ex-works, excluding administrative and
distribution costs
CIF
Delivery including cost, insurance and freight
CIS
The Commonwealth of Independent States
Company
Ferrexpo plc, a public company incorporated in England and Wales with limited
liability
CPI
Consumer Price Index
CSR
Corporate safety and social responsibility
CSR Committee
The corporate safety and social responsibility committee of the Board of the
Company.
DAF
Delivery at frontier
DFS
Detailed feasibility study
Directors
The directors of the Company
Dragline excavators
Heavy excavators used to excavate material. A dragline consists of a large
bucket which is suspended from a boom.
EBITDA
The Group calculates EBITDA as profit from continuing operations before tax and
finance plus depreciation and amortisation (included in cost of sales,
administrative expenses and selling and distribution costs) and non-recurring
cash items included in other income and other expenses plus the net of gains and
losses from disposal of investments and property, plant and equipment.
EPS
Earnings per share
Executive Committee
The executive committee of management appointed by the Company's Board
Executive Directors
The executive directors of the Company
Fe
Iron
Ferrexpo
Ferrexpo plc
Ferrexpo AG Group
Ferrexpo AG and its subsidiaries including FPM
Fevamotinico S.a.r.l.
A company incorporated with limited liability in Luxembourg
FOB
Delivered free on board
FPM
Ferrexpo Poltava Mining, also known as Ferrexpo Poltava GOK Corporation or PGOK,
a company incorporated under the laws of Ukraine
FTSE 250
Financial Times Stock Exchange top 250 companies
FYM
Ferrexpo Yeristovskoye Mining, also known as YGOK, a company incorporated under
the laws of Ukraine to administer the three major growth projects.
GPL
Gorishne, Plavninskoye and Lavrikovskoye Mine, the mine operated by FPM
Group
The Company and its subsidiaries
Growth Markets
Those markets that offer to add new and significant tonnage expansion potential
HSE
Health, safety and environment
IAS
International accounting standards
IASB
International accounting standards board
IFRS
International financial reporting standards, as adopted by the EU
IPO
Initial public offering
Iron ore concentrate
Product of the flotation process with enriched iron content
Iron ore sinter fines
Fine ground iron ore
Iron ore pellets
Dried and hardened agglomerate of iron ore concentrate, whose physical
properties are well suited for transportation and downstream processing in a
blast furnace
JORC
Australasian Joint Ore Reserves Committee - the internationally accepted code
for ore classification
K22
GPL ore has been classified as either K22 or K23 quality, of which K22 ore is of
higher quality (richer)
KPI
Key performance indicator
LIBOR
The London inter-bank offered rate
LLC
Limited liability company
LTIFR
Lost-time injury frequency rate
Majority Shareholder
Fevamotinico S.a.r.l., The Minco Trust and Kostyantin Zhevago (together)
mt
Million tonnes
mtpa
Million tonnes per annum
Natural Markets
Relative new markets in regions where the Group believes it has competitive
advantage which is yet to be exploited
Non-executive Directors
Non- executive directors of the Company
NOPAT
Net operating profit after tax
Ordinary shares
Ordinary shares of 10 pence each in the Company
Ore
A mineral or mineral aggregate containing precious or useful minerals in such
quantities, grade and chemical combination as to make extraction economic
PPI
Ukrainian producer price index
Probable reserves
Those measured and/or indicated mineral resources which are not yet "proved",
but of which detailed technical and economic studies have demonstrated that
extraction can be justified at the time of the determination and under specific
economic conditions.
Proven reserves
Measured mineral resources of which detailed technical and economic studies have
demonstrated that extraction can be justified at the time of determination and
under specific economic conditions.
Relationship Agreement
The relationship agreement entered into among Fevamotinico S.a.r.l., Kostyantin
Zhevago, The Minco Trust and the Company
Reserves
Those parts of mineral resources for which sufficient information is available
to enable detailed or conceptual mine planning and for which such planning has
been undertaken. Reserves are classified as either proven or probable
$/t
US dollars per tonne
Sinter
A porous aggregate charged directly to the blast furnace which is normally
produced by firing relatively courser fine iron ore, other materials, and coke
breeze as the heat source.
Spot price
The current price of a metal for immediate delivery
Sterling/GBP
Pound sterling, the currency of the United Kingdom
Tailings
The waste material produced from ore after economically recoverable metals or
minerals have been extracted. Changes in metal prices and improvements in
technology can sometimes make the tailings economic to process at a later date
TIS-Ruda
Ukrainian port facility on the Black Sea
Tolling
The process by which a customer supplies concentrate to a smelter and the
smelter invoices the customer the smelting charge, and possibly a refining
charge, and then returns the metal to the customer.
tonne or t
Metric tonne
Treasury Shares
A company's own issued shares that it has purchased but not cancelled.
TSF
Tailings storage facility
Traditional Markets
Markets that the Group has supplied historically and in which it enjoys a
competitive advantage based on its location. These include Austria, Ukraine,
Poland, Slovakia, Romania, Bulgaria and Russia.
TSR
Total shareholder return. The total return earned on a share over a period of
time, measured as the dividend per share plus capital gain, divided by initial
share price.
Ukraine
The Republic of the Ukraine
Underlying earnings
An alternative measure which the directors believe provided a clearer picture of
the underlying financial performance of the Group's operations. Underlying
earnings is presented as profit attributable to equity shareholders before
adjusted items. 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 adjusting items include profits and losses of investments
and businesses as well as IPO costs and non-operating foreign exchange gains and
losses.
UAH
Ukrainian hryvnia, the currency of the Republic of the Ukraine
US$ or Dollars
United States dollars, the currency of the United States of America
USS
United States Steel Corporation
VAT
Value Added Tax
Value in use
The implied value of a material to an end user to use one material relative to
other options, e.g. comparing performance of several types of iron ore pellets
into a blast furnace; taking into account the delivered cost of a material and
rates relative to other competition materials on a quality and landed cost
adjusted basis.
Yeristovo or Yeristovskoye
The mine being developed by FYM
This information is provided by RNS
The company news service from the London Stock Exchange
END
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