TIDMFXPO
RNS Number : 5622Q
Ferrexpo PLC
05 August 2010
5 August 2010
Ferrexpo plc
("Ferrexpo", the "Group" of the "Company")
Interim Results
Ferrexpo, the FTSE 250 iron ore producer, today announces its results for the
six months ended 30 June 2010.
Highlights
Operations
Record production and significant price increases
· Production at record levels up 18% to 4.886 million tonnes (1H 2009:4.139
million tonnes)
· Sales volumes up 13% to 4.738 million tonnes (1H 2009: 4.194 million
tonnes)
· Significant price increases of 90% to 120% achieved in 2Q 2010 compared
to 2009/10 annual benchmark
Financial
Strong financial performance with increased profitability
· Revenue up 74% to US$526 million (1H 2009: US$302 million)
· EBITDA up 257% to US$215 million (1H 2009: US$60 million)
· Underlying PBT up 393% to US$183 million1 (1H 2009: US$37 million)
· PBT up 340% to US$166 million (1H 2009: US$38 million)
· Net Debt US$257 million at period end in-line with 31 December 2009
· Interim dividend maintained at 3.3 US cents per share
Outlook
· Industry pricing mechanism continues to evolve
· Maintain a flexible marketing strategy
· Continue to produce at full capacity and to manage cost position
· Re-evaluating costs and schedule for Yersistovo project with aim of
doubling production in medium term
· Prudent financial management to ensure sustainability through all
economic cycles
Michael Abrahams, Chairman said:
"These results reflect the considerable progress the Company has made during the
first six months of the year. We reacted quickly to capitalise on improved
demand in our Traditional markets. Production was at full capacity through-out
the period achieving record levels of pellet volumes while cost increases were
contained. The Group is confident that it can continue to produce at full
capacity and place all of its output through its established market presence
thus underpinning our expectations for a strong financial performance for the
rest of the year. "
Ferrexpo will be hosting an analyst presentation today at 8.30am. The
presentation will be available live on the company's website at www.ferrexpo.com
1 Excludes exceptional write down on VAT receivable of US$15 million
For further information, please contact:
+---------------------------------+--------------------------------+
| Ferrexpo: | |
+---------------------------------+--------------------------------+
| Ingrid Boon | +44 207 389 8304 |
+---------------------------------+--------------------------------+
| | |
+---------------------------------+--------------------------------+
| Pelham Bell Pottinger | |
+---------------------------------+--------------------------------+
| Charles Vivian | +44 207 861 3126 |
+---------------------------------+--------------------------------+
Notes to Editors:
Ferrexpo is a Swiss headquartered resources company with assets in Ukraine,
principally involved in the production and export of iron ore pellets, used in
producing steel. Current output is approximately 9 million tonnes, most of which
is exported to steelmakers around the world. The Group is listed on the main
market of the London Stock Exchange under the ticker FXPO. For further
information please visit www.ferrexpo.com.
Chairman's Statement
Summary
I am delighted to report that for the six months ended 30 June 2010, Ferrexpo
responded to improved industry fundamentals with record production and robust
cost control. Following the cessation of annual benchmark pricing as of 31
March, the industry, led by the major producers, achieved significant price
increases for iron ore and iron ore pellets. These factors resulted in a
substantially improved financial performance in the first half of 2010 compared
with the first half of 2009.
Results
Sales volumes increased 13% to 4.7 million tonnes (1H 2009: 4.2 million tonnes)
while revenues increased 74% to US$526 million (1H 2009: US$302 million). The
Group produced at full capacity through-out the period which allowed for full
absorption of the fixed cost base. This underpinned a 257% increase in EBITDA
for the period to US$215 million (1H 2009: US$60 million) resulting in an EBITDA
margin of 41% (1H 2009: 20%). Underlying Group profit before tax increased by
393% to US$183 million (1H 2009: US$37 million). A US$15 million exceptional
charge was taken to reflect an estimated discount in the market value of the VAT
bond to be issued to Ferrexpo by the Ukrainian government. This is part of the
government's industry wide solution to repay outstanding VAT to the Ukrainian
business sector. Profit before tax for the period was US$166 million an increase
of 340% over the comparable period (1H 2009: US$38 million).
Pricing Environment and Marketing
In the first six months of 2010, European steel mills continued to re-stock iron
ore pellets following very low inventory levels in 2009 and to operate at higher
levels, while Chinese iron ore requirements continued to underpin world demand.
Due to the reduction of capacity by the major iron ore pellet suppliers during
2009 demand for pellets outstripped supply in the first half of the year. This
proved an ideal scenario for iron ore demand and pellet price recovery.
We believe, however, there is currently a growing divergence of pricing horizons
applied by producers who had negotiated quarterly price agreements in the first
half of the year. We anticipate it will take some time for the transparency
which existed under the annual pricing system to return as the market's pricing
mechanism continues to evolve.
Ferrexpo has historically been a price follower of major global seaborne pellet
producers and it intends to continue with this strategy once the industry
establishes a generally accepted pricing mechanism.
Meanwhile Ferrexpo has continued to execute its proven marketing strategy. This
is based on an established logistics infrastructure and close geographic
proximity to its core customer base in Central and Eastern Europe. This provides
Ferrexpo with a significant advantage to competitively deliver via rail and
barge direct to the customer from the mine. The Group's 49% owned TIS-Ruda port
terminal on the Black Sea provides preferential access to the seaborne Growth
markets in Asia as well as to our Natural markets in Western Europe, Turkey and
the Middle East. This ensures that Ferrexpo is less dependent on its Traditional
customer base for pricing and product demand.
Ferrexpo's geographic proximity to its Traditional and Natural markets allows
the Group to deliver on a just-in-time (JIT) basis to its customers thereby
providing working capital flexibility to clients who would prefer smaller
continuous lot sizes rather than delivery of large shipments. This strategy
enabled the Group to increase its market share to these customers during the
2009 downturn when customers were reluctant to commit to large shipments. In the
first half of 2010, Ferrexpo maintained those gains in market share as its sales
mix returned to a more normal sales pattern following a recovery in the European
steel industry. 67% of the Group's sales volume went to Traditional customers as
opposed to 38% in the first half of 2009. This reflects once again the
advantages of our geographic location and established logistics infrastructure
which allowed us to react swiftly to changes in regional demand.
In the first half of 2010 over 90% of the Group's sales volumes were based on
long-term volume framework agreements compared with 44% in the first half of
2009. It is Ferrexpo's ongoing strategy to allocate approximately 10% of sales
to potential new customers through trial cargos. Indeed the Group was successful
in signing a new long term volume framework agreement, during the period, with a
highly regarded major Asian steel mill.
Production
The Ferrexpo Poltava Mine ("Poltava") has been producing iron ore pellets
reliably for the last 30 years. In the first six months of 2010 the mine
produced record levels of pellets as it operated at full capacity through-out
the period and increased purchases of third party concentrate.
Through ongoing production improvements at the Poltava mine, Ferrexpo is
becoming increasingly competitive in the market place. Its cost of production is
placed towards the lower end of the global cost curve which provides the Company
with flexibility to respond to lower iron ore prices relative to its higher cost
peers as was demonstrated in 2009.
Total production increased 18% over the period to approximately 4.9 million
tonnes of pellets compared with 4.1 million tonnes of pellets produced in the
first half of 2009. Production of own ore increased 8% to 4.4 million tonnes for
the six months ended 30 June 2009 while processing of third party concentrate
increased substantially to meet higher demand. Ferrexpo will continue to
purchase third party concentrate provided it can ensure an acceptable return.
The Group produces a mix of 62% and 65% iron content pellets. Of the total 4.9
million tonnes of pellets produced during the period, 49.3% were higher grade
65% iron content pellets an increase compared with the first half of 2009 where
65% iron content pellets comprised 48.4% of total production.
Costs
In the first six months of 2010, local PPI inflation was 14.3% while there was
also cost increases associated with a stronger commodity price environment.
Approximately 70% of costs are in Ukrainian hryvnia while all revenues are
received in US dollars. The hryvnia has remained broadly stable on average since
the end of 2009 at around UAH8.0 to the US dollar. This has resulted in
slightly higher production costs in the period under review compared to the
second half of 2009.
Ferrexpo is continually focused on containing operating cost increases and these
were partially offset by the Business Improvement Programme ("BIP"). During the
period under review, the Poltava mine was able to reduce the consumption per
tonne of pellets produced of both energy and raw material inputs by between 1.5%
and 5%.
Overall the average C1 cash cost of production was US$37.81 per tonne for the
first half of 2010 in line with the Company's expectations. This represented a
9% increase compared to the December 2009 C1 cash cost of US$34.80 per tonne but
it was, however, lower than the local inflation rate of 14% for the period.
Strategy
Ferrexpo has a clear strategy, its capital expenditure projects are aimed at the
expansion and upgrade of the existing mine and processing facilities and to
unlock the substantial value in the Group's under exploited reserves and
resources, starting with the Yeristovo deposit. These projects are discretionary
and can be undertaken when the Group's cash flows and funding capabilities
allow, minimising the execution risk to the financial position of the Company.
As such the speed of development will depend on the performance of the business.
Ferrexpo believes this balanced approach will allow the Group to benefit from
incremental production while maintaining financial prudence for the long term
viability of the Company.
The finalisation of the estimated budgets and timings of these projects are
subject to Board approval which is anticipated in the latter part of 2010.
Dividend
It is the stated strategy of the Company that it should pay modest and
consistent dividends based on continuing profitability and cash generation
through the economic cycle.
The Board believes that the business has sufficient operational flexibility to
respond to the demands it will face in the second half of 2010, and as a result,
it is appropriate to continue with a dividend in line with prior years. The
Directors therefore recommend an interim dividend in respect of profits
generated for the Group in the first half of 2010 of 3.3 US cents per Ordinary
Share for payment on 17 September 2010 to shareholders on the register at the
close of business on 13 August 2010. The dividend will be paid in UK pounds
sterling with an election to receive US dollars.
People
Ferrexpo has a talented international team committed to the continuing success
of the business. On behalf of the Board I would like to thank them all for their
hard work and dedication.
Corporate Governance and Social Responsibility
Ferrexpo understands there is a clear relationship between high quality
corporate governance and creation of shareholder value. The Board's primary
responsibility is to ensure committed and continued compliance with the UK
Corporate Governance Code. Ferrexpo has a balanced and experienced Board
dedicated to fostering a culture of the highest standards of corporate
governance throughout the Company.
The Board's Corporate Safety and Social Responsibility ('CSR') Committee
monitors the management of the Group's health, safety, environmental and
community programmes on a regular basis in line with best practice for mining
companies. Awareness of safety-conscious behaviour has improved markedly during
the period under review we are able to report that, as with 2009, there were no
production-related fatalities at our operations during the period under review.
CSR is a priority within our business and we are pursuing our initiatives to
ensure a culture of continuing improvement.
Principal Risks and Uncertainties
In the second half of 2010, the pricing environment may be volatile as the
industry looks to establish a generally accepted pricing mechanism while
differences in geographic demand may emerge. As the Group demonstrated in 2009
it will continue to react flexibly to changes in geographic demand and increased
variability in pricing. The Group will at all times practice financial prudence
in order to mitigate these risks.
Outlook
The Group is confident that it can continue to produce at full capacity and
place all of its output through its established market presence thus
underpinning our expectations for a strong financial performance for the rest of
the year.
Michael Abrahams CBE DL
Chairman
OPERATING & FINANCIAL REVIEW
Operating Highlights
· Production at record levels up 18% to 4.886 million tonnes (1H 2009:4.139
million tonnes)
· Sales volumes up 13% to 4.738 million tonnes (1H 2009: 4.194 million
tonnes)
· Significant price increases of 90% to 120% achieved in 2Q 2010 compared
to 2009/10 annual benchmark
Financial Highlights
· Revenue up 74% to US$526 million (1H 2009: US$302 million)
· EBITDA up 257% to US$215 million (1H 2009: US$60 million)
· Underlying PBT up 393% to US$183 million (1H 2009: US$37 million)1
· PBT up 340% to US$166 million (1H 2009: US$38 million)
· Net Debt of US$257 million at period end (Year end 2009: US$258 million)
· Dividend maintained at 3.3 US cents per share
OPERATING REVIEW
Key Statistics
+-+--------------------+-------+--------------+-------------+--------+
| | UOM | Six months | Six months | % |
| | | ended 30 | ended 30 |Change |
| | | June 2010 | June 2009 | |
+----------------------+-------+--------------+-------------+--------+
| | | | | |
+----------------------+-------+--------------+-------------+--------+
| Iron ore mined |000't | 14,203 | 13,694 | 3.7 |
+----------------------+-------+--------------+-------------+--------+
| Average Fe | % | 30.21 | 30.30 | (0.3) |
| content | | | | |
+----------------------+-------+--------------+-------------+--------+
| | | | | |
+----------------------+-------+--------------+-------------+--------+
| Concentrate produced |000't | 5,510 | 4,991 | 10.4 |
| from own ore | | | | |
+----------------------+-------+--------------+-------------+--------+
| Average Fe | % | 63.21 | 63.35 | (0.2) |
| content | | | | |
+----------------------+-------+--------------+-------------+--------+
| | | | | |
+----------------------+-------+--------------+-------------+--------+
| Purchased |000't | 509 | 17 | 2894 |
| concentrate | | | | |
+----------------------+-------+--------------+-------------+--------+
| Average Fe | % | 66.50 | 65.56 | 1.4 |
| content | | | | |
+----------------------+-------+--------------+-------------+--------+
| | | | | |
+----------------------+-------+--------------+-------------+--------+
| Total pellet |000't | 4,886 | 4,139 | 18.1 |
| production (BFP) | | | | |
+----------------------+-------+--------------+-------------+--------+
| | | | | |
+----------------------+-------+--------------+-------------+--------+
| | From produced |000't | 4,441 | 4,123 | 7.7 |
| | concentrate | | | | |
+-+--------------------+-------+--------------+-------------+--------+
| | - Lower grade |000't | 2,384 | 2,120 | 12.5 |
+-+--------------------+-------+--------------+-------------+--------+
| | | % | 62.19 | 62.15 | 0.1 |
| | Average Fe content | | | | |
+-+--------------------+-------+--------------+-------------+--------+
| | - Higher |000't | 2,057 | 2,003 | 2.7 |
| | grade | | | | |
+-+--------------------+-------+--------------+-------------+--------+
| | | % | 64.99 | 64.89 | 0.2 |
| | Average Fe content | | | | |
+-+--------------------+-------+--------------+-------------+--------+
| | | | | | |
+-+--------------------+-------+--------------+-------------+--------+
| | From purchased raw |000't | 445 | 15 | 2867 |
| | materials | | | | |
+-+--------------------+-------+--------------+-------------+--------+
| | - Lower |000't | 91 | 15 | 507 |
| | grade | | | | |
+-+--------------------+-------+--------------+-------------+--------+
| | | % | 62.19 | 62.15 | 0.1 |
| | Average Fe content | | | | |
+-+--------------------+-------+--------------+-------------+--------+
| | -Higher grade |000't | 354 | - | - |
+-+--------------------+-------+--------------+-------------+--------+
| | | % | 64.99 | - | - |
| | Average Fe content | | | | |
+-+--------------------+-------+--------------+-------------+--------+
| | | | | |
+----------------------+-------+--------------+-------------+--------+
| Pellet sales volume |000't | 4,738 | 4,194 | 13.0 |
+----------------------+-------+--------------+-------------+--------+
| | | | | |
+----------------------+-------+--------------+-------------+--------+
| Gravel production |000't | 1,437 | 1,478 | (2.8) |
+-+--------------------+-------+--------------+-------------+--------+
1 Excludes exceptional write down on VAT receivable of US$15 million
Existing Operations
The Group's operations performed strongly in the first six months of the year
producing and selling record volumes. Total production of pellets, including
from own ore and purchased third party concentrate, was at record levels in
March 2010 (848,300 tonnes), May 2010 (860,300 tonnes) and June 2010 (864,200
tonnes). The previous high for production was in August 2008 (840,900 tonnes).
Iron ore mined during the period increased 3.7% to 14,202,600 tonnes (1H 2009:
13,693,500 tonnes), while production of concentrate from own ore increased 10.4%
to 5,509,600 tonnes (1H 2009: 4,990,500 tonnes) as the Group drew down on
existing stocks in storage. Total pellets produced from own ore increased 7.7%
which consisted of a 2.7% increase in production of higher quality 65% iron
content pellets and a 12.4% increase of 62% iron content pellets compared to the
first half of 2009.
Pellet production from purchased concentrate increased significantly to meet
higher demand. The Group produced 444,600 tonnes pellets from third party
concentrate compared with only 15,000 tonnes produced in the first half of 2009.
The Group plans to continue to purchase third party concentrate during the
remainder of 2010, provided acceptable margins can be realised, in order to
maximise production and reduce the effect of its fixed cost base.
Overall, total pellet production increased 18% to 4,886 kilotonnes in the first
half of 2010 (1H 2009: 4,139 kilotonnes).
Stripping volumes at the Poltava mine increased 2.5% in the first half of 2010
to 12,285 cubic metres. Approximately 40% of the stripping volumes were
capitalized during the period. This work allows for preparation of the mine area
in order to expose more of the richer ore which enables the production of
increased quantities of higher quality 65% Fe pellets.
The Poltava management continues to drive the Business Improvement Program
("BIP") forward. During the period under review, the Poltava mine was able to
reduce the consumption of electricity per tonne of pellets produced by 5% as
well as the consumption of fuel and grinding bodies per tonne of pellets
produced by 2% respectively compared to the first half of 2009.
Ferrexpo's average C1 cash cost increased 8.6% to US$37.81 per tonne in the
first six months of 2010 compared with the December 2009 C1 cash cost of
US$34.80 per tonne and 9.5% compared with the C1 cash cost of US$34.50 per tonne
for the six months ended 30 June 2009.
The Ukrainian PPI inflation rate from January to June 2010 was 14.3% while year
on year PPI inflation was 21.1% to June 2010. The Group's costs are principally
denominated in Ukrainian hryvnia. The hryvnia has remained broadly stable on
average since the end of 2009 resulting in higher local production costs
compared to the second half of 2009. Over 50% of Ferrexpo's C1 cash cost are
energy related. Electricity tariffs increased 4.4% in the second quarter. There
were no other government regulated tariff increases during the period. Costs for
grinding media, which are 10% of the C1 cash cost, increased 12.5% in the second
quarter due to higher steel prices. The increase in steel prices was more than
reflected in higher sales prices for our iron ore pellets during the period
under review.
Overall, the Group once again, benefitted from producing at full capacity
through-out the period under review. This ensured full absorption of the fixed
cost base and helped mitigate inflationary cost pressures.
The number of personnel on the Ferrexpo Poltava's payroll decreased slightly
over the first six months of the year, with 7,985 people employed at the 30 June
2010 compared to 8,028 at 31 December 2009. While the number of personnel
employed at Ferrexpo Yeristovo increased to 187 employees compared to 78 at 31
December 2009. Overall, average salary costs have increased in line with
domestic inflation.
The Group recorded an exceptional item for a US$15 million write down of the VAT
receivable. This reflects an estimated discount in the market value of the VAT
bond to be issued by the Ukrainian government to Ferrexpo for the repayment of
outstanding VAT. This exceptional charge was fully reflected in the income
statement for the period. The issue of VAT bonds is an industry wide solution
proposed by the Ukrainian government for the repayment of overdue VAT to the
Ukrainian business sector. A full discussion is disclosed in the Financial
Statements note 13.
Marketing and Distribution
The global recession, that began in the final quarter of 2008 and commenced a
slow recovery in the latter part of 2009, has had a marked effect on industry
fundamentals, specifically on annual iron ore benchmark pricing arrangements.
Customer reliance on iron ore spot market prices during the downturn increased
dramatically notwithstanding agreed benchmark pricing between steel producers
and iron ore suppliers. As a result, the largest iron ore producers
substantially agreed quarterly pricing with their customer base from 1 April
2010. This represents a fundamental change to the previous annual pricing system
which had been in place for 40 years.
In spite of the change to shorter term pricing horizons there is a lack of
clarity with respect to the frequency with which price settlements will occur
going forward. Ferrexpo expects that it could take some time for a generally
accepted methodology to evolve and for the pricing transparency that existed
under annual benchmark price arrangements to return.
Robust demand and provisional price settlements in the first six months of 2010
allowed the Group to achieve significant price increases of 90% to 120% in the
second quarter of the year. Ferrexpo will continue set provisional prices with
customers at current market levels going forward.
The recovery in the European steel industry can be seen in the first half
results. Ferrexpo's geographic sales mix reverted to more normal patterns with
67% of total pellet sales volumes to its Traditional markets, 23% to Growth
markets and 10% to Natural markets. By comparison in the first half of 2009,
only 38% of sales were made to Traditional markets, 5% to Natural markets and
the remaining 57% of sales went to Growth markets.
Ferrexpo's Traditional markets are those that it has supplied historically. Many
of its customers within Central and Eastern Europe operate steel plants that
were designed to use its iron ore pellets and the Poltava mine has been
supplying some of these customers for more than 20 years. Moreover, Ferrexpo has
a well established logistics infrastructure to these markets by barge and rail.
Traditional markets include Austria, Bulgaria, Poland, Romania, Russia, Czech
Republic, Serbia and Slovakia.
Natural markets are those in which, due to the Group's location, Ferrexpo has
potential freight advantages and JIT delivery flexibility over more distant
producers. Natural markets include Turkey, the Middle East and Western Europe.
Growth markets include China and other Asian markets that are fuelling
increasing demand for iron ore, offering significant expansion for Ferrexpo's
future production growth. The Group's TIS Ruda JV port terminal on the Black Sea
provides Ferrexpo with preferential access to the seaborne Natural and Growth
markets. Ferrexpo positions itself in these markets as an independent,
alternative and reliable supplier. The Group's ongoing strategy to establish
relationships with potential new customers through trial cargos led to a new
long term volume framework agreement during the period with a well regarded
major Asian steel mill.
Capital Expenditure and Growth Projects
The Group placed all significant capital expenditures on hold in October 2008 in
response to the global financial crisis. In the first six months of 2010 we did,
however, continue to modestly invest in our growth projects so as to progress
critical path items and maintain value.
The Group spent US$42.3 million on capital expenditure in the first half of
2010, in-line with the first half of 2009 (1H 2009: US$43.2 million). US$21.3
million of the capex spend was for the Yeristovo project which included US$16.1
million for payment of CAT equipment. During the period four CAT trucks were
delivered to the Yeristovo site with a further truck delivered at the end of
July. Four draglines are in operation at Yeristovo with three in the pit and one
on the boundary of the pit loading rock and gravel.
With the subsequent material improvement in iron ore markets and current pricing
levels the Group is in a position to increase its level of expenditure and is
actively engaged in a process of re-evaluation of project budgets and schedules.
It is Ferrexpo's strategy to develop the projects described below from the
Group's own internal generated free cash flow. To allow this, the projects can,
if required be developed in stages. This approach will enable Ferrexpo to
prudently manage its financial exposure while at the same time allow the Group
to benefit from incremental increases in the production of pellets and
concentrate.
Northern Pushback and mine life extension of existing pit (Ferrexpo Poltava
mine)
The Northern Pushback project focuses on extending the current pit to access
additional high quality K22 ore at the northern end of the Lavrikovskoe deposit.
The extension is expected to increase mine capacity by approximately 3.5 million
tonnes per annum of ore which, after processing, should convert into
approximately 1.2 million tonnes per annum of 65% iron content pellets. The
project primarily involves an additional mining fleet as well as mine stripping
operations.
The Northern Pushback project was initiated in 2007 and subsequently put on hold
in October 2008 before any significant level of stripping activity had been
undertaken. The Group is engaged in revaluating the project's schedule and
budgets.
Ferrexpo is also conducting a program of additional stripping to extend the life
of the existing pit. Combined with the Northern Pushback project, management
estimates this could deliver production of 32 million tonnes per annum of iron
ore compared to current level of approximately 28.5 million tonnes per annum,
and extend the life of the Poltava mine until approximately 2038. The additional
mining fleet is expected to be delivered in the second half of 2010, following
which Ferrexpo Poltava will re-initiate stripping operations.
Quality upgrade at current processing facilities (Ferrexpo Poltava mine)
Ferrexpo is planning to upgrade the existing concentrating facilities at the
Poltava mining facility to allow it to increase the proportion of 65% iron
content pellets to 100% of total pellet production. Currently approximately half
of the Group's production is split between 65% iron content pellets and 62% iron
content pellets. Development will include additional grinding facilities within
the current concentrator plant to achieve a finer grade as well as a second
flotation plant to allow the concentrate to be processed through the flotation
stage producing a single grade suitable for 65% iron content pellets. The
expected timeframe for this project is three years. It is envisaged that until
this project is completed, production of 65% and 62% iron content pellets will
remain at around current levels.
Developing the Yeristovo deposit
Ferrexpo holds a licence to mine the Yeristovo iron ore deposit, which is
adjacent to the current Poltava mine. The deposit has probable reserves of
approximately 632 million tonnes of iron ore, with an average total iron content
of approximately 34%. Yeristovo will be managed and operated independently from
the existing mine, although its proximity to the existing pit will facilitate
the sharing of certain facilities and resources, particularly during the early
stages of operation, and should allow current best practice being used in the
Poltava mine to be introduced immediately at the Yeristovo mine.
In terms of minimising the execution risk to the financial position of the
Group, Yeristovo will be developed in stages, first by stripping and developing
the mine, then adding concentrating and processing capacity and finally
pelletising capacity. This will provide both investment flexibility should
market conditions or the Group's cash flow position vary from plan, and allow
the Group to benefit from increases in incremental production.
Accordingly, it is anticipated that the project will increase the production of
pellets initially processed by the existing Poltava mining facility from the
current 9.0 million tonnes to 12.0 million tonnes per annum. This will be due to
additional ore from the new Yeristovo mine supplemented by ore from the Northern
Pushback expansion project currently planned at the Poltava mining facility.
Once completed, it is anticipated that the Yeristovo open pit mine will produce
up to 30 million tonnes of iron ore which can be processed into merchant
concentrate or iron ore pellets depending on market demand.
Financial Review
Summary of Financial Results
+---------------------+-----------------+-----------------+---------+
| US$ 000 | 6 months to 30 | 6 months to 30 | % |
| | June 2010 | June 2009 | Change |
+---------------------+-----------------+-----------------+---------+
| Revenue | | 301,759 | 74.3 |
| | 525,833 | | |
+---------------------+-----------------+-----------------+---------+
| | | | |
+---------------------+-----------------+-----------------+---------+
| EBITDA | 215,172 | 60,295 | 256.9 |
+---------------------+-----------------+-----------------+---------+
| As % of revenue | 41% | 20% | |
+---------------------+-----------------+-----------------+---------+
| | | | |
+---------------------+-----------------+-----------------+---------+
| Exceptional VAT | (15,000) | Nil | n/a |
| write down | | | |
+---------------------+-----------------+-----------------+---------+
| | | | |
+---------------------+-----------------+-----------------+---------+
| Underling profit | 183,011 | 37,111 | 393.1 |
| before taxation | | | |
+---------------------+-----------------+-----------------+---------+
| | | | |
+---------------------+-----------------+-----------------+---------+
| Reported profit | 166,164 | 37,792 | 339.7 |
| before taxation | | | |
+---------------------+-----------------+-----------------+---------+
| | | | |
+---------------------+-----------------+-----------------+---------+
| Income tax | (27,458) | (9,084) | 202.3 |
+---------------------+-----------------+-----------------+---------+
| | | | |
+---------------------+-----------------+-----------------+---------+
| Underlying earnings | 154,964 | 27,848 | 456.5 |
+---------------------+-----------------+-----------------+---------+
| | | | |
+---------------------+-----------------+-----------------+---------+
| Reported profit for | 138,706 | 28,708 | 383.2 |
| the period | | | |
+---------------------+-----------------+-----------------+---------+
| | | | |
+---------------------+-----------------+-----------------+---------+
| Underlying earnings | 26.50 | 4.76 | 456.7 |
| per share | | | |
+---------------------+-----------------+-----------------+---------+
| | | | |
+---------------------+-----------------+-----------------+---------+
| Reported earnings | 23.62 | 4.88 | 384.0 |
| per share | | | |
+---------------------+-----------------+-----------------+---------+
Revenue increased by 74.3% to US$525.8 million for the six months ended 30 June
2010 (1H 2009: US$301.8 million). This was driven by the global economic
recovery following the downturn in 2009, with improved demand from our core
customer base in our Traditional markets in Central and Eastern Europe. Sales
volumes increased 13.0% to 4,738 kilotonnes in the first six months of 2010
compared with 4,194 kilotonnes in the in the equivalent 2009 period.
Pricing for the first quarter of 2010 was largely based on the annual benchmark
price to 31 March 2010. In the second quarter the Group agreed quarterly pricing
with its customer base with an achieved Q2 price increase of between and 90% and
120% based on the 2009/10 annual benchmark price.
The mix of pellet sales volumes between Growth and Traditional markets returned
to normal in the first half of 2010 compared with the first half of 2009. In the
first half of 2009, 57% of pellet sales volumes were made to Growth markets as
sales were diverted to Asia to offset poor demand in Europe. In the first half
of 2010 only 23% of sales volumes went to Growth markets and 67% went to
Traditional markets.
Cost of sales
The C1 cash cost of production per tonne is defined as the cash costs of
production of iron ore divided by production volume of iron ore. This excludes
costs such as depreciation, pension costs, stock movement, costs of purchased
ore and concentrate, production cost of gravel, and one-off items.
For the six months ended 30 June 2010, Ferrexpo's average C1 cash cost increased
9.5% to US$37.81 per tonne compared with US$34.54 for the comparable 2009
period. The Group experienced cost increases from cyclical inputs such as oil
and steel. The C1 cash cost per tonne once more benefitted from producing at
full capacity through-out the period under review. This allowed full absorption
of the fixed cost base which along with the Business Improvement Programme
helped mitigate inflationary cost pressures. As a result, the increase in C1
cash costs was lower than the local PPI inflation rate from January to June 2010
of 14.3%.
Just over half of the C1 cash costs are denominated in Ukrainian hryvnia. The
hryvnia has remained broadly flat on average since the end of 2009 resulting in
higher local production costs compared to the second half of 2009.
Approximately half of Ferrexpo's C1 cash cost are energy related. Electricity
tariffs increased 4.4% in the second quarter. There were no other government
regulated tariff increases during the period. Costs for grinding media, which
are 10.0% of the C1 cash cost, increased 12.5% in the second quarter due to
higher steel prices. The increase in steel prices was more than reflected in
higher sales prices for our iron ore pellets during the period under review.
The table below sets out the breakdown of the Group's C1 Cost of Sales.
+-----------------------+---------+----------+---------+---------+
| | 6 months to 30 | 6 months to 30 |
| | June 2010 | June 2009 |
+-----------------------+--------------------+-------------------+
| | US$ | % of |US$ 000 | % of |
| | 000 | total | | total |
+-----------------------+---------+----------+---------+---------+
| | | | | |
+-----------------------+---------+----------+---------+---------+
| Electricity | 44,589 | 26.6 | 37,480 | 26.3 |
+-----------------------+---------+----------+---------+---------+
| Gas | 20,014 | 11.9 | 18,573 | 13.0 |
+-----------------------+---------+----------+---------+---------+
| Fuel | 16,113 | 9.6 | 11,076 | 7.8 |
| | | | | |
+-----------------------+---------+----------+---------+---------+
| Materials | 34,856 | 20.8 | 31,128 | 21.2 |
+-----------------------+---------+----------+---------+---------+
| Spare parts and | 27,646 | 16.5 | 23,318 | 16.4 |
| consumables | | | | |
+-----------------------+---------+----------+---------+---------+
| Personnel costs | 21,467 | 12.8 | 18,803 | 13.2 |
+-----------------------+---------+----------+---------+---------+
| Royalties and levies | 3,231 | 1.8 | 3,044 | 2.1 |
+-----------------------+---------+----------+---------+---------+
| C1 Cost Of Sales |167,916 | 100% |142,422 | 100% |
+-----------------------+---------+----------+---------+---------+
| | | | | |
+-----------------------+---------+----------+---------+---------+
| C1 Cost per tonne | 37.81 | - | 34.54 | - |
+-----------------------+---------+----------+---------+---------+
| Own ore pellet | 4,441 | | 4,123 | |
| production | | | | |
+-----------------------+---------+----------+---------+---------+
Overall, cost of sales for the six months ended 30 June 2010 was US$216.3
million (1H 2009: US$159.7 million). Apart from the impact of C1 cash costs
discussed above cost of sales also includes third-party iron ore concentrate
purchases. The Group purchased 445 thousand tonnes of pellet equivalent third
party concentrate during the period (1H 2009: 15 thousand tonnes). The Group
will continue to purchase third party concentrate provide adequate margins can
be achieved.
Selling and distribution expenses
The main components of Ferrexpo's marketing and distribution costs are railway
freight costs to the Ukrainian border as well as port charges and international
freight expenses for pellets shipped by sea and ocean vessels to customers on a
DES/CFR basis.
The following table highlights the selling and distribution expenses for the
periods indicated:
+-------------------------------------------+--------+--------+
| | 6 | 6 |
| |months |months |
| | to 30 | to 30 |
| | June | June |
+-------------------------------------------+--------+--------+
| (US$ million unless otherwise stated) | 2010 | 2009 |
+-------------------------------------------+--------+--------+
| Railway transportation |42,702 |30,590 |
+-------------------------------------------+--------+--------+
| Port charges |15,774 |18,083 |
+-------------------------------------------+--------+--------+
| International freight |19,238 |21,634 |
+-------------------------------------------+--------+--------+
| Other (commissions, insurances, | 7,140 | 5,499 |
| personnel, depreciation, advertising...) | | |
+-------------------------------------------+--------+--------+
| Total Selling and Distribution expenses |84,854 |75,806 |
+-------------------------------------------+--------+--------+
| Total Sales volume, kt | 4,738 | 4,194 |
+-------------------------------------------+--------+--------+
| Cost per tonne of pellets sold (incl | 17.9 | 18.1 |
| international freight) | | |
+-------------------------------------------+--------+--------+
| DAF/FOB per tonne of pellets sold | 13.1 | 12.1 |
+-------------------------------------------+--------+--------+
Total selling and distribution expenses increased 11.9% to US$84.9 million,
compared to US$75.8 million in the six months ended 30 June 2009. The increase
was a function of 13.0% higher sales volumes, local inflation and a return of
our geographic sales mix to more normal patterns.
The following table shows the geographic split of pellet sales by volume:
+--------------+---------+--------+
| | 6 | 6 |
| | months |months |
| | to 30 | to 30 |
| | June | June |
| | 2010 | 2009 |
+--------------+---------+--------+
| Traditional1 | 67% | 38% |
+--------------+---------+--------+
| Natural2 | 10% | 5% |
+--------------+---------+--------+
| Growth3 | 23% | 57% |
+--------------+---------+--------+
| Total | 100% | 100% |
+--------------+---------+--------+
1Traditional markets include Austria, Czech Republic, Poland, Slovakia,
Romania, Bulgaria, Ukraine and Russia
2Natural markets include Western Europe, Turkey and the Middle East
3Growth markets include China, India, Japan and South Korea
Of the volumes sold, 67.0% was sold to our Traditional customers in Central and
Eastern Europe compared with 38.0% in the first half of 2009. The increased
volumes resulted in a 40.0% increase in railway transportation costs to US$42.7
million in the first half of 2010 (1H 2009: US$30.6 million), as our Traditional
customers largely receive their product by rail.
Port charges reduced 12.8% to US$15.8 million (1H 2009: US$18.1 million),
reflecting lower seaborne sales to Growth markets as their share of sales volume
fell to 22.7% in the first half of 2010 compared with 57.0% in the first half of
2009.
International freight costs decreased 11.1% to US$19.2 million (1H 2009: US$21.6
million) reflecting a normalised level of shipments to Growth markets. The Group
increased barge shipments in Central Europe during the period as well as
increased volumes to Natural markets, which accounted for 10.3% of sales volumes
for the period compared to 4.5% in the first half of 2009.
General and administrative expenses
General and administrative expenses increased 8.1% to US$24.1 million for the
six months ended 30 March 2010 (1H 2009: US$22.3 million). The increase was due
to inflation in Ukraine and higher activity related to projects and business
development.
Other income and expense
Other income was US$0.5 million for the six months ended 30 June 2010 (1H 2009:
US$2.9 million).The decrease is due to a US$1.0 million reimbursement of social
security costs included in the prior year balance as well as lower gains from
the sale of current assets in the first six months of 2010. Other expenses were
US$2.1 million compared to US$1.6 million for the six months ended 30 June 2009.
The difference was largely due to a US$1.1 million reversal of a doubtful debt
in the first six months of 2009.
EBITDA
Ferrexpo defines 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 gains and
losses from disposal of investments and property, plant and equipment.
EBITDA increased materially by 256.7% to US$215.1 million for the six months
ended 30 June 2010 compared with US$60.3 million for the six months ended 30
June 2009. The increase was due to 13.0% higher sales volumes and a 61.5% higher
average DAF/FOB sales price. This was partially offset by a 9.5% increase in C1
cash costs per tonne. The EBITDA margin for the first half of 2010 was 41.3%
compared with 20.0% for the first half of 2009.
Write down of VAT receivable
The Ukrainian Cabinet of Ministers published on 1 June 2010 that the government
intends to convert outstanding overdue VAT balances into government bonds with a
coupon interest rate of 5.5% per annum paid semi annually with 10 half-yearly
principal repayments.
On 18 June 2010, the Group applied to convert all of the VAT outstanding as of
31 December 2009 into government bonds amounting to US$81.3 million. It is
anticipated that the conversion will take place in the second half of 2010.
Accounting standards require such financial instruments, when issued, to be
marked to market, or, if no market exists, an estimate to be made as to the fair
value. Market yields on Ukrainian domestic hryvnia debt currently range between
12.0% to 16.0% and have recently been volatile. If these yields were to continue
at these levels, they would be higher than the coupon interest rate on the
proposed new bond issue. As a result, a fair value adjustment could be realised
on the initial recognition of this financial instrument. Whilst it is not
possible to value this instrument exactly prior to its issue, an estimated gross
charge, before any tax deductions of US$15.0 million, has been recorded in the
income statement to reflect management's estimate of the difference between the
amount of the VAT receivable that is refundable and the expected fair value of
the government bond to be issued in settlement of this debt. This estimate will
be revised when the final terms, conditions and features of the new financial
instrument are known.
This is an exceptional item and the write-down has accordingly been disclosed as
a separate line item in the Group's consolidated income statement.
Finance income and expense
Finance income decreased to US$0.7 million for the six months ended 30 June 2010
(1H 2009: US$1.6 million) due to lower average cash balances. At the end of the
first half of 2010 the Group had a cash balance of US$60.2 million compared with
US$74.3 million at the end of the first half of 2009. Finance expense increased
to US$16.9 million for the six months ended 30 June 2010 (1H 2009: US$10.4
million) due to higher interest rates under the new pre-export financing
facility (US LIBOR +7.0% as compared with US LIBOR + 2.4% under the old
facility). Gross borrowings as of 30 June 2010 were US$317.0 million compared to
US$295.0 million as of 30 June 2009 and US$269.5 million as of 31 December 2009.
Foreign exchange gain/(loss)
Operating foreign exchange gains and losses result from the re-valuation of
monetary items on the balance sheet, such as trade receivables and trade
payables, which are denominated in a currency other than the Group reporting
currency.
The change in the operating foreign exchange differences is related to the
fluctuations in the UAH/US$ over the comparable periods. The Ukrainian hryvnia
slightly appreciated against the US dollar from UAH 7.985 to UAH 7.907 during
the six month period ended 30 June 2010 compared with UAH 7.700 to UAH 7.630 in
the equivalent 2009 period.
The operating foreign exchange loss was US$0.7 million for the six months ended
30 June 2010 compared with an operating foreign exchange loss of US$0.8 million
for the six months ended 30 June 2009.
Non-operating foreign exchange gains and losses result from the re-translation
of non-operating items on the balance sheet, such as financial liabilities,
loans, taxes and dividends, which are denominated in a currency other than the
Group reporting currency.
Non-operating foreign exchange gains decreased to US$0.8 million for the six
month period ended 30 June 2010 (1H 2009: US$3.7 million). The change primarily
related to CHF/US$ exchange rate movements and translation of Ferrexpo AG
liabilities, which are denominated in Swiss francs, as well as the foreign
exchange effect from the GBP/US$ movements related to the dividend payable in
Ferrexpo plc. The average US$ exchange rate depreciated against the Swiss franc
and the British pound by 4.2% and 2.2% respectively for the six months ended 30
June 2010 compared to the equivalent 2009 period.
Income tax expense
Reported profit before tax was US$166.2 million for the six months ended 30 June
2010, compared with US$37.8 million for the six months ended 30 June 2009. The
effective income tax rate for the period was 16.5% compared with 24.0% for the
equivalent 2009 period.
Statement of financial position and cash flow
The Group's cash flow from operating activities increased 45% to US$67.3 million
(1H 2009: US$46.3 million). This was after a working capital outflow of US$135.8
million (1H 2009: US$15.9 million working capital inflow). The working capital
outflow was largely due to a US$28 million increase in trade receivables due to
second quarter price increases, a US$67 million increase in VAT outstanding and
a US$37 million working capital outflow due to the purchase of third party
concentrate which will reverse in the third quarter.
During the six month period to 30 June 2010, the VAT receivable increased from
US$81.3 million as of 31 December 2009 to US$138.5 million. The increase in VAT
receivable was due to VAT paid for local purchases of goods and services in
Ukraine and the import of equipment during the period.
Total cash flow for capital expenditure during the first half of 2010 was
US$42.3 million, in-line with the first half of 2009 (1H 2009: US$43.2 million).
Of the total 2010 spend, US$11.6 million was for sustaining capital expenditure
at the Ferrexpo Poltava mine. Total development capital expenditure amounted to
US$30.7 million. This consisted of US$7.9 million for the Poltava mine which
included capitalised stripping for the mine life extension programme and the
quality upgrade programme. US$21.3 million was for the development of the
Yeristovo deposit, which included US$16.1 million for payment of CAT equipment.
US$1.5 million was spent on development of the northern deposits.
Borrowings
Net financial indebtedness ("NFI") was US$256.9 million at 30 June 2010. This
was in-line with NFI at 31 December 2009 (US$257.7 million). NFI increased 15.6%
compared to 30 June 2009 US$222.3 million.
The Group's primary source of financing is a pre-export facility of US$230
million. The new facility was available from 1 January 2010 and was drawn down
in full to repay the previous pre-export finance facility. The new facility
matures 36 months from 1 January 2010 and is to be repaid in 24 equal monthly
installments with the first installment falling due in January 2011.
The following table analysis the net financial indebtedness of the Group:
+-----------------------------+-------------+-------------+
| US$ 000 | As at | As at |
| | 30.06.10 | 30.06.09 |
| | (unaudited) | (unaudited) |
+-----------------------------+-------------+-------------+
| | | |
+-----------------------------+-------------+-------------+
| Cash and cash equivalents | 60,172 | 74,303 |
+-----------------------------+-------------+-------------+
| Current borrowings | (117,784) | (105,080) |
+-----------------------------+-------------+-------------+
| Non-current borrowings | (199,238) | (189,959) |
+-----------------------------+-------------+-------------+
| Current commodity loans | (53) | (1,467) |
+-----------------------------+-------------+-------------+
| Non-current commodity loans | - | (61) |
+-----------------------------+-------------+-------------+
| Net financial indebtedness | (256,903) | (222,264) |
+-----------------------------+-------------+-------------+
Risk section
Risks to Ferrexpo
The Group's Executive Committee has put in place a formal process to assist it
in identifying and reviewing risks. Plans to mitigate known risks are formulated
and the effectiveness of, and progress in, implementing these plans is reviewed
regularly, in accordance with the Turnbull Guidance. Despite the Group's best
efforts to factor these known risks into its business strategy, inevitably risks
will exist of which the Group is currently unaware.
The list of the principal risks and uncertainties facing the Group's business
that follows is based on the Board's current understanding, but due to the very
nature of risk it cannot be expected to be exhaustive. New risks may emerge and
the severity or probability associated with known risks may change over time.
+-----------------------------------+----------+--+-+------------------------------------+
| Risks relating to the Group's operations |
| |
+----------------------------------------------------------------------------------------+
| Iron ore prices and market |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| Despite an improvement in industry | | A fall in iron ore price or demand |
| fundamentals in the first six months of | | may damage Ferrexpo's financial |
| 2010, uncertainty remains regarding future | | result, as the Group's revenue is |
| changes in the iron ore price and global | | solely derived from the sale of iron |
| demand. The Group's business is dependent on | | ore pellets. |
| price developments in the international iron | | |
| ore market, which is influenced by large | | Mitigation: |
| international mining companies. Sale prices | | Developments in the market are |
| and volumes in the worldwide iron ore market | | closely monitored by the management |
| depend predominantly on the prevailing and | | and Board of Directors in order that |
| expected level of demand for iron ore. | | Ferrexpo can react quickly to |
| | | changes in iron ore prices and |
| | | demand. |
| | | |
| | | The Group successfully reacted to |
| | | adverse market conditions during the |
| | | 2009 financial year by recognising |
| | | the importance of cost reductions |
| | | and marketing flexibility at an |
| | | early stage. |
+----------------------------------------------+--+--------------------------------------+
| Ukrainian VAT receivable |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| Ferrexpo Poltava Mining, as an exporter, and | | The delayed VAT payments resulted in |
| Ferrexpo Yeristovo Mining, as an investor, | | increased working capital funding |
| do not receive substantial amounts of VAT on | | requirements. This could mean |
| revenues to offset against VAT incurred on | | increased borrowing costs or a |
| purchases. The Group relies on the timely | | temporary reduction in levels of |
| repayment of VAT from the Ukrainian | | investment in the Group's major |
| government to ensure sufficient cash flows. | | growth projects. |
| | | |
| During part of the 2009 financial year and | | Mitigation: |
| the first half of the 2010 financial year, | | Funding plans, including the |
| the Ukrainian government did not make | | commitment to capital expenditure, |
| repayments of outstanding VAT balances. | | are maintained so as to manage |
| | | temporary increases in outstanding |
| | | VAT receivable balances. |
| | | |
| | | Outstanding overdue VAT balances to |
| | | 31 December 2009 are expected to be |
| | | converted into government bonds in |
| | | the second half of the 2010 |
| | | financial year. |
| | | |
| | | |
| | | The development of the current VAT |
| | | situation in Ukraine is closely |
| | | monitored by management. |
+----------------------------------------------+--+--------------------------------------+
| Mining risks and hazards |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| The Group's operations are subject to risks | | The Group may experience material |
| and hazards, including industrial accidents, | | mine or plant shutdowns or periods |
| equipment failure, unusual or unexpected | | of reduced production as a result of |
| geological conditions, environmental | | any of the before mentioned factors, |
| hazards, labour disputes, changes in the | | and any such events could negatively |
| local regulatory environment, extreme | | affect the Group's results of |
| weather conditions (especially in winter) | | operations as well as its reputation |
| and other natural phenomena. Hazards | | in the market. |
| associated with open-pit mining include | | |
| accidents involving the operation of | | Mitigation: |
| open-pit mining and rock transportation | | The Group is committed to a |
| equipment and the preparation and ignition | | zero-harm objective, and the |
| of large scale open-pit blasting operations, | | mitigation of mining risk is one of |
| collapses of the open-pit wall and flooding | | the primary operational goals of the |
| of the open pit. | | Group. However, given the nature of |
| | | mining operations there is no |
| | | guarantee that accidents and |
| | | fatalities will not occur in the |
| | | future, despite all the safety |
| | | initiatives undertaken and processes |
| | | put in place. |
| | | |
| | | There were no operational fatalities |
| | | in the first half of 2010 and the |
| | | full year 2009, compared with three |
| | | in 2008 and one in 2007. |
+----------------------------------------------+--+--------------------------------------+
| Costs and reliance on State monopolies |
| |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| In January 2009 Ukraine and Russia entered | | Higher gas prices will affect the |
| into a dispute relating to the supply of | | Group's costs and, if gas supplies |
| natural gas. The dispute concerned the price | | are disrupted in future for any |
| to be paid to Russia by Ukraine for the use | | substantial period of time, this may |
| of Russian gas and the distribution of | | have a detrimental effect on the |
| Russian gas across Ukraine to Western | | Group's ability to conduct its |
| Europe. The dispute resulted in a two-week | | operations. |
| period in which the gas supply to Ukraine | | |
| and Western Europe was disrupted. It was | | Changes in the Group's mining and |
| settled on 20 January 2009, and resulted in | | processing costs could occur as a |
| Ukraine being required to pay significantly | | result of unforeseen events, leading |
| more for natural gas than was previously the | | to reduced profitability or an |
| case. Despite a recent agreement in 2010 | | adverse effect on the feasibility |
| regarding discounted gas deliveries from | | and cost expectations in mining |
| Russia to Ukraine, there can be no assurance | | existing reserves. Many of these |
| that such a dispute will not recur again in | | changes may be beyond the Group's |
| the future and adversely affect the | | control, such as those input costs |
| operating result of the Group. | | controlled by Ukrainian state |
| | | regulation, including railway |
| In addition, the Group currently relies | | tariffs, energy costs and royalties. |
| substantially on the rail freight network | | |
| operated by Ukrzaliznytsya, the Ukrainian | | Mitigation: |
| State-owned southern railway authority, for | | The factors affecting the Group's |
| transportation of its raw materials and | | future cost structure are closely |
| finished products. Railway tariffs for | | monitored and reported to the Board |
| freight increase periodically, and there can | | of Ferrexpo. |
| be no assurance that further increases will | | During the gas dispute between |
| not occur in the future. | | Russia and Ukraine the Group was |
| | | able to buy gas from independent |
| | | suppliers in Ukraine. |
| | | In addition, the Group has taken |
| | | steps to increase its energy |
| | | efficiency and so help to minimize |
| | | the impact of future increases in |
| | | gas and other energy prices. |
+----------------------------------------------+--+--------------------------------------+
| Logistics |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| The Group is dependent for transporting its | | The identified potential logistical |
| product on logistics services provided by | | bottlenecks, if left unmanaged, |
| third parties and State-owned organisations: | | could affect the ability of the |
| the rail freight network, port facilities, | | Group to distribute its products on |
| and barge operators. Any logistical | | time and possibly also its future |
| bottleneck could impair the Group's ability | | growth strategy. |
| to expand its operations. The Ukrainian rail | | |
| fleet is aging, and insufficient capital | | Mitigation: |
| expenditure could result in a shortage of | | The Group has embarked upon a |
| available working rolling stock or a | | programme of investing in its own |
| disruption in transportation. | | railcars and making further |
| | | investments at its TIS-Ruda port |
| | | facility for dredging operations, in |
| | | order to reduce its exposure to |
| | | these potential bottlenecks. |
| | | |
| | | As an example, the investment in |
| | | TIS-Ruda enabled the Group at all |
| | | times throughout 2009 to meet |
| | | delivery commitments requiring |
| | | shipment from the port of Yuzhny. In |
| | | addition, the Group is considering |
| | | other investments to support |
| | | expected future logistical demand |
| | | levels. |
+----------------------------------------------+--+--------------------------------------+
| Labour relations |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| The Group does not have | | Any work slowdown, strike or other |
| individual contracts with its | | labour related developments could |
| employees in Ukraine other than | | impact the Group's production |
| with its senior managers. | | levels and financial results. |
| Approximately 85% of Ferrexpo | | |
| Poltava's employees are members | | Mitigation: |
| of the Poltava Trade Union. | | Ferrexpo is in regular dialogue |
| | | with its employees and their |
| | | representatives to ensure a good |
| | | working relationship. |
+-----------------------------------+---------------+------------------------------------+
| Licences |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| Licences are critical to the Group's | | The lapse of licences held by the |
| operations located in Ukraine, and there is | | Group as well as any failure to |
| no guarantee of their renewal or | | obtain any additional licences may |
| reconfirmation in the future, nor is there a | | adversely affect the Group's ability |
| guarantee that the Group will be able to | | to meet future growth targets. |
| obtain any additional licences. | | |
| | | Mitigation: |
| | | The Group continues to monitor and |
| | | review its commitments under its |
| | | various licences, and continues to |
| | | work to ensure that the conditions |
| | | contained within the licences are |
| | | fulfilled or the appropriate waivers |
| | | obtained. |
+----------------------------------------------+--+--------------------------------------+
| Risks relating to finance |
+----------------------------------------------------------------------------------------+
| Exchange rate risk |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| The Group receives the majority of its | | Variations in the exchange rate can |
| income in US dollars. A large proportion of | | have a significant impact on the |
| the Group's costs are denominated in | | profitability of the Group. |
| Ukrainian hryvnia and are thus exposed to | | |
| the variation in the exchange rate between | | Mitigation: |
| the US dollar and the Ukrainian hryvnia. | | As a depreciation of the Ukrainian |
| | | hryvnia compared with the US dollar |
| | | results in lower costs and |
| | | improvement of the operating |
| | | results, there is currently no need |
| | | to enter into foreign currency |
| | | hedging agreements. |
| | | |
| | | However, the exposure to foreign |
| | | currency fluctuation is closely |
| | | monitored by the Group in order to |
| | | make appropriate decisions on a |
| | | timely basis, if needed. |
+----------------------------------------------+--+--------------------------------------+
| Interest rate risk |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| The majority of the Group's borrowings are | | An increase in interest rates will |
| linked to US$ LIBOR rates so the Group is | | have a negative impact on the |
| exposed to interest rate changes. | | financial results of the Group. |
| | | |
| | | Mitigation: |
| | | Conditions in the financial markets, |
| | | existing financing facilities, and |
| | | financing opportunities are |
| | | regularly reviewed by management in |
| | | order to minimise finance costs and |
| | | maximise the profitability of the |
| | | Group. |
| | | |
| | | The Group did not enter into |
| | | derivative financial instruments |
| | | such as interest rate swaps in the |
| | | first half of 2010. |
+----------------------------------------------+--+--------------------------------------+
| Financing risk |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| Development projects may require additional | | There is a risk that cancellation of |
| funding above the cash generation | | contracts as a result of force |
| capabilities of the existing operations; | | majeure events and/or low price |
| such funding may need to be covered with | | outcomes in subsequent price |
| specific finance arrangements. | | negotiations would require the Group |
| | | to seek the lenders' permission to |
| The Group's principal loan facility contains | | assign additional contracts under |
| covenants relating to Earnings Before | | this facility to meet certain |
| Interest, Tax, Depreciation and Amortisation | | ratios. |
| ('EBITDA') as well as the normal short and | | |
| long-term cover ratio requirements. | | Mitigation: |
| | | The Group's financing risk has been |
| | | mitigated by the new loan facility |
| | | that was secured in November 2009. |
| | | The draw-down of the new loan in |
| | | January 2010 was used to repay the |
| | | previous pre-export finance |
| | | facility. 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. |
| | | |
| | | The Group expects to have sufficient |
| | | liquidity to operate successfully |
| | | throughout 2010 and 2011, with |
| | | sufficient long-term contracts to |
| | | meet the requirements of all debt |
| | | covenants. |
+----------------------------------------------+--+--------------------------------------+
| Customer concentration risk |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| Approximately 55% of sales are to two | | The loss of any one or both of these |
| customers. | | customers could have a material |
| Ferrexpo has entered into framework | | adverse affect on the financial |
| agreements with these customers on terms | | results of the business. |
| that are customary for the industry and has | | |
| been supplying one of these customers for | | Mitigation: |
| more than 20 years. | | The Group part-owns the TIS-Ruda |
| | | port on the Black Sea. The port |
| | | provides preferential access to the |
| | | seaborne markets. In 2009 Ferrexpo |
| | | shifted significant volumes to Asia |
| | | to offset weak demand from these |
| | | customers. The Group's sales |
| | | strategy is to sell at least 30% of |
| | | sales to markets outside Central and |
| | | Eastern Europe. |
+----------------------------------------------+--+--------------------------------------+
| Risks relating to the Group's strategy |
| |
+----------------------------------------------------------------------------------------+
| Development growth projects |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| The Group has several growth projects which | | As with all major capital projects |
| it may commit significant capital | | of this kind, there is a risk of |
| expenditure to. | | insufficient controls and cost |
| | | overruns which could delay |
| | | completion or result in cancelation |
| | | of these projects reducing the |
| | | return on the capital invested. |
| | | There is also a risk that there may |
| | | not be sufficient capital financing |
| | | available. |
| | | |
| | | Mitigation: |
| | | Rigorous project planning and |
| | | capital expenditure approval |
| | | processes are in place to ensure |
| | | that capital expenditure commitments |
| | | do not exceed the Group's cash |
| | | generation capabilities. The |
| | | projects are discretionary and can |
| | | be undertaken when funding and |
| | | market conditions allow. |
| | | |
| | | Monthly reviews occur on site, and |
| | | investment risks are periodically |
| | | reviewed by the Board of Directors. |
+----------------------------------------------+--+--------------------------------------+
| Risks relating to operations in Ukraine |
+----------------------------------------------------------------------------------------+
| Ukrainian inflation |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| Ukraine experienced very high inflation in | | If not mitigated by further |
| the years up to and including 2008 as a | | devaluation of the Ukrainian |
| result of high government spending and rapid | | currency and efficiency |
| economic growth. Ukrainian inflation was | | improvements, an inflationary |
| lower in 2009, partly due to the severe | | environment poses a risk to the |
| economic recession. Inflation, however, has | | costs and profitability level of the |
| increased in the first half of 2010 and a | | Group's business. |
| failure by the Ukrainian government to | | |
| achieve political consensus for economic | | Mitigation: |
| reform may result in further increases. | | Ukrainian inflation is closely |
| | | monitored and relevant conclusions |
| | | are made by the management of the |
| | | Group in order to assess and address |
| | | the implications for the Group in a |
| | | timely manner. |
+----------------------------------------------+--+--------------------------------------+
| Ukrainian economic and social risks |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| Ukraine has been adversely affected by the | | The uncertainties in the Ukrainian |
| global financial crisis and by continuing | | economic and political environment |
| government instability in 2008 and 2009. | | could have an adverse effect on the |
| Further to that, the Ukrainian steel | | Group's business and financial |
| industry, the largest industry in the | | results. |
| country, collapsed in late 2008. In response | | |
| the Ukrainian government depreciated the | | Mitigation: |
| local currency, which was informally tied to | | The presidential elections in |
| the US dollar, in late 2008 to assist the | | February 2010 restored the stability |
| country in recovering from the economic | | of the country and it is expected |
| crisis and to offset high Ukrainian | | that the situation will further |
| inflation. This benefited the Group, as a | | normalise if certain local economic |
| large proportion of its costs are | | and financial structural reforms can |
| denominated in hryvnia. However, a future | | be successfully implemented. |
| decline of the economic environment in | | |
| Ukraine may result in business failures, | | The Board is closely monitoring any |
| repossessions and social unrest in Ukraine | | developments and changes and |
| owing to extensive borrowing in foreign | | maintains regular contact with |
| currencies by the Ukrainian private sector. | | regional and national government |
| | | authorities. |
| | | |
+----------------------------------------------+--+--------------------------------------+
| Legal challenges to mining rights |
+----------------------------------------------------------------------------------------+
| Description: | | Impact: |
| Title to Ferrexpo's mining rights is granted | | In the event that any title to |
| by the state as is normal industry practise | | Ferrexpo's mining rights may be |
| around the world. | | challenged, and the Group is unable |
| | | to defeat such claim, it could |
| | | materially adversely affect the |
| | | financial results and prospects of |
| | | the business. |
| | | |
| | | Mitigation: |
| | | The Group fulfils all its |
| | | obligations with regards to its |
| | | mining rights and it maintains a |
| | | proactive and open relationship with |
| | | governmental authorities. |
+----------------------------------------------+--+--------------------------------------+
| | | | | |
+-----------------------------------+----------+--+-+------------------------------------+
Going Concern
The Group's business activities, together with the risk factors likely to affect
its future development, performance and position are set out in the Financial
Review on pages 10 to 18. The financial position of the company, its cash flows,
liquidity position and borrowing facilities are described in the Financial
Review on pages 10 to 18. In addition, notes 41 of our 2009 Annual Report &
Accounts include the Group's objectives, policies and processes for managing its
capital; its financial risk management objectives and details of its financial
instruments; and its exposures to credit risk, liquidity risk as well as
currency risk and interest rate risk.
The Group's forecasts and projections, taking into account possible changes in
the iron ore market and general economic environment, show that the Group
generates sufficient operating cash flows to comply with the amortisation
schedule for the existing major debt facility and to finance the anticipated
development projects. After making enquiries, the Directors have a reasonable
expectation that the Group has adequate financial resources to continue in
operational existence for the foreseeable future. For this reason, the Directors
continue to adopt the going concern basis of accounting in preparing the
financial statements of the Group.
Interim consolidated income statement
+---------------------------------+-------+-------------+-------------+-----------+
| US$'000 |Notes | 6 | 6 | Year |
| | | months | months | ended |
| | | ended | ended | 31.12.09 |
| | | 30.06.10 | 30.06.09 | (audited) |
| | | (unaudited) | (unaudited) | |
+---------------------------------+-------+-------------+-------------+-----------+
| Revenue | 4 | 525,833 | 301,759 | 648,667 |
+---------------------------------+-------+-------------+-------------+-----------+
| Cost of sales | 5 | (216,335) | (159,653) | (341,067) |
+---------------------------------+-------+-------------+-------------+-----------+
| Gross profit | | 309,498 | 142,106 | 307,600 |
+---------------------------------+-------+-------------+-------------+-----------+
| Selling and distribution | 6 | (84,854) | (75,806) | (162,266) |
| expenses | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| General and administrative | 7 | (24,106) | (22,319) | (43,161) |
| expenses | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Other income | | 510 | 2,924 | 4,102 |
+---------------------------------+-------+-------------+-------------+-----------+
| Other expenses | | (2,109) | (1,604) | (3,418) |
+---------------------------------+-------+-------------+-------------+-----------+
| Operating foreign exchange | 8 | (718) | (817) | 2,534 |
| (loss) / gain | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Operating profit from | | 198,221 | 44,484 | 105,391 |
| continuing operations before | | | | |
| adjusted items | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Write-down of VAT receivable | 13 | (15,000) | - | - |
| | / | | | |
| | 21 | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Asset impairments | 9 | (2,124) | (1,870) | (2,757) |
+---------------------------------+-------+-------------+-------------+-----------+
| Share of profit from associates | | 1,069 | 664 | 1,304 |
+---------------------------------+-------+-------------+-------------+-----------+
| Negative goodwill | | - | - | 503 |
+---------------------------------+-------+-------------+-------------+-----------+
| Initial public offering costs | | (55) | (372) | (427) |
+---------------------------------+-------+-------------+-------------+-----------+
| (Loss) / gain on disposal of | | (627) | - | 213 |
| property, plant and equipment | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Profit before tax and finance | | 181,484 | 42,906 | 104,227 |
+---------------------------------+-------+-------------+-------------+-----------+
| Finance income | | 709 | 1,601 | 2,893 |
+---------------------------------+-------+-------------+-------------+-----------+
| Finance expense | | (16,864) | (10,410) | (23,718) |
+---------------------------------+-------+-------------+-------------+-----------+
| Non-operating foreign exchange | 8 | 835 | 3,695 | (2,552) |
| gain / (loss) | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Profit before tax | | 166,164 | 37,792 | 80,850 |
+---------------------------------+-------+-------------+-------------+-----------+
| Tax | | (27,458) | (9,084) | (9,852) |
+---------------------------------+-------+-------------+-------------+-----------+
| Profit for the period / year | | 138,706 | 28,708 | 70,998 |
+---------------------------------+-------+-------------+-------------+-----------+
| | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Attributable to: | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Equity shareholders of Ferrexpo | | 138,117 | 28,529 | 70,627 |
| plc | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Non-controlling interests | | 589 | 179 | 371 |
+---------------------------------+-------+-------------+-------------+-----------+
| | | 138,706 | 28,708 | 70,998 |
+---------------------------------+-------+-------------+-------------+-----------+
| | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Earnings per share: | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Basic (US cents) | 10 | 23.62 | 4.88 | 12.08 |
+---------------------------------+-------+-------------+-------------+-----------+
| Diluted (US cents) | 10 | 23.57 | 4.87 | 12.05 |
+---------------------------------+-------+-------------+-------------+-----------+
Interim consolidated statement of comprehensive income
+---------------------------------------+-------------+-------------+-----------+
| US$ 000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+---------------------------------------+-------------+-------------+-----------+
| Profit for the period / year | 138,706 | 28,708 | 70,998 |
+---------------------------------------+-------------+-------------+-----------+
| | | | |
+---------------------------------------+-------------+-------------+-----------+
| Exchange differences on translating | | | - |
| foreign operations | | | |
+---------------------------------------+-------------+-------------+-----------+
| Exchange differences arising | 5,652 | 3,361 | (20,842) |
| during the period / year | | | |
+---------------------------------------+-------------+-------------+-----------+
| Exchange differences arising on | 1,288 | 1,451 | (3,697) |
| hedging of foreign operations | | | |
+---------------------------------------+-------------+-------------+-----------+
| | | | |
+---------------------------------------+-------------+-------------+-----------+
| Available-for-sale investments | | | |
+---------------------------------------+-------------+-------------+-----------+
| Gain arising on revaluation during | 637 | - | 400 |
| the period / year | | | |
+---------------------------------------+-------------+-------------+-----------+
| Income tax effect | | (363) | 2,895 |
| | (486) | | |
+---------------------------------------+-------------+-------------+-----------+
| | | | |
+---------------------------------------+-------------+-------------+-----------+
| Other comprehensive income for the | 7,092 | 4,449 | (21,244) |
| period / year, net of tax | | | |
+---------------------------------------+-------------+-------------+-----------+
| | | | |
+---------------------------------------+-------------+-------------+-----------+
| Total comprehensive income for the | 145,798 | 33,157 | 49,754 |
| period / year, net of tax | | | |
+---------------------------------------+-------------+-------------+-----------+
| | | | |
+---------------------------------------+-------------+-------------+-----------+
| Total comprehensive income | | | |
| attributable to: | | | |
+---------------------------------------+-------------+-------------+-----------+
| Equity shareholders of Ferrexpo plc | 145,066 | 32,869 | 49,633 |
+---------------------------------------+-------------+-------------+-----------+
| Non-controlling interests | 732 | 288 | 121 |
+---------------------------------------+-------------+-------------+-----------+
| | 145,798 | 33,157 | 49,754 |
+---------------------------------------+-------------+-------------+-----------+
Interim consolidated statement of financial position
+---------------------------------+-------+-------------+-------------+-----------+
| US$'000 |Notes | As at | As at | As at |
| | | 30.06.10 | 30.06.09 | 31.12.09 |
| | | (unaudited) | (unaudited) | (audited) |
+---------------------------------+-------+-------------+-------------+-----------+
| Assets | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Property, plant and equipment | 12 | 478,439 | 445,271 | 452,100 |
+---------------------------------+-------+-------------+-------------+-----------+
| Goodwill and other intangible | | 101,395 | 104,849 | 100,354 |
| assets | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Investments in associates | | 20,209 | 19,308 | 19,915 |
+---------------------------------+-------+-------------+-------------+-----------+
| Available-for-sale financial | | 2,178 | 2,579 | 2,917 |
| assets | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Deferred tax asset | | 16,154 | 12,193 | 13,673 |
+---------------------------------+-------+-------------+-------------+-----------+
| Other non-current assets | | 10,603 | 11,220 | 9,824 |
+---------------------------------+-------+-------------+-------------+-----------+
| Total non-current assets | | 628,978 | 595,420 | 598,783 |
+---------------------------------+-------+-------------+-------------+-----------+
| | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Inventories | | 84,090 | 60,176 | 59,636 |
+---------------------------------+-------+-------------+-------------+-----------+
| Trade and other receivables | | 81,885 | 44,117 | 38,117 |
+---------------------------------+-------+-------------+-------------+-----------+
| Prepayments and other current | | 36,621 | 15,991 | 19,394 |
| assets | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Income taxes recoverable and | | 185 | 10,037 | 9,741 |
| prepaid | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Other taxes recoverable and | 13 | 123,721 | 56,415 | 81,284 |
| prepaid | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Available-for-sale financial | | - | 655 | 626 |
| assets | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Cash and cash equivalents | 14 | 60,172 | 74,303 | 11,991 |
+---------------------------------+-------+-------------+-------------+-----------+
| Total current assets | | 386,674 | 261,694 | 220,789 |
+---------------------------------+-------+-------------+-------------+-----------+
| | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Total assets | | 1,015,652 | 857,114 | 819,572 |
+---------------------------------+-------+-------------+-------------+-----------+
| | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Equity and liabilities | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Share capital | 15 | 121,628 | 121,628 | 121,628 |
+---------------------------------+-------+-------------+-------------+-----------+
| Share premium | | 185,112 | 185,112 | 185,112 |
+---------------------------------+-------+-------------+-------------+-----------+
| Other reserves | | (340,053) | (324,820) | (347,858) |
+---------------------------------+-------+-------------+-------------+-----------+
| Retained earnings | | 620,003 | 478,366 | 501,175 |
+---------------------------------+-------+-------------+-------------+-----------+
| Equity attributable to equity | | 586,690 | 460,286 | 460,057 |
| shareholders of the parent | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Non-controlling interest | | 12,119 | 12,057 | 11,387 |
+---------------------------------+-------+-------------+-------------+-----------+
| Total equity | | 598,809 | 472,343 | 471,444 |
+---------------------------------+-------+-------------+-------------+-----------+
| | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Interest-bearing loans and | 16 | 199,238 | 189,959 | 18,143 |
| borrowings | /17 | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Trade and other payables | | - | 61 | - |
+---------------------------------+-------+-------------+-------------+-----------+
| Defined benefit pension | | 16,307 | 14,152 | 14,529 |
| liability | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Provision for site restoration | | 1,361 | 1,145 | 1,268 |
+---------------------------------+-------+-------------+-------------+-----------+
| Deferred tax liability | | 2,842 | 5,453 | 3,739 |
+---------------------------------+-------+-------------+-------------+-----------+
| Total non-current liabilities | | 219,748 | 210,770 | 37,679 |
+---------------------------------+-------+-------------+-------------+-----------+
| | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Interest-bearing loans and | 16 | 117,784 | 105,080 | 251,379 |
| borrowings | / | | | |
| | 17 | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Trade and other payables | | 23,743 | 39,359 | 27,926 |
+---------------------------------+-------+-------------+-------------+-----------+
| Accrued liabilities and | | 13,036 | 10,684 | 12,146 |
| deferred income | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Income taxes payable | | 34,341 | 8,505 | 11,105 |
+---------------------------------+-------+-------------+-------------+-----------+
| Other taxes payable | | 8,191 | 10,373 | 7,893 |
+---------------------------------+-------+-------------+-------------+-----------+
| Total current liabilities | | 197,095 | 174,001 | 310,449 |
+---------------------------------+-------+-------------+-------------+-----------+
| | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Total liabilities | | 416,843 | 384,771 | 348,128 |
+---------------------------------+-------+-------------+-------------+-----------+
| | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Total equity and liabilities | | 1,015,652 | 857,114 | 819,572 |
+---------------------------------+-------+-------------+-------------+-----------+
The financial statements were approved by the Board of Directors on 4 August
2010.
Interim consolidated statement of cash flow
+---------------------------------+-------+-------------+-------------+-----------+
| US$ 000 |Notes | 6 | 6 | Year |
| | | months | months | ended |
| | | ended | ended | 31.12.09 |
| | | 30.06.10 | 30.06.09 | (audited) |
| | | (unaudited) | (unaudited) | |
+---------------------------------+-------+-------------+-------------+-----------+
| Net cash flows from operating | 19 | 67,302 | 46,297 | 76,869 |
| activities | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Cash flows from investing | | | | |
| activities | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Purchase of property, plant and | | (42,323) | (43,215) | (85,823) |
| equipment | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Proceeds from sale of property, | | - | 403 | 213 |
| plant and equipment | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Purchase of intangible assets | | (219) | (298) | (598) |
+---------------------------------+-------+-------------+-------------+-----------+
| Proceeds from sale of | | - | - | - |
| intangible assets | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Interest received | | 435 | 1,752 | 2,104 |
+---------------------------------+-------+-------------+-------------+-----------+
| Loans provided to third parties | | (3,820) | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Proceeds from loans from | | - | 4,000 | 6,450 |
| associates | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Net cash flows used in | | (45,927) | (37,358) | (77,654) |
| investing activities | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Cash flows from financing | | | | |
| activities | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Proceeds from borrowings and | 16 | 274,005 | 27,131 | 35,637 |
| finance | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Repayment of borrowings and | 16 | (227,643) | (37,219) | (73,168) |
| finance | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Dividends paid to equity | | (19,289) | (13,417) | (36,325) |
| shareholders of the parent | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Dividends paid to | | (16) | (231) | (234) |
| non-controlling interest | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Net cash flows from financing | | 27,057 | (23,736) | (74,090) |
| activities | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Net increase / (decrease) in | | 48,432 | (14,797) | (74,875) |
| cash and cash equivalents | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Cash and cash equivalents at | | 11,991 | 87,822 | 87,822 |
| the beginning of the period / | | | | |
| year | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Currency translation | | (251) | 1,278 | (956) |
| differences | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
| Cash and cash equivalents at | 14 | 60,172 | 74,303 | 11,991 |
| the end of the period / year | | | | |
+---------------------------------+-------+-------------+-------------+-----------+
Interim consolidated statement of changes in equity
+----------------------------+---------+----------+------+----------+-----+----------+------+----------+------+----------+-------------+----------+------+----------+------+----------+------+----------+-------+----------+----------+----------+
| For the financial year | Attributable to equity shareholders of the parent | |
| 2009 and the six months | | |
| ended 30 June 2010 | | |
+----------------------------+--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------+----------+
| US$ 000 | Issued capital | Share premium | Uniting of | Treasury share | Employee | Net | Trans-lation | Retained | Total capital | Non-controlling | Total equity |
| | | | interest | reserve | Benefit Trust |unreali-sed | reserve | earnings | and reserves | interests | |
| | | | reserve | | reserve | gains | | | | | |
| | | | | | | reserve | | | | | |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| At 1 January 2009 | 121,628 | 185,112 | 31,780 | (77,260) | (15,443) | 813 | (270,604) | 470,098 | 446,124 | 11,769 | 457,893 |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| Profit for the period | - | - | - | - | - | - | - | 70,627 | 70,627 | 371 | 70,998 |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| Other comprehensive income | - | - | - | - | - | 301 | (21,295) | - | (20,994) | (250) | (21,244) |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| Total comprehensive income | - | - | - | - | - | 301 | (21,295) | 70,627 | 49,633 | 121 | 49,754 |
| for the period | | | | | | | | | | | |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| Equity dividends paid to | - | - | - | - | - | - | - | (39,550) | (39,550) | - | (39,550) |
| shareholders of Ferrexpo | | | | | | | | | | | |
| plc | | | | | | | | | | | |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| Share based payments | - | - | - | - | 3,850 | | - | - | 3,850 | - | 3,850 |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| Adjustments relating to | - | - | - | - | - | - | - | - | - | (503) | (503) |
| the increase in | | | | | | | | | | | |
| non-controlling interests | | | | | | | | | | | |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| At 31 December 2009 | 121,628 | 185,112 | 31,780 | (77,260) | (11,593) | 1,114 | (291,899) | 501,175 | 460,057 | 11,387 | 471,444 |
| (audited) | | | | | | | | | | | |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| Profit for the period | | | | | | | | 138,117 | 138,117 | 589 | 138,706 |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| Other comprehensive income | | | | | | 474 | 6,475 | - | 6,949 | 143 | 7,092 |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| Total comprehensive income | - | - | - | - | - | 474 | 6,475 | 138,117 | 145,066 | 732 | 145,798 |
| for the period | | | | | | | | | | | |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| Equity dividends paid to | - | - | - | - | | - | - | (19,289) | (19,289) | - | (19,289) |
| shareholders of Ferrexpo | | | | | | | | | | | |
| plc | | | | | | | | | | | |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| Share based payments | - | - | - | - | 856 | - | - | - | 856 | - | 856 |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| | 121,628 | 185,112 | 31,780 | (77,260) | (10,737) | 1,588 | (285,424) | 620,003 | 586,690 | 12,119 | 598,809 |
| At 30 June 2010 | | | | | | | | | | | |
| (unaudited) | | | | | | | | | | | |
+----------------------------+--------------------+-----------------+----------------+-----------------+-----------------+-------------+-----------------+-----------------+-----------------+------------------+--------------------------------+
| | Attributable to equity shareholders of the parent |
| | |
| For the six months ended | |
| 30 June 2009 | |
+----------------------------+-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------+
| US$ 000 | Issued | Share premium | Uniting of | Treasury share | Employee | Net unrealised gains | Trans-lation | Retained | Total capital | Non-controlling | Total equity |
| |capital | | interest | reserve | Benefit Trust | reserve | reserve | earnings | and reserves | interests | |
| | | | reserve | | reserve | | | | | | |
+----------------------------+---------+-----------------+----------------+-----------------+-----------------+-----------------------------------+-----------------+-----------------+-----------------+------------------+---------------------+
| At 1 January 2009 | 121,628 | 185,112 | 31,780 | (77,260) | (15,443) | 813 | (270,604) | 470,098 | 446,124 | 11,769 | 457,893 |
+----------------------------+---------+-----------------+----------------+-----------------+-----------------+-----------------------------------+-----------------+-----------------+-----------------+------------------+---------------------+
| Profit for the period | - | - | - | - | - | - | - | 28,529 | 28,529 | 179 | 28,708 |
+----------------------------+---------+-----------------+----------------+-----------------+-----------------+-----------------------------------+-----------------+-----------------+-----------------+------------------+---------------------+
| Other comprehensive income | - | - | - | - | - | - | 4,340 | - | 4,340 | 109 | 4,449 |
+----------------------------+---------+-----------------+----------------+-----------------+-----------------+-----------------------------------+-----------------+-----------------+-----------------+------------------+---------------------+
| Total comprehensive income | - | - | - | - | - | - | 4,340 | 28,529 | 32,869 | 288 | 33,157 |
| for the period | | | | | | | | | | | |
+----------------------------+---------+-----------------+----------------+-----------------+-----------------+-----------------------------------+-----------------+-----------------+-----------------+------------------+---------------------+
| Equity dividends paid to | - | - | - | - | - | - | - | (20,261) | (20,261) | - | (20,261) |
| shareholders of Ferrexpo | | | | | | | | | | | |
| plc | | | | | | | | | | | |
+----------------------------+---------+-----------------+----------------+-----------------+-----------------+-----------------------------------+-----------------+-----------------+-----------------+------------------+---------------------+
| Share based payments | - | - | - | - | 1,554 | - | - | - | 1,554 | - | 1,554 |
+----------------------------+---------+-----------------+----------------+-----------------+-----------------+-----------------------------------+-----------------+-----------------+-----------------+------------------+---------------------+
| At 30 June 2009 | 121,628 | 185,112 | 31,780 | (77,260) | (13,889) | 813 | (266,264) | 478,366 | 460,286 | 12,057 | 472,343 |
| (unaudited) | | | | | | | | | | | |
+----------------------------+---------+-----------------+----------------+-----------------+-----------------+-----------------------------------+-----------------+-----------------+-----------------+------------------+---------------------+
| | | | | | | | | | | | | | | | | | | | | | | |
+----------------------------+---------+----------+------+----------+-----+----------+------+----------+------+----------+-------------+----------+------+----------+------+----------+------+----------+-------+----------+----------+----------+
Notes to the interim condensed consolidated financial statements
Note 1: Corporate information
Organisation and operation
Ferrexpo plc (the 'Company') is incorporated in the United Kingdom with
registered office at 2-4 King Street, London, SW1Y 6QL, UK. Ferrexpo plc and its
subsidiaries (the 'Group') operate a mine and processing plant near Kremenchuk
in Ukraine, an interest in a port in Odessa and a sales and marketing company in
Switzerland and Kiev. The Group's operations are vertically integrated from iron
ore mining through to iron ore concentrate and pellet production. The Group's
mineral properties lie within the Kremenchuk Magnetic Anomaly and are currently
being exploited at the Gorishne-Plavninsky and Lavrikovsky deposits. These
deposits are being jointly mined as one mining complex.
The Group's operations are largely conducted through Ferrexpo plc's principal
subsidiary, Ferrexpo Poltava GOK Corporation. The Group comprises of Ferrexpo
plc and its consolidated subsidiaries as set out below:
+-------------------+---------------+---------------------+----------+----------+----------+
| | | | Equity interest |
| | | | owned |
+-------------------+---------------+---------------------+--------------------------------+
| Name | Country | Principal activity | 30.06.10 | 30.06.09 | 31.12.09 |
| | of | | % | % | % |
| | incorporation | | | | |
+-------------------+---------------+---------------------+----------+----------+----------+
| | | | | | |
+-------------------+---------------+---------------------+----------+----------+----------+
| Ferrexpo Poltava | Ukraine | Iron ore mining | 97.3 | 97.1 | 97.3 |
| GOK Corporation* | | | | | |
+-------------------+---------------+---------------------+----------+----------+----------+
| Ferrexpo AG** | Switzerland | Sale of iron ore | 100.0 | 100.0 | 100.0 |
+-------------------+---------------+---------------------+----------+----------+----------+
| DP Ferrotrans*** | Ukraine | Trade, | 97.3 | 97.1 | 97.3 |
| | | transportation | | | |
| | | services | | | |
+-------------------+---------------+---------------------+----------+----------+----------+
| United Energy | Ukraine | Holding company | 97.3 | 97.1 | 97.3 |
| Company LLC*** | | | | | |
+-------------------+---------------+---------------------+----------+----------+----------+
| Ferrexpo Finance | England | Finance | 100.0 | 100.0 | 100.0 |
| plc (formerly | | | | | |
| Ferrexpo UK | | | | | |
| Limited)* | | | | | |
+-------------------+---------------+---------------------+----------+----------+----------+
| Ferrexpo Services | Ukraine | Management services | 100.0 | 100.0 | 100.0 |
| Limited* | | & procurement | | | |
+-------------------+---------------+---------------------+----------+----------+----------+
| Ferrexpo Hong | China | Marketing services | 100.0 | 100.0 | 100.0 |
| Kong Limited* | | | | | |
+-------------------+---------------+---------------------+----------+----------+----------+
| Ferrexpo | Ukraine | Iron ore mining | 98.6 | 98.5 | 98.6 |
| Yeristova GOK | | | | | |
| LLC*** | | | | | |
+-------------------+---------------+---------------------+----------+----------+----------+
| Ferrexpo Belanovo | Ukraine | Iron ore mining | 98.6 | - | 98.6 |
| GOK LLC**** | | | | | |
+-------------------+---------------+---------------------+----------+----------+----------+
* The Group's interest in these entities is held through Ferrexpo
AG.
** Ferrexpo AG was the holding company of the Group until, as a
result of the pre-IPO restructuring; Ferrexpo plc became the holding company on
24 May 2007.
*** The Group's interest in these entities is held through Ferrexpo
Poltava GOK Corporation.
**** The Group's interest in this entity is held through both Ferrexpo
AG and Ferrexpo Poltava GOK Corporation.
At 30 June 2010, the Group also holds through Ferrexpo Poltava GOK Corporation
an interest of 48.6% (30 June 2009: 48.5%; 31 December 2009: 48.6%) in TIS Ruda,
a Ukrainian port located on the Black Sea. As this is an associate, it is
accounted for using the equity method of accounting.
Note 2: Summary of significant accounting policies
Basis of preparation
The interim consolidated financial statements for the six months ended 30 June
2010 have been prepared in accordance with International Accounting Standard
("IAS") 34 Interim Financial Reporting. The interim consolidated financial
statements do not include all of the information and disclosures required in the
annual financial statements, and should be read in conjunction with the Group's
annual financial statements.
The interim consolidated financial statements do not constitute statutory
accounts as defined in section 435 of the Companies Act 2006. The financial
information for the full year is based on the statutory accounts for the
financial year ended 31 December 2009. A copy of the statutory accounts for that
year, which were prepared in accordance with International Financial Reporting
Standards ('IFRS') issued by the International Accounting Standard Board
('IASB'), as adopted by the European Union up to 31 December 2009, has been
delivered to the Register of Companies. The auditors' report under section 495
of the Companies Act 2006 in relation to those accounts was unqualified and did
not contain a statement under 498(2) or 498(3) of the Companies Act 2006.
Financing and going concern
At the period end, the Group has a major debt facility of US$230,000,000 in
place which amortises over the period from 1 January 2011 to 31 December 2012.
The Group is of the view that it will be able to generate sufficient cash flows
to fully repay the debt by the end of this period, in compliance with the terms
of the facility agreements, and to operate the current operation with the
budgeted sustaining and developing capital expenditures. The Group faces several
risks to its business and strategy, which are included in the Financial Review
section of this report.
The Directors are of the view that the Group is a going concern and the interim
consolidated financial statements have been drawn up on this basis. Further
information to the going concern assessment of the Directors is given in the
Financial Review of this report.
Changes in accounting policies
The accounting policies and methods of computation adopted in the preparation of
the interim condensed consolidated financial statements are the same as those
followed in the preparation of the Group's annual financial statements for the
year ended 31 December 2009, except for the adoption of new standards and
interpretations as of 1 January 2010, noted below:
IFRS 2Share-based Payment - Group Cash-settled Share-based Payment Transactions
(amendments)
The standard has been amended to clarify the accounting for group cash-settled
share-based payment transactions. This amendment also supersedes IFRIC 8 and
IFRIC 11. The adoption of this amendment did not have any impact on the
financial position or performance of the Group.
IFRS 3 Business combinations (revised) and IAS 27 Consolidated and separate
financial statements (revised)
The revised standards were issued in January 2008 and become effective for
financial years beginning on or after 1 July 2009. The changes will affect
future acquisitions or loss of control and transactions with non-controlling
interests. The adoption of these revised standards did not have any impact on
the financial position or performance of the Group.
IAS 28 Investments in associates (revised)
The principle adopted under IAS 27 (2008) that a loss of control is recognised
as a disposal and re-acquisition any retained interests at fair value is
extended by consequential amendment to IAS 28. The adoption of this revised
standard as of 1 January 2010 did not have any impact on the financial position
or performance of the Group.
IFRIC 17 Distributions of Non-cash Assets to Owners
This interpretation is effective for annual periods beginning on or after 1 July
2009. It provides guidance on how to account for non-cash distributions to
owners. The interpretation clarifies when to recognise a liability, how to
measure it and the associated assets, and when to derecognise the asset and
liability. The adoption of this interpretation did not have any impact on the
financial position or performance of the Group.
Improvements to IFRSs (issued April 2009)
In April 2009 the IASB issued its second 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 adoption of the
following amendments resulted in changes to accounting policies but did not have
any impact on the financial position or performance of the Group.
The amendments to the following standards below did not have an impact on the
accounting policies, financial position or performance of the Group:
· IFRS 2 Share-based Payments
· IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
· IFRS 8 Operating Segment Information
· IAS 1 Presentation of Financial Statements
· IAS 7 Statement of Cash Flows
· IAS 17 Leases
· IAS 36 Impairment of Assets
· IAS 38 Intangible Assets
· IFRIC 9 Reassessment of Embedded Derivatives
· IFRIC 16 Hedge of Net Investment in a Foreign Operation
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.
Note 4: Revenue
Revenue consisted of the following:
+----------------------------------+-------------+-------------+-----------+
| US$ 000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Revenue from sales of ore pellet | | | |
| and concentrates: | | | |
+----------------------------------+-------------+-------------+-----------+
| Export | 523,752 | 276,266 | 612,829 |
+----------------------------------+-------------+-------------+-----------+
| Ukraine | 203 | 24,976 | 34,483 |
+----------------------------------+-------------+-------------+-----------+
| | 523,955 | 301,242 | 647,312 |
+----------------------------------+-------------+-------------+-----------+
| | | | |
+----------------------------------+-------------+-------------+-----------+
| Revenue from services provided | 1,113 | 367 | 790 |
+----------------------------------+-------------+-------------+-----------+
| Revenue from other sales | 765 | 150 | 565 |
+----------------------------------+-------------+-------------+-----------+
| Total revenue | 525,833 | 301,759 | 648,667 |
+----------------------------------+-------------+-------------+-----------+
Export sales by geographical destination were as follows:
+----------------------------------+-------------+-------------+-----------+
| US$'000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Austria | 166,991 | 24,136 | 105,690 |
+----------------------------------+-------------+-------------+-----------+
| China | 102,583 | 173,057 | 241,882 |
+----------------------------------+-------------+-------------+-----------+
| Slovakia | 72,868 | 37,320 | 77,537 |
+----------------------------------+-------------+-------------+-----------+
| Serbia | 72,752 | 13,826 | 84,193 |
+----------------------------------+-------------+-------------+-----------+
| Czech Republic | 45,391 | 3,465 | 21,293 |
+----------------------------------+-------------+-------------+-----------+
| Turkey | 44,222 | 12,263 | 39,272 |
+----------------------------------+-------------+-------------+-----------+
| Germany | 13,177 | - | 5,573 |
+----------------------------------+-------------+-------------+-----------+
| Hungary | 4,589 | - | 6,539 |
+----------------------------------+-------------+-------------+-----------+
| India | - | 11,535 | 21,225 |
+----------------------------------+-------------+-------------+-----------+
| Japan | - | - | 5,027 |
+----------------------------------+-------------+-------------+-----------+
| Other | 1,179 | 664 | 4,598 |
+----------------------------------+-------------+-------------+-----------+
| Total export revenue | 523,752 | 276,266 | 612,829 |
+----------------------------------+-------------+-------------+-----------+
During the period ended 30 June 2010 sales made to three customers accounted for
approximately 68.3% of the sales revenue (30 June 2009: 36.7%; 31 December 2009:
51.9%).
Sales made to three customers individually amounted to more than 10% of the
total sales. These are disclosed below:
+----------------------------------+-------------+-------------+-----------+
| US$'000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Customer A | 166,991 | 24,136 | 105,690 |
+----------------------------------+-------------+-------------+-----------+
| Customer B | 145,620 | 51,146 | 161,730 |
+----------------------------------+-------------+-------------+-----------+
| Customer C | - | 31,788 | - |
+----------------------------------+-------------+-------------+-----------+
Note 5: Cost of sales
Cost of sales consisted of the following:
+----------------------------------+-------------+-------------+-----------+
| US$ 000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Materials | 31,279 | 30,090 | 60,607 |
+----------------------------------+-------------+-------------+-----------+
| Purchased ore and concentrate | 39,615 | 629 | 8,914 |
+----------------------------------+-------------+-------------+-----------+
| Electricity | 46,015 | 37,667 | 81,438 |
+----------------------------------+-------------+-------------+-----------+
| Personnel costs | 23,530 | 20,260 | 41,670 |
+----------------------------------+-------------+-------------+-----------+
| Spare parts and consumables | 8,891 | 6,561 | 13,007 |
+----------------------------------+-------------+-------------+-----------+
| Depreciation and amortisation | 12,380 | 11,327 | 23,370 |
+----------------------------------+-------------+-------------+-----------+
| Fuel | 16,030 | 11,289 | 23,969 |
+----------------------------------+-------------+-------------+-----------+
| Gas | 21,964 | 18,626 | 28,744 |
+----------------------------------+-------------+-------------+-----------+
| Repairs and maintenance | 19,808 | 14,492 | 38,503 |
+----------------------------------+-------------+-------------+-----------+
| Royalties and levies | 3,210 | 2,004 | 6,484 |
+----------------------------------+-------------+-------------+-----------+
| Stock movement | (8,747) | 3,656 | 10,543 |
+----------------------------------+-------------+-------------+-----------+
| Other | 2,360 | 3,052 | 3,818 |
+----------------------------------+-------------+-------------+-----------+
| Total cost of sales | 216,335 | 159,653 | 341,067 |
+----------------------------------+-------------+-------------+-----------+
Cost of sales is reconciled to "C1" costs in the following manner:
+----------------------------------+-------------+-------------+-----------+
| US$ 000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Cost of sales | 216,335 | 159,653 | 341,067 |
+----------------------------------+-------------+-------------+-----------+
| | | | |
+----------------------------------+-------------+-------------+-----------+
| Depreciation and amortisation | (12,380) | (11,327) | (23,370) |
+----------------------------------+-------------+-------------+-----------+
| Purchased ore and concentrate | (39,615) | (629) | (8,914) |
+----------------------------------+-------------+-------------+-----------+
| Processing costs for purchased | (4,426) | (117) | (1,206) |
| ore and concentrate | | | |
+----------------------------------+-------------+-------------+-----------+
| Production cost of gravel | (28) | (183) | (357) |
+----------------------------------+-------------+-------------+-----------+
| Stock movement in the period | 8,747 | (3,656) | (10,543) |
+----------------------------------+-------------+-------------+-----------+
| Pension service costs | (1,614) | (914) | (1,857) |
+----------------------------------+-------------+-------------+-----------+
| Other | 898 | (405) | 1,662 |
+----------------------------------+-------------+-------------+-----------+
| C1 cost | 167,916 | 142,422 | 296,482 |
+----------------------------------+-------------+-------------+-----------+
| | | | |
+----------------------------------+-------------+-------------+-----------+
| Own ore produced (tonnes) | 4,441,200 | 4,123,700 | 8,609,200 |
+----------------------------------+-------------+-------------+-----------+
| | | | |
+----------------------------------+-------------+-------------+-----------+
| C1 cash cost per tonne (US$) | 37.81 | 34.54 | 34.44 |
+----------------------------------+-------------+-------------+-----------+
"C1" costs represent the cash costs of production of own ore divided by
production volume of own ore, and excludes non-cash costs such as depreciation,
amortisation, pension costs and stock movement, costs of purchased ore,
concentrate and production cost of gravel and excludes one-off items which are
outside the definition of EBITDA.
Note 6: Selling and distribution expenses
Selling and distribution expenses consisted of the following:
+----------------------------------+-------------+-------------+-----------+
| US$ 000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Railway transportation | 42,702 | 30,590 | 69,477 |
+----------------------------------+-------------+-------------+-----------+
| Other transportation and port | 35,012 | 39,717 | 80,998 |
| charges | | | |
+----------------------------------+-------------+-------------+-----------+
| Agent fees | 353 | 416 | 799 |
+----------------------------------+-------------+-------------+-----------+
| Custom duties | 1,315 | 422 | 1,423 |
+----------------------------------+-------------+-------------+-----------+
| Advertising | 1,759 | 1,093 | 2,757 |
+----------------------------------+-------------+-------------+-----------+
| Personnel cost | 607 | 511 | 1,055 |
+----------------------------------+-------------+-------------+-----------+
| Depreciation | 849 | 764 | 1,581 |
+----------------------------------+-------------+-------------+-----------+
| Other | 2,257 | 2,293 | 4,176 |
+----------------------------------+-------------+-------------+-----------+
| Total selling and distribution | 84,854 | 75,806 | 162,266 |
| expenses | | | |
+----------------------------------+-------------+-------------+-----------+
Note 7: General and administrative expenses
General and administrative expenses consisted of the following:
+----------------------------------+-------------+-------------+-----------+
| US$ 000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Personnel costs | 11,573 | 11,593 | 23,933 |
+----------------------------------+-------------+-------------+-----------+
| Buildings and maintenance | 1,381 | 1,102 | 2,391 |
+----------------------------------+-------------+-------------+-----------+
| Taxes other than income tax and | 1,264 | 1,898 | 3,930 |
| other charges | | | |
+----------------------------------+-------------+-------------+-----------+
| Professional fees | 3,584 | 1,548 | 2,731 |
+----------------------------------+-------------+-------------+-----------+
| Depreciation and amortisation | 1,847 | 1,600 | 2,534 |
+----------------------------------+-------------+-------------+-----------+
| Communication | 275 | 218 | 529 |
+----------------------------------+-------------+-------------+-----------+
| Vehicles maintenance and fuel | 466 | 362 | 854 |
+----------------------------------+-------------+-------------+-----------+
| Repairs | 274 | 326 | 1,041 |
+----------------------------------+-------------+-------------+-----------+
| Half year review fees | 184 | 195 | 195 |
+----------------------------------+-------------+-------------+-----------+
| Audit fees | 506 | 480 | 917 |
+----------------------------------+-------------+-------------+-----------+
| Non-audit fees | 806 | 184 | 184 |
+----------------------------------+-------------+-------------+-----------+
| Security | 763 | 744 | 1,659 |
+----------------------------------+-------------+-------------+-----------+
| Research | - | 1 | 1 |
+----------------------------------+-------------+-------------+-----------+
| Other | 1,183 | 2,068 | 2,262 |
+----------------------------------+-------------+-------------+-----------+
| Total general and administrative | 24,106 | 22,319 | 43,161 |
| expenses | | | |
+----------------------------------+-------------+-------------+-----------+
Note 8: Foreign exchange gains and losses
+----------------------------------+-------------+-------------+-----------+
| US$ 000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Operating foreign exchange | (718) | (817) | 2,534 |
| (losses) / gains | | | |
+----------------------------------+-------------+-------------+-----------+
| Non-operating foreign exchange | 835 | 3,695 | (2,552) |
| gains / (losses) | | | |
+----------------------------------+-------------+-------------+-----------+
| Total foreign exchange gains / | 117 | 2,878 | (18) |
| (losses) | | | |
+----------------------------------+-------------+-------------+-----------+
Operating foreign exchange gains and losses are those items that are directly
related to the production and sale of pellets (e.g. trade receivables, trade
payables on operating expenditure). Non-operating gains and losses are those
associated with the Group's financing and treasury activities and with local
income tax payables.
Note 9: Asset impairments
Impairment losses relate to adjustments made against the carrying value of
assets where this is higher than the recoverable amount. Write-offs and
impairment losses for the six months ended 30 June 2010 consisted of the
following:
+----------------------------------+-------------+-------------+-----------+
| US$ 000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Write-off of inventories | - | - | (144) |
+----------------------------------+-------------+-------------+-----------+
| Reversal / (write-off) of | - | 31 | (717) |
| property, plant and equipment | | | |
+----------------------------------+-------------+-------------+-----------+
| Impairment of available-for-sale | (2,124) | (1,901) | (1,896) |
| financial assets | | | |
+----------------------------------+-------------+-------------+-----------+
| Total asset impairments | (2,124) | (1,870) | (2,757) |
+----------------------------------+-------------+-------------+-----------+
The impairment of the available-for-sale financial assets in the periods above
are related to the investment in LLC Atol.
Note 10: Earnings per share and dividends paid and proposed
Basic EPS is calculated by dividing the net profit for the period attributable
to ordinary equity shareholders of Ferrexpo plc by the weighted average number
of ordinary shares.
Diluted earnings per share is calculated by adjusting the weighted average
number of ordinary shares in issue on the assumption of conversion of all
potentially dilutive ordinary shares. All share awards are potentially dilutive
and have been included in the calculation of diluted earnings per share.
+----------------------------------+-------------+-------------+-----------+
| | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Profit for the period / year | | | |
| attributable to equity | | | |
| shareholders: | | | |
+----------------------------------+-------------+-------------+-----------+
| | | | |
+----------------------------------+-------------+-------------+-----------+
| Basic earnings per share (US | 23.62 | 4.88 | 12.08 |
| cents) | | | |
+----------------------------------+-------------+-------------+-----------+
| Diluted earnings per share (US | 23.57 | 4.87 | 12.05 |
| cents) | | | |
+----------------------------------+-------------+-------------+-----------+
| | | | |
+----------------------------------+-------------+-------------+-----------+
| Underlying earnings for the | | | |
| period / year: | | | |
+----------------------------------+-------------+-------------+-----------+
| | | | |
+----------------------------------+-------------+-------------+-----------+
| Basic earnings per share (US | 26.50 | 4.76 | 12.80 |
| cents) | | | |
+----------------------------------+-------------+-------------+-----------+
| Diluted earnings per share (US | 26.44 | 4.75 | 12.77 |
| cents) | | | |
+----------------------------------+-------------+-------------+-----------+
The calculation of the basic and diluted earnings per share is based on the
following data:
+----------------------------------+-------------+-------------+-----------+
| Thousands | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| | | | |
+----------------------------------+-------------+-------------+-----------+
| Weighted average number of | | | |
| shares | | | |
+----------------------------------+-------------+-------------+-----------+
| Basic number of ordinary shares | 584,812 | 584,493 | 584,652 |
| outstanding | | | |
+----------------------------------+-------------+-------------+-----------+
| Effect of dilutive potential | 1,201 | 1,520 | 1,361 |
| ordinary shares | | | |
+----------------------------------+-------------+-------------+-----------+
| Diluted number of ordinary | 586,013 | 586,013 | 586,013 |
| shares outstanding | | | |
+----------------------------------+-------------+-------------+-----------+
The basic number of ordinary shares is calculated by subtracting the shares held
in treasury from the total number of ordinary shares in issue.
'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 calculated before non-controlling
interests have been deducted and excludes adjusted items. The calculation of
underlying earnings per share is based on the following earnings data:
+----------------------------+-------+-------------+-------------+-----------+
| US$ 000 |Notes | 6 | 6 | Year |
| | | months | months | ended |
| | | ended | ended | 31.12.09 |
| | | 30.06.10 | 30.06.09 | (audited) |
| | | (unaudited) | (unaudited) | |
+----------------------------+-------+-------------+-------------+-----------+
| Profit attributable to | | 138,117 | 28,529 | 70,627 |
| equity holders | | | | |
+----------------------------+-------+-------------+-------------+-----------+
| Write-down of VAT | 13 | 15,000 | - | - |
| receivable | / | | | |
| | 21 | | | |
+----------------------------+-------+-------------+-------------+-----------+
| Asset impairments | 9 | 2,124 | 1,870 | 2,757 |
+----------------------------+-------+-------------+-------------+-----------+
| IPO costs | | 55 | 372 | 427 |
+----------------------------+-------+-------------+-------------+-----------+
| Negative goodwill | | - | - | (503) |
| generated on rights issue | | | | |
+----------------------------+-------+-------------+-------------+-----------+
| Loss / (gain) on disposal | | 627 | - | (213) |
| of PPE | | | | |
+----------------------------+-------+-------------+-------------+-----------+
| Non-operating foreign | 8 | (835) | (3,695) | 2,551 |
| exchange losses | | | | |
+----------------------------+-------+-------------+-------------+-----------+
| Tax on adjusted items | | (124) | 772 | (823) |
+----------------------------+-------+-------------+-------------+-----------+
| Underlying earnings | | 154,964 | 27,848 | 74,823 |
+----------------------------+-------+-------------+-------------+-----------+
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
+----------------------------------+-------------+-------------+-----------+
| US$ 000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Proposed per ordinary share | | | |
+----------------------------------+-------------+-------------+-----------+
| Interim dividend for 2010: 3.3 | 19,289 | - | - |
| US cents | | | |
+----------------------------------+-------------+-------------+-----------+
| Final dividend for 2009: 3.3 US | - | - | 19,289 |
| cents | | | |
+----------------------------------+-------------+-------------+-----------+
| | | | |
+----------------------------------+-------------+-------------+-----------+
| Paid per ordinary share | | | |
+----------------------------------+-------------+-------------+-----------+
| Final dividend for 2009: 3.3 US | 19,289 | - | - |
| cents | | | |
+----------------------------------+-------------+-------------+-----------+
| Interim dividend for 2009: 3.3 | - | - | 19,289 |
| US cents | | | |
+----------------------------------+-------------+-------------+-----------+
| Final dividend for 2008: 3.3 US | - | 13,417 | 20,261 |
| cents 1 | | | |
+----------------------------------+-------------+-------------+-----------+
| Total dividends paid during the | 19,289 | 13,417 | 39,550 |
| period | | | |
+----------------------------------+-------------+-------------+-----------+
1 The final dividend for 31 December 2008 was US$20,261,000, of which US$
6,844,000 in respect of withholding tax remained unpaid as at 30 June 2009.
Note 11: EBITDA
The Group calculates EBITDA as profit from continuing operations before tax and
finance plus depreciation and amortisation (included in cost of sales, general
and administrative expenses and selling and distribution costs) and
non-recurring cash items included in other income and other expenses plus the
net 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 |Notes | 6 | 6 | Year |
| | | months | months | ended |
| | | ended | ended | 31.12.09 |
| | | 30.06.10 | 30.06.09 | (audited) |
| | | (unaudited) | (unaudited) | |
+----------------------------+-------+-------------+-------------+-----------+
| Profit before tax and | | 181,484 | 42,906 | 104,227 |
| finance | | | | |
+----------------------------+-------+-------------+-------------+-----------+
| Write-down of VAT | 13 | 15,000 | - | - |
| receivable | / | | | |
| | 21 | | | |
+----------------------------+-------+-------------+-------------+-----------+
| Asset impairments | | 2,124 | 1,870 | 2,757 |
+----------------------------+-------+-------------+-------------+-----------+
| IPO costs | | 55 | 372 | 427 |
+----------------------------+-------+-------------+-------------+-----------+
| Negative goodwill | | - | - | (503) |
+----------------------------+-------+-------------+-------------+-----------+
| Share based payments | | 801 | 1,182 | 3,423 |
+----------------------------+-------+-------------+-------------+-----------+
| Loss / (gain) on disposal | | 627 | - | (213) |
| of PPE | | | | |
+----------------------------+-------+-------------+-------------+-----------+
| Depreciation and | | 15,081 | 13,965 | 28,018 |
| amortisation | | | | |
+----------------------------+-------+-------------+-------------+-----------+
| EBITDA | | 215,172 | 60,295 | 138,136 |
+----------------------------+-------+-------------+-------------+-----------+
Note 12: Property, plant and equipment
During the six months ended 30 June 2010, the Group acquired property, plant and
equipment with a cost of US$43,381,525 (30 June 2009: US$44,695,000; 31 December
2009: US$86,006,000) and disposed of property, plant and equipment with original
costs of US$3,361,456 (30 June 2009: US$2,107,000; 31 December 2009:
US$8,179,000).
Note 13: Other taxes recoverable and prepaid
+----------------------------------+-------------+-------------+-----------+
| US$ 000 | As at | As at | As at |
| | 30.06.10 | 30.06.09 | 31.12.09 |
| | (unaudited) | (unaudited) | (audited) |
+----------------------------------+-------------+-------------+-----------+
| VAT receivable | 123,448 | 56,274 | 81,269 |
+----------------------------------+-------------+-------------+-----------+
| Withholding tax | 255 | - | - |
+----------------------------------+-------------+-------------+-----------+
| Other taxes prepaid | 18 | 141 | 15 |
+----------------------------------+-------------+-------------+-----------+
| Total | 123,721 | 56,415 | 81,284 |
+----------------------------------+-------------+-------------+-----------+
The VAT receivable results from VAT paid on domestic purchases of goods and
services and on the imports of equipment and where relevant services into
Ukraine to the extent that this can not be offset on VAT paid on the sale of
goods and services.
During the six month period to 30 June 2010, the VAT receivable increased from
US$81,268,909 to US$138,448,896, before the write-down described below, 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. VAT on trading items is due to be repaid three months after it is
incurred. Due to the economic downturn and general financial crisis in 2009
allied with the presidential elections in early 2010, the ongoing negotiations
for financial aid from the IMF and the late adoption of the state budget for
2010, the Ukrainian government has not been making timely repayments of VAT made
on purchases of plant equipment and goods and services to the extent that these
can not be offset against VAT charged on sales. The amounts have been classified
in the accounts as repayable within one year. None of the VAT receivable amounts
are in dispute and measures which will result in the collection of this
receivable are well advanced and expected to be converted in a bond in the near
term (see below).
Write-down of VAT receivable
As a result of a decision by the Ukrainian Cabinet of Ministers published on 1
June 2010, outstanding overdue VAT balances will be converted into government
bonds with a coupon interest rate of 5.5% p.a. paid semi annually with 10 half
yearly principal repayments. At the current time uncertainty exists as to the
tradability of the bonds, the exact timing and process of conversion. It is
expected that the VAT bonds will relate to outstanding VAT receivable as of the
end of December 2009 amounting to US$81,268,909.
Accounting standards require such financial instruments, when issued, to be fair
valued, or, if no market exists, an estimate to be made as to fair value. Market
yields on Ukranian domestic hryvnia debt currently lie in a range of 12% to 16%
and have recently been volatile. At the current time this is higher than the
coupon interest rate on the proposed new bond issue. As a result, a one off fair
value adjustment could be realised on the initial recognition of this financial
instrument. Whilst it is not possible to value this instrument exactly at the
current time, an estimated gross charge, before any tax deductions of
US$15,000,000, has been recorded in the income statement to reflect the
directors' estimate of the difference between the amount of the VAT receivable
that is refundable and the expected fair value of the government bond to be
issued in settlement of this debt. This estimate will be revised when the final
terms, conditions and features of the new financial instrument are known.
The Group applied to convert the outstanding VAT balance as of 31 December 2009
into government bonds on 18 June 2010 and it is anticipated that the conversion
will take place in the second half of the financial year 2010.
Note 14: Cash and cash equivalents
As at 30 June 2010 the Group held cash and cash equivalents of US$60,171,631 (30
June 2009: US$74,303,025; 31 December 2009: US$11,990,751).
Note 15: Share capital and reserves
The share capital of Ferrexpo plc at 30 June 2010 was 613,967,956 (30 June 2009:
613,967,956; 31 December 2009: 613,967,956) ordinary shares at par value of
GBP0.10 paid for cash, resulting in share capital of US$121,628,000 which is
unchanged since the Group's Initial Public Offering in June 2007.
This balance includes 25,343,814 shares (30 June 2009: 25,343,814 shares; 31
December 2009: 25,343,814 shares) which are held in treasury, resulting from a
share buyback that was undertaken in September 2008.
Note 16: Interest bearing loans and borrowings
During the period ended 30 June 2010, the remaining outstanding balance
amounting to US$207,727,272 under the term loan and revolving pre-export finance
facility entered into on 27 December 2006 for an amount of $275,000,000 and
subsequently amended on 5 July 2007 to an amount of $335,000,000 was fully
repaid (The amounts repaid on the same facility in the periods for the 6 months
ended 30 June 2009: US$36,364,000; 12 months ended 31 December 2009:
US$72,727,272).
The Group entered into a new three year term loan pre-export finance facility on
27 November 2009 in the amount of US$230,000,000. This pre-export finance
facility was drawn in full on 8 January 2010 and was used for repayment of the
pre-export finance facility entered into on the 27 December 2006 as amended on 5
July 2007.
As at 30 June 2010 the pre-export finance facility was fully drawn (30 June
2009: fully drawn; 31 December 2009: fully drawn, each in respect of the
pre-export finance facility then existing) and will be repaid in 24 instalments
with the first instalment falling due in January 2011.
The pre-export term loan credit facility is guaranteed and secured as follows:
· Ferrexpo Poltava has provided an unlimited financial and performance
suretyship covering all of Ferrexpo AG and Ferrexpo Finance plc's obligations
under the pre-export finance facility agreement (and related financing
documents);
· Ferrexpo plc has provided a parent company guarantee;
· Ferrexpo AG has pledged its bank account held with the agent to the banks
syndicated into the pre-export finance facility into which all proceeds from the
sale of iron ore pellets under certain contracts are required to be paid;
· Ferrexpo Poltava and Ferrexpo AG have pledged all of their rights under
certain contracts for the export of iron ore pellets; and
· Ferrexpo AG has pledged all its rights under certain contacts for the
sale of iron ore pellets and its rights under certain related credit support
documents;
In January 2009, Ferrexpo Poltava GOK Corporation concluded a sale and financial
leaseback transaction relating to rail cars with a facility amount of
US$19,718,000. During the six month period to 30 June 2010 US$617,000 of the
principal was repaid (30 June 2009: US$486,000; 31 December 2009: US$1,099,000).
Note 17: Net financial indebtedness
Net financial indebtedness of the Group is shown in the note below:
+-----------------------------+-------+-------------+-------------+-----------+
| US$ 000 |Notes | As at | As at | As at |
| | | 30.06.10 | 30.06.09 | 31.12.09 |
| | | (unaudited) | (unaudited) | (audited) |
+-----------------------------+-------+-------------+-------------+-----------+
| Cash and cash equivalents | 14 | 60,172 | 74,303 | 11,991 |
+-----------------------------+-------+-------------+-------------+-----------+
| Current borrowings | 16 | (117,784) | (105,080) | (251,379) |
+-----------------------------+-------+-------------+-------------+-----------+
| Non-current borrowings | 16 | (199,238) | (189,959) | (18,143) |
+-----------------------------+-------+-------------+-------------+-----------+
| Current commodity loans | | (53) | (1,467) | (124) |
+-----------------------------+-------+-------------+-------------+-----------+
| Non-current commodity loans | | - | (61) | - |
+-----------------------------+-------+-------------+-------------+-----------+
| Net financial indebtedness | | (256,903) | (222,264) | (257,655) |
+-----------------------------+-------+-------------+-------------+-----------+
Note 18: Related party disclosure
During the periods presented the Group entered into arm's length transactions
with entities under common control of the majority owner of the Group,
Kostyantin Zhevago and with other related parties. Management considers that
the Group has appropriate procedures in place to identify and properly disclose
transactions with the related parties.
The related party transactions entered into by the Group during the periods
presented are summarised below:
Entities under common control are those under control of Kostyantin Zhevago. TIS
Ruda, in which the Group holds an interest of 48.6%, is the only associated
company of the Group. The other related parties are principally those entities
controlled by Olexander Moroz (supervisory board member of Ferrexpo Poltava GOK
Corporation until 14 May 2010).
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| | 6 months | 6 months | Year ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------+----------------------------------+----------------------------------+----------------------------------+
| US$ 000 |Entities |Asso-ciated | Other |Entities |Asso-ciated | Other |Entities |Asso-ciated | Other |
| | under | compa-nies |related | under | compa-nies |related | under | compa-nies |related |
| | common | |parties | common | |parties | common | |parties |
| | control | | | control | | | control | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Iron ore | - | - | - | 277 | - | 511 | | | |
| pellet sales | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Other sales | 492 | - | 873 | - | - | - | 506 | - | 1,480 |
| (1) | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Total revenue | 492 | - | 873 | 277 | - | 511 | 506 | - | 1,480 |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Purchase of | 52,099 | - | 5,776 | 2,219 | - | 5,942 | 4,458 | - | 11,930 |
| materials (2) | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Purchase of | 203 | - | 123 | 220 | - | 110 | 444 | - | 23 |
| services (3) | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| General and | 2,076 | - | 1 | 1,343 | - | 5 | 3,315 | - | - |
| administration | | | | | | | | | |
| expenses (4) | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Selling and | - | 5,301 | 6,274 | - | 6,680 | 3,433 | - | 11,849 | 11,736 |
| distribution | | | | | | | | | |
| (5) | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Other | 78 | - | 4 | 37 | - | 10 | 91 | - | 8 |
| operating | | | | | | | | | |
| expenses (6) | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Total | 54,456 | 5,301 | 12,177 | 3,819 | 6,680 | 9,500 | 8,308 | 11,849 | 23,697 |
| expenses | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Finance | 254 | 52 | - | 891 | 197 | - | 1,329 | 267 | - |
| income (7) | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Finance | (275) | - | - | (347) | - | - | (816) | - | - |
| expenses (7) | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Net finance | (21) | 52 | - | 544 | 197 | - | 513 | 267 | - |
| income/(costs) | | | | | | | | | |
+----------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
(1) Other sales to other related parties consist of scrap metal sales made
to Ferrolit, a company under control of a supervisory board member of FPM. Other
sales to entities under common control are mainly related to sales of power,
steam and water and the lease of premises to Kislorod and Vorskla-Steel.
(2) Purchase of materials from entities under common control consists of
purchased concentrate in the amount of US$48,928,000 from Vostock Ruda during
the six months period ended 30 June 2010 (30 June 2009: US$ US$769,000; 31
December 2009: US$1,386,000) and the purchase of compressed air and oxygen of
US$1,740,000 (30 June 2009: US$ US$2,899,000; 31 December 2009: US$1,414,000)
from Kislorod. Purchase of materials from other related parties includes
purchased cast iron balls from Ferrolit of US$5,733,000 (30 June 2009:
US$5,528,000; 31 December 2009: US$11,286,000), which are used in the production
process.
(3) Kuoni Attorneys at law Ltd. has provided services to the Group of
US$123,000 (30 June 2009: US$ nil; 31 December 2009: US$23,000) during the 6
months to 30 June 2010. Wolfram Kuoni who is a partner in the firm is also an
independent non-executive Director of Ferrexpo plc. The services were provided
on an arm length basis by other members of Kuoni Attorneys at law Ltd.
(4) The Group paid US$1,663,000 during the six months period ended 30 June
2010 to FC Vorskla under a contract entered into on 1 April 2009 and renewed on
10 December 2009 for advertisement, marketing and general PR related services
(30 June 2009: US$1,076,000; 31 December 2009: US$2,631,000).
(5) Selling and distribution services are purchased from TIS Ruda, an
associated company as the Group holds an interest of 49.9%. These services
relate to port services including port charges, handling costs, agent
commissions and storage costs. Services from other related parties are mainly
provided by Slavutich Ruda which is under control of Olexander Moroz, a
supervisory board member of FPM until 14 May 2010. Slavutich Ruda provided
logistic management services mainly related to custom clearance services and
coordination of rail transit. The total billings amounted to US$6,251,000 during
the six months period ended 30 June 2010 (30 June 2009: US$3,260,000; 31
December 2009: US$11,507,000) and Slavutich Ruda earned commission income of
US$319,000 on these services (30 June 2009: US$416,000; 31 December 2009:
US$793,000).
(6) Other operating expenses mainly relate to communication services
provided by TV & Radio Co. In the six month period ended 30 June 2010, these
amounted to US$56,000 (30 June 2009: US$19,000; 31 December 2009: US$60,000).
(7) The Group has transactional banking arrangements with Finance &Credit
Bank (F&C), which is under common control of Kostyantin Zhevago. Finance income
and expenses relate to these transactional banking arrangements. Further
information is provided under transactional banking arrangements in this note.
Sale and purchases of property, plant, equipment and investments
The table below details the transactions of a capital nature which were
undertaken between group companies and entities under common control, associated
companies and other related parties during the periods presented.
+---------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| | 6 months | 6 months | Year ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+---------------+----------------------------------+----------------------------------+----------------------------------+
| US$ 000 |Entities |Asso-ciated | Other |Entities |Asso-ciated | Other |Entities |Asso-ciated | Other |
| | under | compa-nies |related | under | compa-nies |related | under | compa-nies |related |
| | common | |parties | common | |parties | common | |parties |
| | control | | | control | | | control | | |
+---------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Purchase of | -- | - | - | 2,200 | - | - | 2,200 | - | - |
| property | | | | | | | | | |
| plant and | | | | | | | | | |
| equipment (1) | | | | | | | | | |
+---------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
(1) On 31 March 2009, the Group acquired a trial filter press from
Progress Plant Company, an entity under common control, for US$2,200,000.
The outstanding investments respectively balances with related parties for the
periods presented are as follows:
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| | 6 months | 6 months | Year ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+--------------------+----------------------------------+----------------------------------+----------------------------------+
| US$ 000 |Entities |Asso-ciated | Other |Entities |Asso-ciated | Other |Entities |Asso-ciated | Other |
| | under | compa-nies |related | under | compa-nies |related | under | compa-nies |related |
| | common | |parties | common | |parties | common | |parties |
| | control | | | control | | | control | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Investments | 2,178 | - | - | 2,576 | - | - | 2,917 | - | - |
| available-for-sale | | | | | | | | | |
| (1) | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Prepayments | 972 | - | - | - | - | - | - | - | - |
| for PPE (2) | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Loans (3) | - | - | - | - | 3,000 | - | - | 2,000 | - |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Total | 3,150 | - | - | 2,576 | 3,000 | | 2,917 | 2,000 | - |
| non-current | | | | | | | | | |
| assets | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Investments | - | - | - | 655 | - | - | 626 | - | - |
| available-for-sale | | | | | | | | | |
| (1) | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Loans (3) | - | 2,550 | - | - | 2,000 | - | - | 550 | - |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Trade and | 2,138 | - | 9 | 1,967 | 43 | 281 | 1,999 | 93 | 6 |
| other | | | | | | | | | |
| receivables | | | | | | | | | |
| (4) | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Prepayments | 157 | 805 | 50 | 38 | - | 2 | 995 | - | 1 |
| and other | | | | | | | | | |
| current | | | | | | | | | |
| assets (2) | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Short term | - | - | - | - | - | - | 411 | - | - |
| deposits with | | | | | | | | | |
| banks (5) | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Cash and cash | 15,860 | - | - | 35,218 | - | - | 1,712 | - | - |
| equivalents | | | | | | | | | |
| (5) | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Total current | 18,155 | 3,355 | 59 | 37,878 | 2,043 | 283 | 5,743 | 643 | 7 |
| assets | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Trade and | 2,158 | 2 | 1,020 | 335 | - | 1,548 | 514 | - | 1,146 |
| other | | | | | | | | | |
| payables (6) | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
| Current | 2,158 | 2 | 1,020 | 335 | - | 1,548 | 514 | - | 1,146 |
| liabilities | | | | | | | | | |
+--------------------+----------+-------------+---------+----------+-------------+---------+----------+-------------+---------+
(1) The investments available-for-sale comprised of shareholdings in LLC
Atol (9.95%), OJSC Stahanov (3.14%) and Vostock Ruda (1.10%). The majority
ownership of these companies is held by the principal shareholder of Ferrexpo
plc and OJSC Stahanov is also listed at the Ukrainian stock exchange. The
changes of the values in the table above are related to fair value adjustments
made and recorded impairments at the end of the periods respectively year. The
shareholdings for all investments remained unchanged during the periods
disclosed above. The investment in LLC Atol was subject of an additional
impairment of US$2,124,000 as of 30 June 2010 (30 June 2009: US$1,870,000; 31
December 2009: US$ nil) resulting in a full impairment. Further information is
provided in note 22 of the Annual Report & Accounts 2009.
(2) A prepayment for the purchase of press filter equipment in the amount
of US$972,000 has been made to Progress Plant Company in the six months period
ended 30 June 2010 (30 June 2009: US$ nil; 31 December 2009: US$ nil). The
company is controlled by Kostyantin Zhevago. Prepayments and other current
assets consists a dividend receivable amounting to US$781,000 and accrued
interest income due from TIS Ruda.
(3) Loans were granted to TIS Ruda in 2007 and 2008, which have been
partially repaid during the financial year 2009. The Group holds an interest of
48.6% in this Ukrainian company operating a port located on the Black Sea. The
company provides port services to the Group (see above). TIS Ruda is an
associated company of the Group.
(4) As of 30 June 2010 trade and other receivables included outstanding
amounts relating to the disposal of shares in Vostock Ruda of US$1,181,000 (30
June 2009: US$1,223,000; 31 December 2009: US$1,169,000). During the financial
year 2008, 2.10% of the Group's interest in Vostock Ruda was sold to Progress
Plant Company. Both companies are under common control of Kostyantin Zhevago.
(5) As of 30 June 2010 cash and cash equivalents with Finance &Credit Bank
(F&C) were US$15,860,000 (30 June 2009: US$35,218,000; 31 December 2009:
US$1,712,000). Further information is provided under transactional banking
arrangements below.
(6) Trade and other payables due to entities under common control amounted
to US$1,545,000 as of 30 June 2010 relate to the concentrate purchased from
Vostock Ruda (30 June 2009: US$ nil; 31 December 2009: US$ nil) and to
compressed air and oxygen purchased from Kislorod of US$ 377,000 (30 June 2009:
US$ nil; 31 December 2009: US$ 368,000). Trade and other payables due to other
related parties amounting to US$849,000 as of 30 June 2010 relate to purchased
material from Ferrolit (30 June 2009: US$ nil; 31 December 2009: US$989,000).
Transactional banking arrangements
The Group has transactional banking arrangements with Finance & Credit Bank
(F&C) in Ukraine which is under common control of the majority shareholder of
Ferrexpo plc. Finance income and finance costs are disclosed in the table above.
The Group entered into a multi-currency revolving loan facility agreement in
April 2007 with F&C, which expired on 16 April 2010 and has been extended to 16
April 2013 upon the same terms and conditions except for two changes. The
maximum facility limit has been increased from UAH50.5 million to UAH80.0
million (US$10.1 million at the exchange rate as of 30 June 2010) and the
interest rates increased for UAH advances from 16% pa to 18% pa.
On 19 April 2010, in addition to the original April 2007 loan described above,
the Group entered into a further multi-currency revolving loan facility
agreement with F&C for a period of one year maturing on 18 April 2011 and with a
maximum facility limit of UAH80.0 million (US$10.1 million at the exchange rate
as of 30 June 2010). This new loan is offered under the same terms and
conditions as the original loan. Additional assets of US$20.1 million have been
pledged for the new loan facility. The total value of pledges for the original
and new loan facility is US$33.4 million.
Other related party transaction
In August 2009, the Group paid Swiss Withholding Tax of US$984,106 on behalf of
Kostyantin Zhevago on costs incurred for the Initial Public Offering completed
in June 2007. This was settled in accordance with terms and conditions entered
into at the time of the Initial Public Offering of the company.
Note 19: Reconciliation of profit before income tax to net cash flow from
operating activities
+----------------------------------+-------------+-------------+-----------+
| US$ 000 | 6 | 6 | Year |
| | months | months | ended |
| | ended | ended | 31.12.09 |
| | 30.06.10 | 30.06.09 | (audited) |
| | (unaudited) | (unaudited) | |
+----------------------------------+-------------+-------------+-----------+
| Profit before tax | 166,164 | 37,792 | 80,850 |
+----------------------------------+-------------+-------------+-----------+
| Adjustments for non-cash items: | | | |
+----------------------------------+-------------+-------------+-----------+
| Depreciation of property, plant | 15,081 | 13,965 | 28,018 |
| and equipment and amortisation | | | |
| of intangible assets | | | |
+----------------------------------+-------------+-------------+-----------+
| Finance expense | 16,864 | 8,784 | 20,622 |
+----------------------------------+-------------+-------------+-----------+
| Finance income | (709) | (1,601) | (2,893) |
+----------------------------------+-------------+-------------+-----------+
| Share of income from associates | (1,069) | (664) | (1,304) |
+----------------------------------+-------------+-------------+-----------+
| Movement in allowance for | (1,948) | (3,646) | (5,199) |
| doubtful receivables | | | |
+----------------------------------+-------------+-------------+-----------+
| Loss / (profit) on disposal of | 627 | (57) | (213) |
| PPE | | | |
+----------------------------------+-------------+-------------+-----------+
| Write-down of VAT receivable | 15,000 | - | - |
+----------------------------------+-------------+-------------+-----------+
| Asset impairments | 2,124 | 1,870 | 2,757 |
+----------------------------------+-------------+-------------+-----------+
| Site restoration provision | 93 | 64 | 159 |
+----------------------------------+-------------+-------------+-----------+
| Employee benefits | 2,587 | 1,562 | 5,474 |
+----------------------------------+-------------+-------------+-----------+
| IPO costs | 55 | 372 | 427 |
+----------------------------------+-------------+-------------+-----------+
| Share based payments | 801 | 1,182 | 3,423 |
+----------------------------------+-------------+-------------+-----------+
| Negative goodwill generated on | - | - | (503) |
| rights issue | | | |
+----------------------------------+-------------+-------------+-----------+
| Operating foreign exchange loss | 718 | 817 | (2,534) |
| / (gain) | | | |
+----------------------------------+-------------+-------------+-----------+
| Non-operating foreign exchange | (835) | (3,695) | 2,552 |
| (gain) / loss | | | |
+----------------------------------+-------------+-------------+-----------+
| Operating cash flow before | 215,553 | 56,745 | 131,636 |
| working capital changes | | | |
+----------------------------------+-------------+-------------+-----------+
| | | | |
+----------------------------------+-------------+-------------+-----------+
| Changes in working capital: | | | |
+----------------------------------+-------------+-------------+-----------+
| (Increase) / decrease in trade | (50,899) | 18,096 | 14,961 |
| and other receivables | | | |
+----------------------------------+-------------+-------------+-----------+
| (Increase) / decrease in | (24,454) | 1,094 | 1,777 |
| inventories | | | |
+----------------------------------+-------------+-------------+-----------+
| Increase / (decrease) in trade | (3,292) | (8,107) | (6,474) |
| and other accounts payable | | | |
+----------------------------------+-------------+-------------+-----------+
| (Increase)/decrease in other | (57,140) | 4,817 | (24,038) |
| taxes recoverable and prepaid | | | |
+----------------------------------+-------------+-------------+-----------+
| Cash generated from operating | 79,768 | 72,645 | 117,862 |
| activities | | | |
+----------------------------------+-------------+-------------+-----------+
| | | | |
+----------------------------------+-------------+-------------+-----------+
| Interest paid | (12,540) | (8,784) | (19,197) |
+----------------------------------+-------------+-------------+-----------+
| Income tax credits / (paid) | 1,780 | (17,215) | (18,899) |
+----------------------------------+-------------+-------------+-----------+
| Post-employment benefits paid | (1,706) | (349) | (2,897) |
+----------------------------------+-------------+-------------+-----------+
| Net cash flows from operating | 67,302 | 46,297 | 76,869 |
| activities | | | |
+----------------------------------+-------------+-------------+-----------+
Note 20: Commitments and contingencies
Commitments
+----------------------------------+-------------+-------------+-----------+
| US$ 000 | As at | As at | As at |
| | 30.06.10 | 30.06.09 | 31.12.09 |
| | (unaudited) | (unaudited) | (audited) |
+----------------------------------+-------------+-------------+-----------+
| Operating lease commitments | 19,165 | 19,548 | 19,702 |
+----------------------------------+-------------+-------------+-----------+
| Capital commitments on purchase | 54,727 | 52,118 | 41,404 |
| of PPE | | | |
+----------------------------------+-------------+-------------+-----------+
Legal
In the ordinary course of business, the Group is subject to legal actions and
complaints. Management believes that the ultimate liability, if any, arising
from such actions or complaints will not have a material adverse effect on the
financial condition or the results of future operations of the Group.
Tax and other regulatory compliance
Ukrainian legislation and regulations regarding taxation and custom regulations
continue to evolve. Legislation and regulations are not always clearly written
and are subject to varying interpretations and inconsistent enforcement by
local, regional and national authorities, and other governmental bodies.
Instances of inconsistent interpretations are not unusual.
The uncertainty of application and the evolution of Ukrainian tax laws,
including those affecting cross border transactions, create a risk of additional
tax payments having to be made by the Group, which could have a material effect
on the Group's financial position and results of operations. The Group does not
believe that these risks are any more significant than those of similar
enterprises in Ukraine.
Note 21: Subsequent events
No material adjusting or non-adjusting events have occurred subsequent to the
period end.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR MMGGRNDNGGZM
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