TIDMFXPO
RNS Number : 1017H
Ferrexpo PLC
11 March 2015
11 March 2015
FERREXPO plc
("Ferrexpo" or the "Group")
2014 Full Year Results
Ferrexpo plc, a top five supplier of iron ore pellets to the
global steel industry, today announces its financial results for
the year ended 31 December 2014.
Michael Abrahams, Non-Executive Chairman, said:
"Ferrexpo has had a successful year against a backdrop of a
dramatic fall in iron ore prices and significant political upheaval
in Ukraine. The Group increased pellet production, including the
output of its premium 65% Fe pellets, completed its modernisation
and expansion programme reaching 12 million tonnes per year
annualised capacity, agreed further long term contracts with
premium international steel mills and moved all customers to a
sustainable index linked pricing mechanism.
Pricing has proved to be challenging with the benchmark iron ore
price falling by 47% to US$72 per tonne from US$135 per tonne at
the start of 2014, on average 28% below 2013. EBITDA has, however,
been maintained at levels in line with the prior year as a result
of strong pellet premiums, increased production and lower
costs.
Iron ore pricing is likely to remain subdued in 2015 and
Ferrexpo, along with the general consensus of market observers,
expects that the average CFR 62% Fe China benchmark price will be
materially below 2014.
The significant investments the Group has made over the past
five years, along with strong pellet premiums, reduced operating
costs, as a result of the devaluation of the local currency, as
well as lower freight and energy costs, should enable the Group to
remain strongly competitive in the world pellet market.
The Company's operations in Ukraine are remote from the current
conflict area. The current year has started well both in production
and sales. In January 2015, Ferrexpo produced a record one million
tonnes of pellets, while in February all of the Group's output was
in the form of premium 65% Fe pellets, another record for the
Group. Sales volumes continue to be at or above base contract
levels. Ukraine, however, has a weak banking and financial system
and the overall situation in the country, remains uncertain and
subject to change.
The Board would like to express its sincere appreciation to all
of the Group's employees, especially in Ukraine, for their
contribution to this strong set of results and for their continued
dedication during a challenging time in the country and in the iron
ore industry.
Ferrexpo's performance in 2014 demonstrated the resilience and
strength of its business and gives the Board confidence in its
ability to deliver further profitability when external conditions
improve."
2014 Financial Highlights:
US$ million (unless otherwise Year ended Year ended Change
stated) 31.12.14 31.12.13
------------------------------- ----------- ----------- -------
Total pellet production (kt) 11,021 10,813 2%
------------------------------- ----------- ----------- -------
Sales volumes (kt) 11,167 10,689 4%
------------------------------- ----------- ----------- -------
Revenue 1,388 1,581 (12%)
------------------------------- ----------- ----------- -------
EBITDA 496 506 (2%)
------------------------------- ----------- ----------- -------
Profit before tax 254 305 (17%)
------------------------------- ----------- ----------- -------
Diluted EPS (US cents per
share) 30.39 44.69 (32%)
------------------------------- ----------- ----------- -------
Dividend (US cents per share) 13.2 13.2 -
------------------------------- ----------- ----------- -------
Net cash flow from operating
activities 288 233 24%
------------------------------- ----------- ----------- -------
Capital investment 235 278 (15%)
------------------------------- ----------- ----------- -------
Net debt (678) (639) 6%
------------------------------- ----------- ----------- -------
Net debt to EBITDA 1.4x 1.3x 8%
------------------------------- ----------- ----------- -------
2014 Summary of Operations and Financial Results
-- Most regrettably there were three fatalities during the
period at the Group's operations. Ferrexpo enforces strict
compliance with health and safety standards. The prevention of
incidents and injuries is the highest priority of the Board and
management, who follow the principle that all accidents are
avoidable.
-- Production volumes grew 2% to a record 11 million tonnes.
Output of 65% Fe pellets increased 16% to 5.8 million tonnes, which
reflected the ramp up of the Group's Quality Upgrade project
following the commissioning of two new floatation and fine grinding
units in 2014.
-- Strong customer demand underpinned a 4% increase in sales volumes to 11.2 million tonnes.
-- Higher pellet premiums and an excellent marketing
performance, resulting in improved price realisations, partly
offset a lower iron ore benchmark price. Ferrexpo's net realised
FOB price declined by 18% compared to a 28% decline in the iron ore
fines benchmark price.
-- The cash cost of production reduced by 23%, or US$14 per
tonne, to US$46 per tonne of pellets (2013: US$60 per tonne) as a
result of local currency devaluation as well as increased operating
efficiencies.
-- EBITDA of US$496 million was in line with 2013 (US$506
million). The strong performance was achieved in the light of
significantly lower selling prices and included a non-cash
operating foreign exchange gain of US$76 million.
-- Due to the lower iron ore price environment, Ferrexpo has
fully impaired its investment in Ferrous Resources resulting in a
non-cash charge of US$82 million.
-- The Group completed its investment programme during the year
to improve the quality and quantity of its pellet output to 65% Fe
and 12 million tonnes respectively.
-- Cash at 31 December 2014 was US$627 million (31 December
2013: US$390 million) of which liquidity inside Ukraine was US$160
million (31 December 2013: US$143 million)
-- Net debt as of 31 December 2014 was US$678 million (31 December 2013: US$639 million).
-- Net cash flow from operations increased 24%, and given
Ferrexpo's continued strong financial performance in 2014, the
Board is proposing to maintain total dividends in line with the
prior year at US 13.2 cents per ordinary share. 2015 has started
well with one million tonnes of pellet production in January and
100% of the pellet output in February was 65% Fe Ferrexpo premium
pellets.
There will be an analyst and investor meeting at 09.00 (UK time)
today at the offices of Deutsche Bank, Winchester House, 1 Great
Winchester Street, EC2N 2DB. A live video webcast and slide
presentation of this event will be available on www.ferrexpo.com.
It is recommended that participants register at 08.45. The
presentation will be hosted by Michael Abrahams (Chairman),
Kostyantin
Webcast link: http://edge.media-server.com/m/p/udpvn95p
Webcast access on mobile devices:
For access to the live and on demand webcast from any IOS Apple
or Android mobile devices.
For further information contact:
Ferrexpo:
Ingrid McMahon +44 207 389 8304
Maitland:
Peter Ogden +44 207 379 5151
Liz Morley
Notes to Editors:
Ferrexpo is a Swiss headquartered iron ore company with assets
in Ukraine. It has been mining, processing and selling high quality
iron ore pellets to the global steel industry for over 35 years.
Ferrexpo's resource base is one of the largest iron ore deposits in
the world. The Group is the 5(th) largest supplier of pellets to
the global steel industry and the largest exporter of pellets from
the CIS. In 2014, it produced a record 11 million tonnes of
pellets, a 2% increase compared to 2013. Ferrexpo has a diversified
customer base supplying steel mills in Austria, Slovakia, the Czech
Republic, Germany and other European states, as well as in China,
India, Japan, Taiwan and South Korea. Ferrexpo is listed on the
main market of the London Stock Exchange under the ticker FXPO. For
further information, please visit www.ferrexpo.com
Performance Review
2014 has proved to be a challenging but successful year for
Ferrexpo. Against a backdrop of lower commodity prices and
increasing political uncertainty in Ukraine, where the Group's
mining facilities are located, Ferrexpo has successfully:
-- Increased pellet production and improved product quality
-- Completed the quality and capacity upgrade projects on time
and below budget
-- Increased production of ore from the Yeristovo mine
-- Improved the efficiency of its mining, processing and
pelletizing operations, reducing costs in constant currency
-- Moved all customers to a sustainable index linked pricing
mechanism
-- Agreed further long term contracts with premium international
steel mills
In addition, Ferrexpo has seen an improvement in its margins
compared to 2013, when the benchmark iron ore price was on average
28% higher at US$135 per tonne compared to an average of US$97 per
tonne in 2014, as a result of:
-- Improved pellet premiums
-- Local currency devaluation
-- Higher production
-- Lower freight costs
Significant investment over the past five years has resulted in
increased production and lower costs in constant currency. In 2014,
the Company reached annualised installed capacity of 12 million
tonnes, a 30% increase compared to 2007 the year of the Group's
IPO. Ferrexpo's improved position on the global cost curve for
pellets is as a result of this investment programme, along with the
weaker local currency, and is supporting margins and
competitiveness in the current low iron ore price environment.
The Group's mining operations are in the Poltava region of
central Ukraine, 425 kilometres to the North West of the conflict
in the East of the country.
Results
Ferrexpo is pleased to report a good set of results reflecting
the strength of the assets and the business model. EBITDA for the
year ended 31 December 2014 was only slightly lower than 2013 at
US$496 million (2013: US$506 million). Significantly lower iron ore
prices were mostly offset by the positive factors described
above.
In 2014, Ferrexpo Poltava Mining (FPM) became the single largest
producer and exporter of iron ore pellets in the Former Soviet
Union producing a record 11 million tonnes of pellets, a 2%
increase compared to 2013. The Group increased the average quality
of its production delivering a 16% increase in the output of 65% Fe
Ferrexpo Premium Pellets (FPP). FPP represented approximately 53%
of total production in 2014 (2013: 46%), reflecting ramp up
following the commissioning of two new floatation and fine grinding
units in 2014.
The Group now operates from two mines. This has significantly
extended its mining capability and production flexibility.
During the month of December 2014, production was reduced by 144
thousand tonnes of pellets due to disruptions in electricity
supply. Ferrexpo's production facilities and its export routes are
currently operating at full capacity and one million tonnes of
pellets were produced in January 2015, a new record for the
Group.
Ferrexpo continued to develop its long standing marketing
strategy of targeting and strongly supporting key steel producers
around the world. Ferrexpo developed its position as a key exporter
of pellets to the global steel industry increasing sales to Japan
and Germany by 40% compared to 2013.
During the past years, the industry has been characterised by an
increase in the supply of lower grade iron ore fines. The major
Australian iron ore producers again increased their supply in 2014,
reaching an inflection point in the iron ore price cycle. As a
result of this increased supply, the benchmark price for 62% Fe
fines CFR China declined by 47% from US$135 per tonne as of 1
January 2014 to US$72 per tonne as of 31 December 2014. The average
price was 28% lower at US$97 per tonne compared to an average of
US$135 per tonne in 2013. The average price for the two months
ended February 2015 declined further to US$65 per tonne.
Ferrexpo is a producer of iron ore pellets which sells at a
premium to iron ore fines and lump. Incremental additions of
pelletising capacity have not grown at the same rates as for iron
ore fines and, as a result, average pellet premiums increased in
2014.
During the year Ferrexpo was able to improve its sales mix which
was supported by all long term customers being priced on a
sustainable index linked pricing mechanism for the full year. As a
result of this and higher pellet premiums, Ferrexpo was able to
materially offset the effect of the 47% decline in the industry's
benchmark price, a testament to the strong business model the Group
has developed.
Revenue
Total revenue for the period decreased by 12% to US$1,388
million compared to US$1,581 million in 2013. This reflected a 28%
reduction in the average China CFR Platt's 62% Fe fines price.
Ferrexpo's net realised DAP/FOB price, in contrast, fell by only
18% compared to the Platts 62% Fe fines price. The lower sales
price was compensated, in part, by higher sales volumes increasing
4% to 11.2 million tonnes. The Group's marketing arm also achieved
an increase in the premium paid for iron ore pellets compared to
iron ore fines and moved all long term contract pricing to relevant
iron ore indexes (2013: 60% linkage), further offsetting the
underlying fall in price. All of the Group's revenue is in US
Dollars.
Operating Profit from Continuing Operations before Adjusted
Items
Operating profit from continuing operations before adjusted
items increased to US$409 million in 2014 compared to US$401
million in 2013. The margin was 29%, an increase of 4% compared to
2013. The strong performance was achieved in light of significantly
lower selling prices. The Group's cost base benefittedfrom a lower
C1 cost of production, which reduced by US$14 per tonne compared to
2013, and lower transportation costs, both as a result of the
weaker local currency as well as efficiency improvements. The
Hryvnia devaluation also resulted in a non-cash operating foreign
exchange gain of US$76 million.
EBITDA
EBITDA for the year reduced modestly by 2% to US$496 million
(2013: US$506 million) reflecting lower depreciation compared to
the prior year. See note 3 to the accounts.
Ferrous Resources
Due to the lower iron ore price environment, Ferrexpo has fully
impaired its investment in Ferrous Resources resulting in a
non-cash charge of US$82 million. The Company is currently looking
at opportunities to unlock value in this investment.
Interest and Tax
Finance expense was US$69 million (2013: US$66 million). The
increase reflected the drawdown of debt facilities during the
period, principally held as additional cash liquidity, which was
considered necessary given the volatile operating environment in
2014.
As of 31 December 2014, gross debt was US$1.3 billion compared
to US$1.0 billion as of 31 December 2013. Net new facilities of
US$300 million were drawn, demonstrating the strength of the
business amid a difficult environment in Ukraine.
The average cost of Group debt for the period was 4.85% compared
to an average of 5.15% in 2013. The reduction in the average cost
of debt reflected lower rates on the new facilities compared to the
average interest rate in the prior year.
The headline Group taxation charge increased to 28% (2013: 14%).
The increase was as a result of impairment charges and higher
charitable donations, both of which were non-deductible for
taxation purposes. Eliminating these, the tax charge was 18%. This
was higher than 2013 as a result of an increased proportion of
profits earned in Ukraine and a higher level of disallowed costs.
The tax paid is now in line with Ukraine's statutory tax rate. As
in the prior year, the majority of tax paid by the Group is inside
Ukraine.
There is a requirement in Ukraine for exporters to prepay a
certain percentage of VAT refunds in the form of Corporate Profit
Tax (CPT). In 2014, this reduced to an average of 28% (2013: 50%).
CPT paid under this arrangement is in excess of the tax due,
resulting in a prepaid CPT balance. The devaluation of the local
currency during the year reduced this prepaid tax balance expressed
in US Dollars by US$57 million. At the year-end, US$73 million of
CPT had been prepaid (31 December 2013: US$88 million). The US$58
million loss on devaluation was recorded in the translation
reserve. Full details on pre-paid corporate profit tax are
disclosed in note 12 to the accounts.
Currency
Ferrexpo prepares its accounts in US Dollars. The functional
currency of the Ukrainian operations is the Hryvnia. During the
year the Hryvnia devalued from UAH7.99 per US Dollar as of 31
December 2013 to UAH15.8 per US Dollar as of 31 December 2014. The
average rate during the year was UAH11.9 per US Dollar. Balances at
the year-end are converted at the prevailing rate. This has
resulted in a reduction in the net assets of the Group by US$1,206
million and has been reflected in the translation reserve. Since
the year end, the Hryvnia has further devalued by 76% to a level of
around UAH27.8 per US Dollar as of 28 February 2015. This will
result in reduced operating costs and corresponding reductions in
the net assets of the Group expressed in US Dollars. For further
information please see the section on Ukraine on page 17.
Cash Flows
Net cash flows from operating activities were US$288 million.
The strong performance compared to 2013 (US$233 million) reflected
receipt of VAT receivables from prior years.
In 2014, the Group received ten VAT re-payments, which amounted
to US$141 million, all of which were subject to an average 28%
prepayment of the refund as corporate profit tax. During the year,
the Group sold VAT bonds, received in part as lieu of long
outstanding VAT obligations with a face value of US$135 million for
US$97 million (22% discount to face value in local currency). Due
to the devaluation of the Hryvnia, a US$117 million loss on
remaining VAT balances was also incurred which was recorded in the
translation reserve. In total, VAT losses as a result of the
Hryvnia devaluation and the loss on sale of the VAT bonds, amounted
to US$156 million in 2014.
The Ukrainian gross VAT balance as of 31 December 2014 was US$73
million (31 December 2013: US$318 million).
Full details of the movement on VAT is included in note 14 to
the accounts.
Investment
During 2014, the Group completed its investment programme to
improve the quality and quantity of pellet output to 65% Fe and 12
million tonnes respectively. US$235 million was spent on capital
projects in the existing and new mines as well as on the Group's
logistics infrastructure in 2014 (2013: US$278 million). For
further information see Capital Investment on pages 15 and 16.
Debt and Liquidity
Ferrexpo has continued to maintain its financial discipline. Net
debt to EBITDA remained healthy at 1.4x (1.3x as of 31 December
2013). At the period end, Ferrexpo had net debt of US$678 million
(2013: US$639 million). Had the Group been able to recoup its prior
year VAT balances on time (see above), net debt would have been
US$156 million lower.
As a result of the losses on VAT and the reduced iron ore price
outlook for the coming years, the current amortization profile of
the Company's debt facilities did not optimally match the net cash
flow generation of the business taking into account its inherent
operational risks.
To remedy the situation based on the current outlook, on 23
February 2015, the Company extended US$160 million of its US$500
million Eurobond due for repayment in April 2016 equally into April
2018 and April 2019 and prepaid US$54 million of the outstanding
liability at par value. This helps to better match the liability
profile of the business with forecast cash flows.
The business operates a significant liquidity buffer to ensure
that it can continue to operate in a volatile commodity price and
country environment. The Group will therefore be looking to further
manage the liability profile of its debt should opportunities
arise. Management believe the Company has sufficient cash flows and
liquid resources to meet it debt repayment obligations as they fall
due and the accounts have been drawn up on a going concern basis,
however attention is drawn to the risks facing the business on page
20.
For further information also see Financial Management on page
18.
Market Environment
The 47% price decline in the benchmark iron ore price in the
calendar year 2014 primarily reflected a significant increase in
supply from three of the major iron ore producers, namely Rio
Tinto, BHP Billiton and Fortescue. Together these producers
increased exports of all iron ore products by 85 million tonnes in
calendar year 2014 (100% basis).
The increase in supply of iron ore exports between 2000 and 2014
has principally come from the production of iron ore fines, as can
be seen from the following table.
Exports of iron ore (Mt)
Increase Proportion of
2000 2014 (Mt) increase
-------------------- ------ ------- ------------ -------------
Pellets 106 144 +38 4%
-------------------- ------ ------- ------------ -------------
Lump 93 207 +114 12%
-------------------- ------ ------- ------------ -------------
Sinter Fines 265 1,016 +751 78%
-------------------- ------ ------- ------------ -------------
Pellet feed 18 73 +55 6%
-------------------- ------ ------- ------------ -------------
Total 482 1440 +958
-------------------- ------ ------- ------------ -------------
Average annual world GDP growth rate between
from 2000 to 2014 3.7%
--------------------------------------------------- -------------
The four largest producers - Rio Tinto, BHP Billiton, Fortescue
(all in Australia) and Vale in Brazil - together account for over
60% of the world export market and have increased their exports by
a combined 729 million tonnes or 321% since 2000. With a slowdown
in demand from China in 2014 this significant increase in supply,
with the largest single year increase seen in 2014, eventually
culminated in the significant decline of the iron ore market price.
The iron content of the new supply from Rio Tinto and BHP Billiton
has been between 61% Fe to 62% Fe. The increase in supply from
Fortescue (approximately 146 million tonnes since 2000) has an
average iron content of approximately 58%.
By contrast, total pellet exports have only increased by 38
million tonnes or 36% since 2000, reflecting the capital intensive
nature of establishing pellet operations and the high barriers to
entry.
Ferrexpo believes that the increase in comparatively lower grade
iron ore products in relation to pellets has driven an increase in
the premium paid for higher quality iron units in 2014, which has
become relatively more limited in supply.
Pellet production
Pellet production for the seaborne market comes from seven
principal suppliers including Ferrexpo.
CRU believe the largest pellet exporters in 2014 were as
follows.
Pellet exports (million
tonnes) 2014
------------------------- -----
Vale (Brazil) 26.8
------------------------- -----
Samarco (Brazil) 23.2
------------------------- -----
LKAB (Sweden) 17.0
------------------------- -----
Metalloinvest (Russia) 13.9
------------------------- -----
Ferrexpo (Ukraine) 11.0
------------------------- -----
Rio Tinto (IOC) (Canada) 8.3
------------------------- -----
Cliffs Natural Resources
(USA) 6.0
------------------------- -----
Total Exports 143.7
------------------------- -----
% of top 7 exporters 74%
------------------------- -----
CRU's 2014 cost curve highlights the weighted average business
costs for Samarco, Vale, LKAB, Ferrexpo, IOC and Cliffs Natural
Resources. Of these producers, according to CRU, the two Brazilian
operations were the lowest cost, followed by Ferrexpo. The
estimates are based on the average currency exchange rates for the
full year and therefore only partially reflect the further
devaluation of the Ukrainian Hryvnia that took place during 2014
and in 2015. According to CRU, it is likely that the relative cost
position of Ferrexpo has improved over the course of 2014 and this
will have been further improved due to the devaluation in February
2015. Labour and other Hryvnia-denominated components of cost have
become relatively cheaper, although the devaluation may lead to
significant inflation in future years.
In 2014, Vale completed construction of new pelletising capacity
of 8.3 million tonnes per annum and Samarco added another 7.5
million tonnes per annum. It is expected that at least half of this
production will go to the Middle East steel market to produce
direct reduced iron for use in electric arc furnaces and as such
not compete in the traditional blast furnace steel market. Overall,
CRU expects Brazilian pellet exports to increase by 17 million
tonnes from an estimated 48 million tonnes in 2014 to 65 million
tonnes by 2018. No other significant increase in pellet supply is
expected.
Industry Outlook
Following significant supply additions to the global iron ore
market in 2014, further additions are expected in the coming 12
months. Rio Tinto, BHP and Vale have announced that they expect to
produce an additional 65 million tonnes in calendar year 2015
(consisting of 35 million tonnes, 20 million tonnes and 10 million
tonnes respectively). Further iron ore supply is expected from
Anglo American's 25 million tonnes per annum Minas Rio project in
Brazil, which shipped its first iron ore to the international
market in 4Q14, and Hancock Prospecting's 55 million tonne per
annum Roy Hill project in Australia, which is expected to commence
production in September 2015. While some high cost supply has
exited the market, and more may follow, the Group expects that 2015
will witness another year of price pressure as excess supply of
iron ore units outweighs demand and higher cost producers take time
to exit the market.
Marketing
Despite the significant fall in iron ore prices during 2014,
average pellet premiums remained robust. The annual long term
contract premium paid for iron ore pellets in the key markets of
Western Europe and North East Asia increased significantly, from
US$28 per tonne in calendar year 2013 to US$38 per tonne in
calendar year 2014. Average Chinese spot market pellet premiums for
65% Fe pellets also increased from approximately US$21 per tonne
for the year ended 2013 to over US$27 per tonne for the year ended
2014 (source: Chinese spot market pellet premium derived from the
Metal Bulletin 65% Pellet Index).
In 2014, the Group improved its pricing realisations as it
completed the move to sustainable index based pricing for all long
term contracts over a full year of sales, for the first time. As a
result of the higher pellet premiums, improved pricing terms and
favourable customer mix, Ferrexpo's average realised price
outperformed the benchmark fines price by 10% declining by 18%
compared to a 28% decline for the 62% Fe fines benchmark price.
Sales are priced compared to the index using several different
quotation periods in line with market practice. These quotation
periods are negotiated at the start of each long term contract and
can be monthly, quarterly in arrears or current quarter.
Total sales volumes in 2014 were 11.2 million tonnes, a 4%
increase compared to 2013 (10.7 million tonnes). Sales of FPP
increased 14% to 5.7 million tonnes from 5 million tonnes in 2013,
a record for the Group, while sales of FBP declined 7% to 5.4
million tonnes (2013: 5.8 million tonnes) as the Group focused on
increasing output of its premium product in line with its Quality
Upgrade Programme ("QUP"). Demand from the Group's customers was
strong throughout the period with long term contracts performing at
or above base volume levels.
The Group sells in a variety of markets targeting premium steel
mills who themselves supply premium customers.
The table below shows the breakdown of sales volumes by key
regions.
Year ended 31.12.2014 Year ended 31.12.2013
---------------------------- --------------------- ---------------------
Eastern and Central Europe 49% 47%
---------------------------- --------------------- ---------------------
China 25% 27%
---------------------------- --------------------- ---------------------
North East Asia 10% 8%
---------------------------- --------------------- ---------------------
Western Europe 8% 5%
---------------------------- --------------------- ---------------------
Turkey, Middle East and
India 8% 13%
---------------------------- --------------------- ---------------------
Total sales volume (million
tonnes) 11,167 10,689
---------------------------- --------------------- ---------------------
The Group's fastest growing markets were Germany and Japan,
where sales volumes increased by 58% and 28% respectively. In 2014,
new long term contracts were signed with two steel mills who are
top five steel producers globally and produce sophisticated flat
steel products requiring premium iron ore inputs. 91% of sales were
made under long term framework agreements (2013: 83%) while 9% of
sales were on a spot basis (2013: 17%). In addition, market
development activity continued with first cargoes shipped to new
customers in Western Europe, North East Asia and Turkey.
Selling and Distribution
Total selling and distribution expenses decreased by 7%, or
US$24 million, to US$312 million for the year ended 31 December
2014, compared to US$336 million in 2013.
CFR sales made up the vast majority of Ferrexpo business to
non-traditional markets during 2014. CFR deliveries to the Far
East, Turkey and Germany saw a 4% increase in volumes year on year.
International freight costs for CFR sales amounted to US$123
million (2013: US$114 million). Ferrexpo's long term sales
contracts in 2014 which do not utilise physical ocean freight were
worked back to a FOB equivalent price using the Baltic Exchange C3
freight prices (Capesize route from Tubarao to Qingdao). This key
index price declined slightly to US$20.64 per tonne in 2014
compared to US$20.97 in 2013, and Ferrexpo capesize loadings were
unchanged against 2013 levels at 22 vessels.
By year-end, the cost of international shipping on the C3 route
dropped dramatically to approximately US$14.5 per tonne following
the 65% fall in crude oil price to US$54 per barrel as of 31
December 2014. The freight outlook for 2015 remains weak supporting
FOB net-back prices.
Short haul deliveries helped push throughput from the Group's
loading facilities at Yuzhny TIS Ruda on the Ukrainian Black Sea to
a record volume of 6.3 million tonnes (awaiting advice on 2013
equivalent) with CFR shipments to Romania (which can connect with
the Group's barging fleet on the Danube River) and Croatia
broadening the Group's logistics options to traditional
markets.
Distribution costs incurred in delivering pellets to the
Ukrainian border for export decreased by 6% to US$145 million
(2013: US$154 million). Rail tariff inflation was 5% in 2014,
however, rail costs were significantly reduced in Dollar terms due
to the devaluation of the Hryvnia during the year, 100% of rail
costs are incurred in local currency. The Group also receives
tariff discounts from the Ukrainian rail authorities for the Group
using its own rail wagons of 3% to 6% depending on the route. As of
31 December 2014, the Group owned 2,200 rail cars. Another 300 rail
cars were ordered in February 2014 and were due for delivery in the
second half of the financial year 2014. As a consequence of the
ongoing conflict in eastern Ukraine, only 25 rail cars were
delivered in 2014. Due to the uncertainty surrounding the delivery
of the remaining rail cars, the Group has recorded a provision of
US$8 million as of 31 December 2014.
Ferrexpo owns and operates barges which deliver iron ore and
other products through Europe via inland waterway. Deliveries are
principally made via the Danube River. The Group's barging
operations delivered 1.1 million tonnes of iron ore via 139 barges
to customers in Central Europe in 2014 (2013: 1.5 million
tonnes).
Mining and Production
In 2014, pellet production from own ore, increased 2% to 10.7
million tonnes compared to 10.5 million tonnes in 2013.
Approximately one third of the pellets produced, or 3.4 million
tonnes, were from FYM ore as the mine completed its ramp up in
2013. Including third party materials, total pellet production
increased 2% to 11 million tonnes (2013: 10.8 million tonnes). This
represented record production for the Group, however, production
was constrained in the second quarter of 2014, due to a scheduled
refurbishment of pellet line number three, and from reductions in
electricity supply in December 2014, which resulted in the loss of
144 kilotonnes of production.
Total production of 65% Fe pellets increased by 16%, to 5.8
million tonnes, compared to 5 million tonnes in 2013. Following the
completion of FPM's quality upgrade programme as of 31 December
2014 we expect to produce an increasing amount of 65% Fe pellets in
2015, once ramp up is finished in the first quarter of 2015.
FPM successfully integrated FYM ore into its production
facilities and completed a major modernisation and refurbishment
programme of its production facilities whilst increasing output. As
result it has increased its output capacity by approximately one
third compared to 2007. The processing and pelletising facilities
can now produce 1 million tonnes of pellets per month. This level
of output was achieved in January 2015.
In 2015, the Group is aiming to optimise output from the FPM and
FYM pits so that it can maximise production and minimise costs per
tonne.
Production Statistics
Change
(000't unless otherwise stated) 2014 2013 %
-------------------------------- ------ ------ -------
Iron ore processed from FPM
&FYM 29,957 30,599 (2.1%)
-------------------------------- ------ ------ -------
Average Fe content 33.38% 32.26% 3.5%
-------------------------------- ------ ------ -------
Concentrate produced ('WMS') 13,726 13,195 4.0%
-------------------------------- ------ ------ -------
Weighted average Fe content
% 62.7% 62.8% (0.2%)
-------------------------------- ------ ------ -------
Pellets produced from FPM &
FYM 10,670 10,466 2.0%
-------------------------------- ------ ------ -------
Higher grade 5,544 4,725 17.3%
-------------------------------- ------ ------ -------
Average Fe content % 64.9% 64.9% (0.1%)
-------------------------------- ------ ------ -------
Lower grade 5,126 5,741 (10.7%)
-------------------------------- ------ ------ -------
Average Fe content % 62.2% 62.2% -
-------------------------------- ------ ------ -------
Purchased concentrate 405 401 1.0%
-------------------------------- ------ ------ -------
Average Fe content % 65.8% 65.9% (0.2%)
-------------------------------- ------ ------ -------
Pellets produced from purchased
concentrate 351 347 1.0%
-------------------------------- ------ ------ -------
Higher grade 259 263 (1.6%)
-------------------------------- ------ ------ -------
Average Fe content % 64.9% 64.9% 0.1%
-------------------------------- ------ ------ -------
Lower grade 92 84 9.1%
-------------------------------- ------ ------ -------
Average Fe content % 62.2% 62.2% -
-------------------------------- ------ ------ -------
Total pellet production 11,021 10,813 1.9%
-------------------------------- ------ ------ -------
Pellet sales volume 11,167 10,689 4.5%
-------------------------------- ------ ------ -------
Gravel output 1,819 2,281 (20.3%)
-------------------------------- ------ ------ -------
Total Group stripping volume
(million m3) 49,697 49,208 1.0%
-------------------------------- ------ ------ -------
Health and Safety
Most regrettably there were three fatalities during the period
two at FPM and one at FBM. These incidents were due to breaches of
existing risk control measures designed to prevent accidents.
Following these tragic events Ferrexpo has strengthened its focus
on ensuring compliance of existing standards whilst reviewing
leading practice in order to implement the highest standards in all
operating areas. The prevention of all incidents and injuries to
employees is the highest priority of the Board and management, who
follow the principle that all accidents are avoidable.
Areas that Ferrexpo is specifically focusing on within health
and safety include:
-- Significant risk controls and reporting culture
-- Review and implementation of best practice safety
standards
-- Continued implementation of behavioural based safety
program
The lost-time injury frequency rate ('LTIFR') at FPM (including
contractors) decreased to 0.49 per million man hours in 2014 (2013:
0.60 per million man hours). FYM experienced no lost time injuries
during the period. Since its inception FYM has experienced only one
lost time injury. Ferrexpo's total LTIFR in Ukraine was 0.47 per
million man hours compared to 0.58 per million man hours in
2013.
LTIFR for the Group's barging operation, DDSG, including leased
crews, was 9.08 per million man hours worked (2013: 12.80 per
million man hours worked). The difference in LTIFR between the
mining and barging operations principally reflects the lower hours
worked at the barging operations compared to the mining
operations.
LTIFR 2014 2013
------------------- ---- -----
Mining operations 0.47 0.58
------------------- ---- -----
Barging operations 9.08 12.80
------------------- ---- -----
Total Group 0.86 1.07
------------------- ---- -----
2013 numbers have been restated to include the Group's barging
activities as well as re-instatement of contractor hours worked at
the mining operations.
Production Costs
The C1 cash cost of production (1) from own ore improved by
US$14 per tonne to US$45.9 per tonne in 2014 compared to US$59.8
per tonne in 2013. The 23% reduction per tonne was largely driven
by a 97% fall in the value of the Hryvnia per US Dollar from UAH
7.8 per US Dollar to UAH15.8 per US Dollar by year end. The Group
also benefitted from a 15% decline in gas prices and improved
consumption norms due to higher production volumes and positive
contribution from FYM ore. This was offset by increased royalty
payments following an increase in royalty rates for iron ore
miners. The mining royalty increased between two and three times,
in local currency, depending on the grade of the iron ore product.
The Group also experienced local electricity price inflation of
14%.
(1) The C1 cash cost of production per tonne is defined as the
cash costs of production of pellets from own ore divided by
production volume of own ore, and excludes non-cash costs such as
depreciation, pension costs and inventory movements, costs of
purchased ore, concentrate and production cost of gravel.
The following table shows the % breakdown of the Group's cost
base by category:
Input % of C1 cash
cost
----------------- -------------
Electricity 25%
----------------- -------------
Gas 15%
----------------- -------------
Fuel 13%
----------------- -------------
Materials 10%
----------------- -------------
Personnel 10%
----------------- -------------
Grinding bodies 7%
----------------- -------------
Maintenance 7%
----------------- -------------
Spares 6%
----------------- -------------
Royalties 4%
----------------- -------------
Explosives 3%
Business Improvement Programme
The BIP aims to increase process efficiencies and reduce
consumption norms in the production process thereby reducing the
cash cost of production by up to 2% per annum.
Specific focus areas include increasing plant throughput,
increasing mobile mining fleet utilisation, debottlenecking
processing activities, and improving process control.
As gas and electricity represent approximately 40% of the cash
cost of production, a major focus of the BIP is to identify and
implement material energy savings projects in the mining and
processing operations.
For the year ended 31 December 2014, FPM reduced its average
consumption per tonne in electricity, gas and grinding bodies by
23%, 24% and 31% respectively, compared to 2005 which was the year
before the BIP was initiated.
The average C1 cost for the year ended 31 December 2014 was
US$45.9 per tonne and it is estimated that the cumulative
productivity gains since the inception of the BIP are approximately
US$8.2 per tonne of pellets. As such, the BIP has reduced the C1
cost of production by 18% using 2014 average prices.
Consumption
norms 2014 2005 % change
---------------- ----- ----- --------
Electricity
kWh/t 159.2 205.5 (23%)
---------------- ----- ----- --------
Gas m3/t 16.8 22 (24%)
---------------- ----- ----- --------
Grinding bodies
kg/t 4.4 6.4 (31%)
---------------- ----- ----- --------
Resource Savings under BIP since Inception in 2006
Resource Savings
------------------------ -------
Power (million kWh) 155
------------------------ -------
Steam (Gcal) 14,333
------------------------ -------
Grinding media (tonnes) 3,499
------------------------ -------
Diesel fuel (million
litres) 4.23
------------------------ -------
Gas (th. m3) 19,186
------------------------ -------
Lining (tonnes) 165
------------------------ -------
Haul truck tyres
(pcs) 80
------------------------ -------
Ancillary fleet
tyres (pcs) 205
------------------------ -------
Bentonite (tonnes) 257
------------------------ -------
The Group undertook 36 BIP projects in 2014.
Examples of some of the initiatives are:
Power consumption reduction
-- Use of dewatering wells in the north-eastern part of the FPM
pit reduced the power required to pump water from intermediate
levels compared to from the pit floor. Savings for the year
amounted to 3,275 thousand KWh of electricity.
-- Installation of a level control system in the magnetic
hydro-separators within the beneficiation plant as well as
installation of controllers to manage rotation more effectively
enabled automation of the process. This initiative extended
component life and achieved reductions in power consumption of
5,891 thousand KWh.
Diesel fuel reduction
-- Installation of an automated fleet control system with GPS
navigators allowed for optimization of the mobile mining fleet.
This reduced fuel consumption by 456 kilo litres per year. The GPS
also reduced the travel distance of the fleet increasing tyre life
and saving 205 tyres.
Reduced grinding media consumption
-- Optimization of beneficiation plant grinding mills rotation
and grinding media addition from the installing new mill gears with
a lower gear ratio has resulted in a drop in the consumption of
grinding media by 620 tonnes per annum whilst maintaining the same
level of grinding to ensure product quality.
Environmental Impact
As in 2013, the Group is pleased to report that there were no
reportable environmental incidents during the year.
Gas Emissions
Emissions in
tonnes 2014 2013
---------------------- ------ ------
Total gas emissions 6,474 5,815
---------------------- ------ ------
Of which:
---------------------- ------ ------
Nitrogen dioxide 3,755 2,762
---------------------- ------ ------
Carbon monoxide 2,391 2,107
---------------------- ------ ------
Sulphur dioxide 328 946
---------------------- ------ ------
Total solid emissions 6,087 5,828
---------------------- ------ ------
Total emissions 12,561 11,643
---------------------- ------ ------
Please note 2013 numbers have been restated to include sulphur
dioxide and solid emissions from FYM.
The increase in emissions is due to a due to a 2% increase in
Group pellet production volumes and a 6% increase in waste material
compared to 2013. The increase in waste material reflects the
continued development of the new FYM pit resulting in additional
volumes of overburden and waste rock.
CO(2) Emissions
The table below shows the Group's carbon intensity ratio which
is in line with 2013. FPM, FYM, FBM and the barging operations
collected information on greenhouse gas emissions created by solid,
liquid, and gaseous fuels, as well as refrigerants, explosives,
purchased steam and electricity.
2014 2013
----------------- --------- ---------
2,282,614
CO2 emissions 2,356,907 (2)
----------------- --------- ---------
Pellets produced
(kt) 11,021 10,813
----------------- --------- ---------
Intensity ratio 0.21 0.21
----------------- --------- ---------
(2) 2013 restated to include barging activities
CO2 emissions directly generated by the operations were 0.43
million tonnes in 2014 compared to 0.39 million tonnes in 2013.
Emissions generated from indirect sources were 1.93 million tonnes
in 2014 compared to 1.90 million tonnes in 2013. The 2013 numbers
have been restated to include the Group's barging operations.
Capital Investment
As of 31 December 2014, Ferrexpo has substantially completed its
investment programme to increase the quality and quantity of its
pellet output.
The Group has spent approximately US$2 billion since its IPO in
2007 developing additional iron ore mining capacity at FYM as well
as executing a major modernisation of FPM's mining and production
facilities to increase the beneficiation and pelletising capacity
to 12 million tonnes per annum of output.
Capital investment in 2014 amounted to US$235 million, 15% below
2013 (US$278 million). The reduction reflects the phasing and
completion of the Group's programme to upgrade the existing FPM
facilities and the development of the FYM pit and the associated
infrastructure. As of 31 December 2014, these programmes were
substantially completed, with the final sections of the floatation
facilities at FPM expected to be commissioned in the first quarter
of 2015 at a cost of approximately US$3 million.
As a result, in 2015, the Group expects to reach production of
12 million tonnes of pellets per annum with an increased volume of
higher grade 65% Fe pellets. The Group expects to produce only 65%
Fe pellets in 2016, however, depending on the relative economics of
lower grade pellets these may also be produced from time to time.
The increase in volume, combined with higher average iron content
of the pellets, should enable Ferrexpo to further expand its high
quality customer base and achieve higher pricing and margins
compared to the 62% Fe pellet product.
Sustaining capital expenditure required to maintain this level
of output will depend on the cycle of maintenance capital for FPM's
production facilities, and are estimated to be in the range of
US$50 million to US$100 million annually. If appropriate, capital
investment could include small scale, high return projects that
will incrementally increase production capacity.
The next phase of investment at FYM will be commenced at an
appropriate time in accordance with the Group's overall strategy.
This phase will principally involve additional stripping works,
following which the Group will have mining capacity in excess of
its processing capabilities. Subject to appropriate economics and
funding, Ferrexpo will construct a 10 million tonne per annum
concentrator. This will be supplied by FYM ore which at full
capacity, following further investment, can yield approximately 10
million tonnes of pellet equivalent output in the form of high
quality 67% Fe concentrate.
In the current low priced iron ore market environment, however,
Ferrexpo is not pursuing any significant new growth projects until
appropriate gearing levels are reached.
Capital expenditure breakdown:
US$ million 2014 2013
----------------------------- ---- ----
FPM 136 149
----------------------------- ---- ----
Sustaining (incl.
logistics) 43 67
----------------------------- ---- ----
Capacity upgrade
project 37 20
----------------------------- ---- ----
Mine life extension 12 15
----------------------------- ---- ----
Quality upgrade project 44 47
----------------------------- ---- ----
FYM 73 100
----------------------------- ---- ----
Stripping and infrastructure 62 98
----------------------------- ---- ----
Concentrator 11 2
----------------------------- ---- ----
FBM, other deposits 9 9
----------------------------- ---- ----
Logistics 17 20
----------------------------- ---- ----
Total 235 278
----------------------------- ---- ----
CSR
Ferrexpo is the largest employer in the Poltava region of
Ukraine. Approximately 99% of the Group's employees are based in
Ukraine, representing 9,541 people. Given the fragile state of
Ukraine's economy and the ongoing conflict in the east of the
country, leading to much social upheaval, the Group increased its
support for local and regional communities during this difficult
period. As a result, community support donations increased from
US$10 million in 2013 to US$39 million in 2014. The majority of the
spend was used to support local and regional public organisations
whose finances were under strain. Examples of donations made
include the purchase of medical equipment for hospitals, care for
the elderly, heating and lighting equipment for local
infrastructure and general repairs to schools and hospitals. Future
community support spending will be subject to iron ore pricing and
the Group's ability to fund such spend along with its other
commitments.
People
Ferrexpo is pleased to report that it continues to maintain a
good relationship with its workforce and that there was no labour
related disruption to production during the year. There have been
no significant industrial actions or labour disputes at FPM since
its privatisation in 1995, or at FYM since its inception.
In 2014, the Group employed on average 9,658 staff and 1,927
contractors (2013 average: 9,696 staff and 2,220 contractors).
Ferrexpo expects to employ fewer contractors in 2015, as it has
completed its investment programmes at FPM and FYM and any further
significant investment is on hold in the current low price iron ore
environment.
Average personnel costs at the Group's Ukrainian operations
accounted for 10% of the cash cost of production per tonne of
pellets (2013:11%). In 2014, the Group experienced wage inflation
of 12% in local currency.
Ferrexpo believes it is important to attract, retain and develop
skilled workers. In 2014, approximately 86% of the local workforce
underwent training initiatives, principally related to safety and
professional training.
The Board would like to express its sincere appreciation to all
of the Group's employees, especially in Ukraine, for their
contribution to this strong set of results and for their continued
dedication during a challenging time in the country and in the iron
ore industry.
In November 2014, Jim North joined the Company as Group Chief
Operating Officer. Jim was previously Chief Operating Officer of
London Mining. Prior to this he held a variety of senior
operational management roles with Rio Tinto, BHP Billiton and Mount
Isa Mines, in Africa, South America and Australia.
Ukraine
In 2014, GDP growth in Ukraine declined by 7.5% while foreign
currency reserves as of 31 December 2014 were approximately two
months of import cover at about US$6 billion. The Ukrainian Hryvnia
devalued by 97% from UAH 8.0 per US Dollar to UAH15.8 per US Dollar
in 2014.
On 5 February 2015, the National Bank of Ukraine ceased
interventions in the foreign exchange market and the Hryvnia
devalued by 45% to approximately UAH24 per US Dollar, and is
currently trading around the UAH23 per US Dollar level. The Board
of Ferrexpo notes this recent fall in the value of the Hryvnia.
Ferrexpo continues to hold liquidity inside Ukraine amounting to
approximately US$160 million for daily operating activities in a
mix of local currency and US Dollars to cover operating costs and
capital investment.
This recent devaluation has put further strain on the Ukrainian
banking sector. The Board is aware of liquidity constraints inside
the banking system both in local and in hard currency. Ferrexpo is
not experiencing any difficulties in making or receiving payments
and at the current time the Board is not looking to significantly
reduce the level of cash held locally or to review its banking
relationships until the situation stabilises.
The National Bank of Ukraine is undertaking measures to
stabilise the banking sector including the provision of liquidity
and the requirement for shareholders of certain banks to inject new
capital following the recent sharp devaluation in the currency. In
order to ensure that Ferrexpo's operations remain as far as
possible unaffected by the recent troubles, the Board continues to
hold funds required for operations in Ukraine with Ferrexpo's
long-standing transactional bank, Bank Finance & Credit. This
bank, which is controlled by Ferrexpo's CEO and majority
shareholder Kostyantin Zhevago, has recently received liquidity
support from the National Bank. The Board continues to monitor the
situation closely.
On 12 February 2015, the IMF announced a new four year loan
package of approximately US$17.5 billion to Ukraine. This is
expected to help stabilise the country's balance of payments and
financial system.
Dividends
Ferrexpo aims to maintain stable and sustainable dividend
payments throughout the business cycle. The prospects of the
Company remain sound following the completion of over US$2 billion
of investment since its IPO in 2007. The Group operates in a
premium sector of the iron ore market with a first-class customer
portfolio and has a competitive low cost base. In light of
Ferrexpo's continued strong financial performance in 2014, the
Board is maintaining total dividends for the year in line with 2013
at US 13.2 cents per ordinary share (1H 2014/1H 2013 interim
dividend: 3.3 US cents per ordinary share).
In accordance with this, a final ordinary dividend of US 3.3
cents per share is being proposed (2013 final ordinary dividend:
US3.3 cents per ordinary share), as well as a special dividend of
US 6.6 cents, as paid in the previous two years. The Group will
target to maintain dividends at this level in future. The total
average annual dividend yield for the Group has been 4.7% since
2012.
Payment of the final ordinary dividend will be made on 29 May
2015 to shareholders on the register at the close of business on 1
May 2015. The dividend will be paid in UK Pounds Sterling with an
election to receive US dollars.
The special dividend will be paid on 27 March 2015 to
shareholders on the register at the close of business on 20 March
2015 and will amount to US$38 million, bringing the total final
ordinary and special dividend to US$58 million. (2013: US$58
million).
Financial Management
As described under results, on 23 February 2015, the Company
extended the maturity of US$161 million of its US$500 million
Eurobond due in April 2016 equally into April 2018 and April 2019
and prepaid US$54 million of the outstanding liability at par
value. This has improved the liability profile of the business. For
further information please see
http://www.ferrexpo.com/investor-relations/news/press-releases.
As of 31 December 2014, the Group held cash of US$627 million
(31 December 2013: US$390 million) and net debt of US$678 million
(31 December 2013: US$639 million).
The Group will continue to proactively manage its debt repayment
schedule and it aims to progressively reduce its absolute debt
levels.
Corporate Governance and Board
The Board of Ferrexpo remains committed to maintaining high
standards of governance and integrity throughout the Group, and
being compliant with the UK Corporate Governance Code and all the
relevant regulations and guidelines. In 2014, initiatives included
the establishment of an Executive Compliance Committee which is
responsible for compliance risk assessment and management
throughout the Group.
As reported last year, the Board has begun the task of
refreshing its membership, and has appointed external recruitment
consultants to search for suitable candidates who can provide the
necessary diversity and balance, including the appointment of a
female director. The Group is seeking a replacement for the
Chairman, Michael Abrahams, who is planning to retire at the
Group's AGM in 2016. In August 2014, Bert Nacken joined the Board
in succession to Lucio Genovese, and the Board hopes to make
further appointments in due course. The Board would like to thank
Lucio for the contribution he has made as a Non-Executive Director
over the past seven years, especially as Chairman of the
Remuneration Committee.
Bert Nacken previously spent 34 years at Billiton and then BHP
Billiton, working in various operational and management roles
throughout the world, notably as President of the Cerro Matoso
ferro-nickel operation in Colombia (1997-2001), as President of the
Minera Escondida copper mine in Chile (2004-2007), and most
recently as the Chief Operating Officer of BHP Billiton Western
Australia Iron Ore (2009-2011). Since 2011 he has worked as a
mining consultant.
Ferrexpo's principal shareholder and CEO, Kostyantin Zhevago,
holds 50.3% of the shares in the Company, and his interests remain
aligned with those of the other shareholders. His relationship with
the Company is governed by a relationship agreement that is fully
compliant with the requirements of the recently revised Listing
Rules.
Outlook
Iron ore pricing is likely to remain subdued and Ferrexpo, along
with the general consensus of market observers, expects the average
62% Fe CFR China benchmark price to be materially below 2014. The
significant investments the Group has made over the past several
years totalling US$2 billion is resulting in higher production
volumes, increased quality and lower costs in constant currency.
The Group's cost base is also benefitting from lower energy costs
and the devaluation of the Hryvnia, although this may be offset be
inflation in future periods. While strong pellet premiums and
reduced freight rates are helping to partially offset lower
benchmark pricing. As a result, the Group expects to remain
profitable and strongly competitive in the world pellet market as
one of the lowest cost producers.
Ukraine currently holds approximately two months of foreign
currency reserves and has a very weak banking and financial system.
Failure to secure continued financial support in March 2015 from
the IMF could disrupt currency flows and the availability of
operational financial assets held in country as well as potentially
disrupt VAT refunds. The Group believes it has made all necessary
plans to ensure smooth and continued operations.
The Company's operations in Ukraine are remote from the current
conflict area. The situation generally, however, remains uncertain
and subject to change.
The current year has started well both in production and sales.
In January 2015, Ferrexpo produced a record one million tonnes of
pellets, while in February all of the Group's output was in the
form of premium 65% Fe pellets, another record for the Group. Sales
volumes continue to be at or above base contract levels.
Principal risks
The list of the principal risks and uncertainties facing the
Group's business that follows below is based on the Board's current
understanding. Due to the very nature of risk it cannot be expected
to be completely exhaustive. New risks may emerge and the severity
or probability associated with known risks may change over
time.
Risks Relating to Operations in Ukraine
POLITICAL AND LEGAL (SEE NOTE 16 IN THE ACCOUNTS)
Possible Impact
Recent civil conflict, political instability and ongoing
military action in parts of the Donetsk and Luhansk regions of
Ukraine have negatively impacted the economy and relations with the
Russian Federation resulting in recent Ukraine sovereign risk
rating downgrades by all credit agencies.
Ukraine has a large external debt refinancing requirement in
2015 and 2016, while foreign reserves were reported at US$5.6
billion as of 1 March 2015. The country currently holds
approximately two months of foreign currency reserves and has a
very weak banking and financial system. Failure to secure continued
financial support in March 2015 from the IMF could disrupt currency
flows and the availability of operational financial assets held in
country.
In addition, escalating geopolitical tensions have had an
adverse effect on the Ukrainian financial market. The ability of
local companies and financial institutions to obtain funding from
the international capital markets has been hampered as a result of
decreased appetite for Ukrainian credit exposure. Any continuing or
escalating military action in eastern Ukraine could have a further
adverse effect on the economy.
The current situation in Ukraine, could also affect the ability
of Ferrexpo to obtain financing or re-financing or the ability of
Ferrexpo to use its cash held in Ukraine or the Government's
ability to meet its payment obligations to Ferrexpo on amounts due,
such as VAT refunds. For further information see note 2 on page
32.
Other risks could include a weak judicial system that is
susceptible to outside influence, and can take an extended period
of time for the courts to reach final judgement. The Group faces a
legal claim over a shareholding in FPM. The case has been running
for more than seven years in Ukraine. On 16 February 2015, the High
Commercial Court of Ukraine rejected the case of the claimants and
upheld the decisions of the Commercial Courts of the first and
second instances, reconfirming the validity of the SPA. The
Claimants have a right of appeal to the Supreme Court of Ukraine
but after taking legal advice, the Board believes that any appeal
that the claimants bring will be without merit and that the SPA
will remain valid.
Mitigation
-- The Group holds significant liquidity on and offshore to
ensure smooth operations should the economic weakness of the
country disrupt the financial system.
-- At the time of writing, Ferrexpo's operations remain largely
unaffected by the civil conflict in the east of Ukraine. The Group
experienced a minor electricity shortage in December due to lack of
coal availability from the conflict zone for electricity
generation. Ferrexpo is monitoring the situation and has
contingency plans in place to purchase natural gas or heavy duty
fuel on behalf of a local power station to generate emergency
electricity should a shortfall occur again. The electricity
vulnerability is mostly a winter concern when overall demand for
electricity is high.
-- Ukraine relies on Russia to supply approximately 15% of its
gas requirements. In 2014, Ferrexpo sourced some natural gas from
Slovakia.
UKRAINIAN BANKING SECTOR
Possible Impact
The Ukrainian banking sector is considered weak and
undercapitalised according to credit rating agencies. The
substantial devaluation of the Hryvnia since 1 January 2014 has
required many banks to inject new capital. The devaluation of the
Hryvnia has also weakened confidence in the banking sector causing
large outflows of deposits and the need for liquidity support from
the National Bank of Ukraine. Also see Ukrainian Currency Risk.
As of 31 December 2014, Ferrexpo had c.US$627 million in cash
and cash equivalents, of which c.US$160 million was held in Ukraine
to shield operations from disruptions. The liquidity held in
Ukraine can fund up to three months of operating and capital
expenditures at current exchange rates and liquidity outside
Ukraine is sufficient for eight months. The Group's Ukrainian
liquidity is held in Bank Finance and Credit, which is controlled
by Kostyantin Zhevago, the Chief Executive Officer and the ultimate
beneficial owner of 50.3% of Ferrexpo's shares. Bank Finance and
Credit is subject to these risks facing the Ukrainian banking
sector following the devaluation to date in 2015. For further
details see note 16 to the accounts, Related Party
Transactions.
Mitigation
-- The vast majority of the Group's financial transactions and
cash flows originate in Ukraine and flow through the banking
system. The Group regularly reviews its banking relationship, and
the stability, service and reliability of its partners, in the
context of the overall banking sector within the country. To date,
the Group has not experienced unusual disruptions to its banking
service.
UKRAINIAN CURRENCY
Possible Impact
Fluctuations in the Group's operational currency can impact its
profitability and the book value of its assets.
During the year the Hryvnia devalued from UAH7.9 per US Dollar
as of 31 December 2013 to UAH15.8 per US Dollar as of 31 December
2014. The average rate during the year was UAH11.9 per US Dollar.
Balances at the year-end are converted at the prevailing rate. The
devaluation has significantly reduced the Group's cash cost of
production, however, it has also reduced the net assets of the
Group as of 31 December 2014 by US$1,206 million compared to 31
December 2013 (see statement of Other Comprehensive Income).
On 5 February 2015, the National Bank of Ukraine ceased
interventions in the foreign exchange market and the Hryvnia
devalued by 45% to UAH23.1 per US Dollar, and is currently trading
around the UAH23.0 per US Dollar level and has traded in a range
between 15.7 and 30.0 to date in 2015. For further detail of the
impact of the Hryvnia on the economy please see Ukrainian Banking
Sector risk.
Mitigation
-- The Group's revenue is all received in US Dollars while
approximately 55% of the Group's cost to deliver a tonne of pellets
to boarder dispatch points are in Hryvnia. Ferrexpo benefits from a
devaluation through lower costs, although the benefits may be
eroded over time due to inflation.
The accounting value of the fixed assets in Ukraine reduce due
to a devaluation, however, this has no effect on the underlying
ability of the assets to generate future cash flows.
UKRAINIAN PRODUCER PRICE INFLATION (PPI)
Possible Impact
As approximately 55% of the Group's cost to produce and deliver
a tonne of pellets to border dispatch points for export are in
Hryvnia, the Group is exposed to local cost inflation.
Following the substantial devaluation of the Hryvnia in 2014 and
in the first two months of 2015, the Group expects inflation to
increase to increase significantly over the next few years. In
2015, the Group anticipates that most of the local costs will still
be lower in US Dollar terms but that this situation will reverse
over time and could lead to hyperinflation.
Mitigation
-- The Group's BIP has achieved continuing efficiency
improvements and cost reductions over many years. Since inception
of BIP in 2006, the cash cost of production has reduced by US$8.2
per tonne of pellets. The Group also has a consistent track record
of producing at full capacity to achieve maximum overhead
absorption and is set to expand production output in 2015.
UKRAINIAN VAT RECEIVABLE (SEE NOTE 14 IN THE ACCOUNTS)
Possible Impact
As nearly all of the Group's output is exported, it does not
collect substantial amounts of VAT on local sales (which could
otherwise be offset against VAT incurred on purchases of goods and
services). The Ukrainian government refunds the outstanding balance
of VAT, although not always on a timely basis and repayment can be
dependent on the overall health of the government's finances. See
political and legal risk, particularly surrounding IMF support for
the country.
The late repayment of VAT results in increased working capital,
which must be funded from operating cash flows and debt. As
Ukrainian VAT balances are in local currency the balances in US
Dollar terms are exposed to the devaluation of the UAH.
In 2014, Ferrexpo received VAT bonds as payment for outstanding
balances prior to 2014. The Group subsequently sold these bonds for
US$97 million cash which reflected a discount to par value of 22%.
Due to the devaluation of the Hryvnia during 2014, a US$117 million
loss on VAT was incurred which was recorded in the translation
reserve, which together with the US$21 million loss of the sale of
VAT bonds resulted in a total loss on VAT of US$156 million.
The VAT balance as of 31 December 2014 was US$73 million (31
December 2013: US$318 million). The Group did not receive VAT
repayments in November and December of 2014, however, it has
received VAT repayments in January and February 2015. Full details
of the movement on VAT is included in note 14 to the accounts.
Mitigation
-- The Group maintains an open dialogue with the government and
operates to best international standards, ensuring the validity of
the VAT claims.
-- Ferrexpo also plans working capital requirements and
available liquidity to ensure that there is sufficient headroom. It
reduces capital investment as far as possible to ensure non-payment
is mitigated.
UKRAINIAN TAXES
Possible Impact
As part of an ongoing agreement with the majority of industry
players in Ukraine, the tax authorities have been remitting regular
VAT refunds in 2014 in exchange for the pre-payment of corporate
profit tax in respect of future periods. This can result in
significant amounts of taxation being paid in advance of the
profits being earned, which as a result of falling prices,
increasing costs, changes in tax legislation or financial
difficulties experienced by the country, may not result in the
Group recovering or being able to offset these amounts against
future profits. In 2014, Ferrexpo paid US$40 million in this
respect resulting in a year-end balance of US$73 million (2013:
US$88 million).
Mitigation
-- The Group takes regular advice on tax matters from Ukraine
tax experts and complies with all known requirements. The Group
maintains a transparent and open relationship with local, regional
and national tax authorities.
COUNTERPARTY RISK (SEE NOTE 16 IN THE ACCOUNTS)
Possible Impact
The Group operates in Ukraine which has a weak country credit
profile as defined by international credit rating agencies.
Financial instability of the Group's counterparties, including its
major suppliers, the government, local banks which operate in a
weak banking sector can absorb high amounts of working capital, or
result in material financial loss.
Counterparty risk could also lead to lower sales volumes, delays
in projects and interruption of production or financial loss in the
event of a default by counterparties and adversely affect its
future financial results.
In February 2014, 300 rail cars were ordered for delivery in the
second half of the year. As a consequence of the ongoing conflict
in eastern Ukraine, where the rail cars are manufactured, only 25
rail cars were delivered in 2014, and a prepayment amounting to
US$8 million was impaired. For further information see Related
Party Disclosure note 16.
Poor relations with the Russian Federation can impact the
ability of Ukrainian companies to import oil and gas from Russia as
well as have a general negative impact on Ukrainian GDP growth.
As a result of the annexation of Crimea by the Russian
Federation, certain Russian individuals and organisations were
sanctioned by the European Union, the United States and other
countries. This could have a negative impact on Ferrexpo if any of
these individuals or organisations were customers or suppliers to
the Group.
Mitigation
-- The financial strength of all of the Group's counterparties
is subject to regular and thorough review. The results of these
reviews are used to determine appropriate levels of exposures
consistent with benefits obtained, and available alternatives in
context of the Group's operations, in order to mitigate the
potential risk of financial loss. To date, the Group has not
experienced any financial losses from transactions with its
counterparties.
-- The Group develops its supplier base in order to avoid
excessive dependence on any supplier, actively encouraging a
diversity of supply where reasonable and practical.
-- The Group does not sell any of its product into Russia or
have any financial arrangements with Russian banks.
Risks Relating to the group's operations
IRON ORE PRICES AND MARKET
Possible Impact
Fluctuations in iron ore prices as well as in demand have
negatively impacted the financial result of the Group in 2014. The
benchmark price for 62% Fe fines CFR China declined 47% from US$135
per tonne as of 1 January 2014 to US$72 per tonne as of 31 December
2014. The average price was 28% lower at US$97 per tonne compared
to an average of US$135 per tonne in 2013. The average price for
the two months ended February 2015 declined further to US$65 per
tonne. There continues to be a risk associated with lower iron ore
prices, however, the price is now trading from a lower base and the
Group's costs have been significantly reduced in 2014.
Mitigation
-- Ferrexpo has a competitive cost base which has enabled it to
produce at full capacity and remain profitable throughout past
commodities cycles.
-- Ferrexpo has a well invested asset base which together with
its low cost base ensures its resilience in a low price
environment.
-- The Group has an established, broad customer base and
logistics infrastructure which can service regional and seaborne
markets. This provides flexibility should a particular region
experience a decline in demand.
MINING RISKS AND HAZARDS
Possible Impact
Mining risks and hazards may result in employee and contractor
fatalities as well as material mine or plant shutdowns or periods
of reduced production. Such events could damage the Group's
reputation and operating results.
Mitigation
-- Safety, environmental and operational performance is
regularly and rigorously reviewed throughout the organisation
including the COO, the Executive Committee and the Board.
-- Through its capital investment programme Ferrexpo has and is
modernising its mining and production facilities which is improving
safety, environmental and operational performance.
-- All accidents are fully investigated and lessons are drawn and implemented.
-- Appropriate safety training is regularly provided to employees.
-- Employee remuneration is linked to safety performance
RELIANCE ON STATE MONOPOLIES
Possible Impact
The Group purchases certain goods and services from state-owned
enterprises, and changes in the related tariffs affect the Group's
cost base. Availability of services can also be limited, which
could affect the Group's ability to produce and deliver
pellets.
During December 2014, Ferrexpo experienced reductions in the
supply of electricity during certain times of the day. This
resulted in the loss of 144 thousand tonnes of pellet production.
To date, these disruptions have not continued in January or
February 2015.
The supply of gas to Ukraine predominantly comes from Russia.
The recent geopolitical tension has increased the risk of
disruption to supply.
Other areas of reliance on state monopolies include railway
tariffs and availability of rail wagons, supply of gas and
electricity and associated tariffs, and mining royalties.
Mitigation
-- The factors affecting the Group's future cost structure are closely managed.
-- Cost reduction initiatives are planned and reported to the Board.
-- Since inception of BIP in 2006, it has reduced the C1 cash
cost by US$8.2 per tonne of pellets.
-- The Group has purchased its own rail wagons to reduce reliance on state-owned rail cars.
-- Ferrexpo has contingency plans in place to purchase natural
gas or heavy duty fuel on behalf of a local power station to
generate emergency electricity should there be an electricity
shortfall in 2015 (see Political and Legal risk on page 20).
-- Ferrexpo has begun to diversify its sources of gas supply and
in 2014 purchased some natural gas from Slovakia.
-- To date, the Group has not experienced any material supply
disruption of key inputs since its IPO in 2007.
-- Ferrexpo actively looks to invest in areas to reduce reliance
on state monopolies, subject to funding availability.
LOGISTICS
Possible Impact
The Group's logistics capability is dependent on services
provided by third parties and state-owned organisations, mainly in
relation to rail and port services. Logistical bottlenecks may
affect the Group's ability to distribute its products on time,
impacting customer relationships.
As at 31 December 2014, Ferrexpo owned 2,200 rail cars. Another
300 rail cars were ordered in February 2014 and were due for
delivery in the second half of the financial year 2014. As a
consequence of the ongoing conflict in eastern Ukraine, no rail
cars were delivered and there is uncertainty about the timing of
delivery of these rail cars
Mitigation
-- The Group continues to invest in its logistics facilities in
order to ensure available capacity, better service its customers,
lower costs and to reduce reliance on third-party providers. Beside
considerable investment in the rail car fleet over recent years,
Ferrexpo owns 139 barges operating on the Danube/Rhine River
corridor. It also owns a 48.6% in the port of TIS Ruda which
guarantees the Group independent access to the seaborne markets
avoiding reliance on the state port.
RISKS RELATED TO THE GROUP'S STRATEGY
EXPANSION CAPITAL INVESTMENT
Possible Impact
The Group's growth depends on its ability to upgrade existing
facilities and develop its iron ore resource base. For any major
capital project there is a risk of insufficient controls, cost
overruns, shortage of required skills, and unexpected technical
problems affecting the time taken to complete the project and the
return on the capital invested.
Mitigation
-- The Group has established strict procedures to control,
monitor and manage this expenditure which is regularly reviewed by
the Investment and Executive Committee and the Board.
GOVERNMENT APPROVALS OF EXPANSION
Possible Impact
The Group does not yet have all the governmental approvals
required to develop future deposits. Although all approvals that
have been applied for have been granted, there is no guarantee that
others will be granted in the future.
Mitigation
-- Ferrexpo maintains an open and proactive relationship with
various governmental authorities and is fully aware of the
importance of compliance with local legislation and standards.
-- The Group monitors and reviews its commitments under its
various mining licences in order to ensure that the conditions
contained within the licences are fulfilled or the appropriate
waivers obtained. Ferrexpo maintains strict compliance with the
Ukrainian mining code and execution of work in accordance with the
project design through active engagement of Ukrainian and
international legal advisers.
INVESTMENT OPPORTUNITIES
Possible Impact
Ferrexpo evaluates and, if it believes appropriate, enters into
net present value opportunities which it believes are potentially
value accretive to the Company and can reduce future operating
risk.
There is a risk that Ferrexpo may make acquisitions or
investments, which may not be accretive to earnings or otherwise
meet its operational or strategic expectations. In addition such an
investment or acquisition may divert management's attention away
from ongoing business activities.
Due to the lower iron ore price environment, Ferrexpo fully
impaired its investment in Ferrous Resources in the third quarter
of 2014, resulting in a non-cash charge of US$82 million. The
Company is currently looking at opportunities to unlock value in
this investment.
Mitigation
-- Management has procedures in place to ensure any potential
investment opportunity undergoes thorough due diligence and meets
strict financial criteria. All investment decisions are approved by
the Board.
Statement of Directors' Responsibilities
Statement by the Directors under the UK Corporate Governance
Code
The Directors are responsible for preparing the Annual Report
and the Group and Company financial statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare Group and Parent
Company financial statements for each financial year. Under that
law the Directors have prepared the financial statements in
accordance with International Financial Reporting Standards
('IFRS') as adopted by the EU. Under company law the Directors must
not approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the Group
and the Parent Company and of their profit or loss for that period.
In preparing those financial statements, the Directors are required
to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether applicable IFRS have been followed, subject to
any material departures disclosed and explained in the financial
statements; and
prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Parent Company and enable them
to ensure that its financial statements comply with the Companies
Act 2006. They have general responsibility for taking such steps as
are reasonably open to them to safeguard the assets of the Group
and to prevent and detect fraud and other irregularities.
Under applicable law and regulations the Directors are also
responsible for preparing a Directors' Report, Directors'
Remuneration Report and Corporate Governance statement that comply
with that law and those regulations. The Directors are responsible
for the maintenance and integrity of the corporate and financial
information included on the Company's website. Legislation in the
UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions. The
Board considers that the Annual Report and financial statements,
taken as a whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the Group's
performance, business model and strategy.
Responsibility Statement of the Directors in Respect of the
Annual Report and Accounts
We confirm on behalf of the Board that to the best of our
knowledge:
(a) the financial statements give a true and fair view of the
assets, liabilities, financial position and profit of the Company
and the undertakings included in the consolidation taken as a
whole; and
(b) the Strategic Report and the Directors' Report includes a
fair review of the development and performance of the undertakings
included in the consolidation as a whole, and the principal risks
and uncertainties that they face.
For and on behalf of the Board
Michael Abrahams
Chairman
Christopher Mawe
Chief Financial Officer
10 March 2015
Consolidated Income Statement
Year ended
US$'000 Notes 31.12.14 Year ended 31.12.13
Revenue 4 1,388,285 1,581,385
Cost of sales 3/5 (647,960) (773,221)
-------------------------------------------------------------------- ------ ----------- --------------------
Gross profit 740,325 808,164
-------------------------------------------------------------------- ------ ----------- --------------------
Selling and distribution expenses 6 (311,514) (335,718)
General and administrative expenses 7 (48,642) (54,839)
Other income 9,094 6,662
Other expenses 8 (57,014) (23,457)
Operating foreign exchange gains 9 76,372 622
-------------------------------------------------------------------- ------ ----------- --------------------
Operating profit from continuing operations before adjusted items 408,621 401,434
-------------------------------------------------------------------- ------ ----------- --------------------
Underrecovery and write-down of VAT receivable 14 (6,790) (36,421)
Write-offs and impairment losses 10 (83,534) (854)
Share of profit from associates 4,878 3,551
Losses on disposal of property, plant and equipment (4,825) (8,492)
-------------------------------------------------------------------- ------ ----------- --------------------
Profit before tax and finance from continuing operations 318,350 359,218
-------------------------------------------------------------------- ------ ----------- --------------------
Finance income 11 19,250 2,372
Finance expense 11 (68,472) (65,953)
Non-operating foreign exchange (losses)/gains 9 (14,846) 9,755
-------------------------------------------------------------------- ------ ----------- --------------------
Profit before tax 254,282 305,392
-------------------------------------------------------------------- ------ ----------- --------------------
Income tax expense 12 (70,442) (41,608)
-------------------------------------------------------------------- ------ ----------- --------------------
Profit for the year from continuing operations 183,840 263,784
-------------------------------------------------------------------- ------ ----------- --------------------
Profit attributable to:
Equity shareholders of Ferrexpo plc 178,316 261,984
Non-controlling interests 5,524 1,800
-------------------------------------------------------------------- ------ ----------- --------------------
Profit for the year from continuing operations 183,840 263,784
-------------------------------------------------------------------- ------ ----------- --------------------
Earnings per share:
Basic (US cents) 13 30.46 44.76
Diluted (US cents) 13 30.39 44.69
-------------------------------------------------------------------- ------ ----------- --------------------
Consolidated Statement of Comprehensive Income
US$ 000 Notes Year ended 31.12.14 Year ended 31.12.13
Profit for the year 183,840 263,784
Items that may subsequently be reclassified to profit or loss:
Exchange differences on translating foreign operations (1,205,667) (437)
Income tax effect 15 80,394 -
Net losses on available-for-sale investments - (138)
Income tax effect - 30
------------------------------------------------------------------ ------ -------------------- --------------------
Net other comprehensive loss to be reclassified to profit or
loss in subsequent periods (1,125,273) (545)
------------------------------------------------------------------ ------ -------------------- --------------------
Reclassification to profit or loss relating to (712) -
available-for-sale investments impaired
------------------------------------------------------------------ ------ -------------------- --------------------
Items that will not be reclassified subsequently to profit or
loss:
Remeasurement gains on defined benefit pension liability 1,649 498
Income tax effect (195) (58)
------------------------------------------------------------------ ------ -------------------- --------------------
Net other comprehensive income not being reclassified to profit
or loss in subsequent periods 1,454 440
------------------------------------------------------------------ ------ -------------------- --------------------
Other comprehensive loss for the year, net of tax (1,124,531) (105)
------------------------------------------------------------------ ------ -------------------- --------------------
Total comprehensive (loss)/income for the year, net of tax (940,691) 263,679
------------------------------------------------------------------ ------ -------------------- --------------------
Total comprehensive (loss)/income attributable to:
Equity shareholders of Ferrexpo plc (926,422) 261,888
Non-controlling interests (14,269) 1,791
------------------------------------------------------------------ ------ -------------------- --------------------
(940,691) 263,679
------------------------------------------------------------------ ------ -------------------- --------------------
Consolidated Statement of Financial Position
As at As at
US$'000 Notes 31.12.14 31.12.13
Assets
Property, plant and equipment 926,433 1,533,819
Goodwill and other intangible assets 60,468 117,086
Investments in associates 8,569 20,546
Available-for-sale financial assets 46 82,778
Inventories 81,987 58,303
Other non-current assets 18,211 34,575
Income taxes recoverable and prepaid 12 73,782 54,242
Other taxes recoverable and prepaid 14 1,519 78,281
Deferred tax assets 32,358 37,612
-------------------------------------------------------------- ------ ------------ ----------
Total non-current assets 1,203,373 2,017,242
-------------------------------------------------------------- ------ ------------ ----------
Inventories 124,722 180,863
Trade and other receivables 87,226 102,498
Prepayments and other current assets 21,057 25,073
Income taxes recoverable and prepaid 12 - 33,233
Other taxes recoverable and prepaid 14 71,982 182,863
Cash and cash equivalents 626,509 390,491
-------------------------------------------------------------- ------ ------------ ----------
931,496 915,021
-------------------------------------------------------------- ------ ------------ ----------
Assets classified as held for sale 26 106
-------------------------------------------------------------- ------ ------------ ----------
Total current assets 931,522 915,127
-------------------------------------------------------------- ------ ------------ ----------
Total assets 2,134,895 2,932,369
-------------------------------------------------------------- ------ ------------ ----------
Equity and liabilities
Issued capital 121,628 121,628
Share premium 185,112 185,112
Other reserves (1,452,988) (347,326)
Retained earnings 1,855,690 1,753,200
-------------------------------------------------------------- ------ ------------ ----------
Equity attributable to equity shareholders of Ferrexpo plc 709,442 1,712,614
-------------------------------------------------------------- ------ ------------ ----------
Non-controlling interests 8,159 22,428
-------------------------------------------------------------- ------ ------------ ----------
Total equity 717,601 1,735,042
-------------------------------------------------------------- ------ ------------ ----------
Interest-bearing loans and borrowings 3/15 1,056,253 928,196
Defined benefit pension liability 28,557 53,154
Provision for site restoration 2,345 2,871
Deferred tax liabilities 841 2,031
-------------------------------------------------------------- ------ ------------ ----------
Total non-current liabilities 1,087,996 986,252
-------------------------------------------------------------- ------ ------------ ----------
Interest-bearing loans and borrowings 3/15 248,374 101,043
Trade and other payables 32,351 50,001
Accrued liabilities and deferred income 34,191 35,508
Income taxes payable 12 5,898 12,554
Other taxes payable 14 8,484 11,969
-------------------------------------------------------------- ------ ------------ ----------
Total current liabilities 329,298 211,075
-------------------------------------------------------------- ------ ------------ ----------
Total liabilities 1,417,294 1,197,327
-------------------------------------------------------------- ------ ------------ ----------
Total equity and liabilities 2,134,895 2,932,369
-------------------------------------------------------------- ------ ------------ ----------
The financial statements were approved by the Board of Directors
on 10 March 2015.
Kostyantin Zhevago Christopher Mawe
Chief Executive Officer Chief Financial Officer
Consolidated Statement of Cash Flows
Year ended
US$'000 Notes 31.12.14 Year ended 31.12.13
Profit before tax 254,282 305,392
Adjustments for:
Depreciation of property, plant and equipment and amortisation of
intangible assets 82,269 99,645
Interest expense 11 64,166 60,466
Write-down of VAT receivable 14 6,790 36,421
Interest income 11 (19,250) (2,372)
Share of profit from associates (4,878) (3,551)
Movement in allowance for doubtful receivables 8,011 661
Loss on disposal of property, plant and equipment 4,825 8,492
Write-offs and impairment losses 10 83,534 854
Site restoration provision 1,180 503
Employee benefits 6,531 8,654
Share-based payments 530 1,266
Operating foreign exchange gains 9 (76,372) (622)
Non-operating foreign exchange gains 9 14,846 (9,755)
--------------------------------------------------------------------------- ------ ----------- --------------------
Operating cash flow before working capital changes 426,464 506,054
--------------------------------------------------------------------------- ------ ----------- --------------------
Changes in working capital:
Decrease in trade and other receivables 5,395 27,485
Increase in inventories (96,554) (88,482)
Decrease in trade and other accounts payable (11,083) (29,489)
Decrease/(increase) in VAT recoverable and other taxes prepaid (1) 14 86,950 (12,516)
--------------------------------------------------------------------------- ------ ----------- --------------------
Cash generated from operating activities 411,172 403,052
--------------------------------------------------------------------------- ------ ----------- --------------------
Interest paid (61,307) (57,037)
Income tax paid 12 (58,077) (108,321)
Post-employment benefits paid (3,340) (4,768)
--------------------------------------------------------------------------- ------ ----------- --------------------
Net cash flows from operating activities 288,448 232,926
--------------------------------------------------------------------------- ------ ----------- --------------------
Cash flows from investing activities
Purchase of property, plant and equipment (232,809) (270,534)
Proceeds from sale of property, plant and equipment and intangible
assets 5,322 910
Purchases of intangible assets (1,711) (7,268)
Acquisition of subsidiary/purchase of available-for-sale investment (17) (82,382)
Interest received 2,376 2,090
Dividends from associates 2,755 -
--------------------------------------------------------------------------- ------ ----------- --------------------
Net cash flows used in investing activities (224,084) (357,184)
--------------------------------------------------------------------------- ------ ----------- --------------------
Cash flows from financing activities
Proceeds from borrowings and finance 392,515 26,279
Repayment of borrowings and finance (119,009) (19,308)
Arrangement fees paid (3,580) (10,643)
Dividends paid to equity shareholders of Ferrexpo plc (76,904) (77,882)
Dividends paid to non-controlling shareholders - (1)
--------------------------------------------------------------------------- ------ ----------- --------------------
Net cash flows from financing activities 193,022 (81,555)
--------------------------------------------------------------------------- ------ ----------- --------------------
Net increase/(decrease) in cash and cash equivalents 257,386 (205,813)
Cash and cash equivalents at the beginning of the year 390,491 596,560
Currency translation differences (21,368) (256)
--------------------------------------------------------------------------- ------ ----------- --------------------
Cash and cash equivalents at the end of the year 626,509 390,491
--------------------------------------------------------------------------- ------ ----------- --------------------
(1) The movement in the current year includes the effect of VAT
receivable balance amounting to US$97,067 thousand recovered
through VAT bonds. See also note 14.
Consolidated Statement of Changes in Equity
Attributable to equity shareholders of Ferrexpo
plc
---------------------------------------------------------------------------------------
Uniting Employee Net
of Treasury benefit unrealised Total
Issued Share interest share trust gains Translation Retained capital Non-controlling Total
US$000 capital premium reserve reserve reserve reserve reserve earnings and reserves interests equity
At 1 January
2013 121,628 185,112 31,780 (77,260) (7,808) 820 (295,588) 1,568,077 1,526,761 20,637 1,547,398
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
Profit for
the period - - - - - - - 261,984 261,984 1,800 263,784
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
Other
comprehensive
(loss)/income - - - - - (108) (428) 440 (96) (9) (105)
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
Total
comprehensive
(loss)/income
for the
period - - - - - (108) (428) 262,424 261,888 1,791 263,679
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
Equity
dividends
paid
to
shareholders
of Ferrexpo
plc - - - - - - - (77,301) (77,301) - (77,301)
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
Share-based
payments - - - - 1,266 - - - 1,266 - 1,266
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
At 31 December
2013 121,628 185,112 31,780 (77,260) (6,542) 712 (296,016) 1,753,200 1,712,614 22,428 1,735,042
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
Profit for
the period - - - - - - - 178,316 178,316 5,524 183,840
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
Other
comprehensive
(loss)/income - - - - - (712) (1,105,480) 1,454 (1,104,738) (19,793) (1,124,531)
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
Total
comprehensive
(loss)/income
for the
period - - - - - (712) (1,105,480) 179,770 (926,422) (14,269) (940,691)
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
Equity
dividends
paid
to
shareholders
of Ferrexpo
plc - - - - - - - (77,280) (77,280) - (77,280)
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
Share-based
payments - - - - 530 - - 530 - 530
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
At 31 December
2014 121,628 185,112 31,780 (77,260) (6,012) - (1,401,496) 1,855,690 709,442 8,159 717,601
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ------------ --------------- -------------
Notes to the Consolidated Financial Statements
Note 1: Corporate information
The financial information for the year ended 31 December 2014
does not constitute statutory accounts as defined in section 435 of
the Companies Act 2006. The audited statutory accounts for the year
ended 31 December 2013 have been delivered to the Registrar of
Companies and those for 2014 will be delivered following the
Company's annual general meeting convened for Thursday, 21 May
2015.
The auditor has reported on the statutory accounts for year
ended 31 December 2014. The auditor's report was unqualified.
Ferrexpo plc will publish on or around 31 March 2015 its Annual
Report and Accounts for the year ended 31 December 2014 on its
corporate website www.ferrexpo.com.
Organisation and operation
Ferrexpo plc (the 'Company') is incorporated in the United
Kingdom, which is considered to be the country of domicile, with
registered office at 2-4 King Street, London, SW1Y 6QL, UK.
Ferrexpo plc and its subsidiaries (the 'Group') operate two mines
and a processing plant near Kremenchug in Ukraine, an interest in a
port in Odessa and sales and marketing activities around the world
including offices in Switzerland, Japan, China, Dubai and Ukraine.
The Group also owns logistics assets in Austria which operates a
fleet of vessels operating on the Rhine and Danube waterways and an
ocean going vessel which provides top off services and operates on
international sea routes. The Group's operations are vertically
integrated from iron ore mining through to iron ore concentrate and
pellet production and subsequent logistics. The Group's mineral
properties lie within the Kremenchug Magnetic Anomaly and are
currently being extracted at the Gorishne-Plavninskoye and
Lavrikovskoye ('GPL ') and Yeristovskoye deposits.
The majority shareholder of the Group is Fevamotinico S.a.r.l.
('Fevamotinico'), a company incorporated in Luxembourg and
ultimately owned by The Minco Trust, of which Kostyantin Zhevago,
the Group's Chief Executive Officer, is a beneficiary. At the time
this report was published, Fevamotinico held 50.3% (2013: 50.3%) of
Ferrexpo plc's issued share capital.
At 31 December 2014, the Group also holds through OJSC Ferrexpo
Poltava Mining an interest of 48.6% (2013: 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
Whilst the preliminary announcement has been prepared in
accordance with International Financial Reporting Standards
('IFRS') and International Financial Reporting Interpretation
Committee ("IFRIC") interpretations adopted for use by the European
Union and with those parts of the Companies Act 2006 applicable to
companies reporting under IFRS, this announcement does not itself
contain sufficient information to comply with IFRS. The Board
approved the full financial statements that comply with IFRS on
Tuesday, 10 March 2015. The financial statements have been prepared
under the historical cost convention as modified by the recording
of pension assets and liabilities and the revaluation of certain
financial instruments.
During the period ended 31 December 2014, the Ukrainian Hryvnia
has devalued by 97% compared to the US Dollar; from 7.993 as at 31
December 2013 to 15.787 as at 31 December 2014. As a result of this
devaluation, the total equity decreased by US$1,205,667 thousand as
of 31 December 2014 due the exchange differences on translating
foreign operations which is reflected in the translation reserve.
Further details are provided in the statement of other
comprehensive income and note 9.
The Group's principal risks likely to affect its future
development, performance and position are set out on pages 20 to
25. The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the Performance
Review on pages 5 to 19.
The Group continues to generate positive free cash flow in the
current iron ore price environment. Taking into account the Group's
low cost of production, its premium iron ore product together with
its high quality customer base, its available reserve base and
increased production capacity following the completion of the
recent growth projects along with the current level of liquidity,
the Directors are of the view that the Group is a going concern and
the consolidated financial statements have been drawn up on this
basis.
Changes in accounting policies
The accounting policies and methods of computation adopted in
the preparation of these consolidated financial statements are
consistent with those of the previous year, except for the adoption
of new and amended IFRS and IFRIC interpretations effective as of 1
January 2014, noted below:
Standards adopted affecting reported results, financial position
or disclosures
IFRS 12 Disclosure of involvement with other entities
The new standard covers the disclosures that were previously
required in consolidated financial statements under IAS 27
Consolidated and separate financial statements as well as those
included in IAS 31 Interests in joint ventures and IAS 28
Investments in associates. The new standard became mandatory in the
EU for financial years beginning on or after 1 January 2014. A
number of additional disclosures are required by this new standard
in respect of the judgement required to determine that the Group
has control over these entities and the information on which
entities accumulated non-controlling interests.
Standards and interpretations adopted with no effect on reported
results, financial position or disclosures
IFRS 10 Consolidated financial statements
The new standard provides additional guidance to assist in the
determination of which entities are controlled and are required to
be consolidated. This standard replaces the portion of IAS 27
Consolidated and separate financial statements that addresses the
accounting for consolidated financial statements. The new standard
became mandatory in the EU for financial years beginning on or
after 1 January 2014. The new standard did not have an impact on
the financial position or performance of the Group.
IFRS 11 Joint arrangements
The new standard replaces IAS 31 Interests in joint ventures and
SIC 13 Jointly-controlled entities - non-monetary contributions by
ventures. The standard defines contractually agreed sharing of
control of an arrangement and the accounting for joint operations
and joint ventures. The new standard became mandatory in the EU for
annual periods beginning on or after 1 January 2014. The new
standard did not have an impact on the financial position or
performance of the Group.
IAS 32 Financial instruments: presentation - offsetting
financial assets and financial liabilities
The amendment clarifies existing application issues relating to
the offset of financial assets and financial liabilities
requirements. The amendment became effective for financial years
beginning on or after 1 January 2014 with retrospective
application. The amendment did not have an impact on the financial
position or performance of the Group.
IAS 36 Impairment of assets - recoverable amount disclosures
The amendment to the standard was issued in May 2013 and became
effective for financial years beginning on or after 1 January 2014.
The amendment removes the requirement to disclose recoverable
amounts when there has been no impairment or reversal of
impairment. Further to that, the disclosure requirements have been
aligned with those under US GAAP for impaired assets. The amendment
did not have an impact on the financial position or performance of
the Group.
IAS 39 Financial instruments: recognition and measurement -
novation of derivatives and continuation hedge accounting
The amendment to the standard was issued in June 2013 and
provides guidance in respect of the continuation of hedge
accounting if a hedging derivative was novated. The amendment
became effective for the financial years beginning on or after 1
January 2014 and did not have an impact on the financial position
or performance of the Group.
New standards and interpretations not yet adopted
The Group has elected not to early adopt the following revised
and amended standards, which are not yet mandatory in the EU.
The list below includes only standards and interpretations that
could have an impact on the consolidated financial statements of
the Group.
IFRS 9 Financial instruments
The complete standard has been issued in July 2014 including the
requirements previously issued and additional amendments. The new
standard replaces IAS 39 and includes a new expected loss
impairment model, changes to the classification and measurement
requirements of financial assets as well as to hedge accounting.
The new standard becomes effective for financial years beginning on
or after 1 January 2018. The Group will assess the impact on its
consolidated financial statements.
IFRS 15 Revenue from contracts with customers
The new standard was issued in May 2014 and establishes the
principles for the disclosure of useful information in the
financial statements in respect of contracts with customers. The
new standard becomes mandatory for financial years beginning on or
after 1 January 2017. The effect from the additional disclosure
requirements will be assessed and disclosure will be made once the
Group has fully assessed the impact of applying IFRS 15.
IFRS 11 Joint arrangements - acquisition of interests in joint
operations
The amendment was issued in May 2014 and provides guidance in
respect of the accounting for acquisitions in interests of joint
operations. The amendment becomes mandatory for financial years
beginning on or after 1 January 2016. The Group does not expect an
impact on its consolidated financial statements from this
amendment.
IAS 1 Presentation of Financial Statements - disclosure
initiative
The amendment was issued in December 2014 and includes a number
of smaller projects aiming to improve the presentation and
disclosure principles and requirements in existing standards. The
amendment becomes mandatory for financial years beginning on or
after 1 January 2016. The Group does not expect a significant
impact on its consolidated financial statements arising from the
application of this amendment.
IAS 16 Property, plant and equipment and IAS 38 Intangible
assets - clarification of acceptable methods of depreciation and
amortisation
The amendment to the two standards was issued in November 2013
and becomes effective for financial years beginning on or after 1
January 2016. The amendment clarifies the pattern to be applied in
case of revenue-based amortisation methods for tangible and
intangible assets. The Group does not apply revenue-based
amortisation methods and does thus not expect an impact on its
consolidated financial statements.
IAS 19 Employee benefits - defined benefit plans: employee
contributions
The amendment to the standard was issued in November 2013.
Whilst the IASB implementation date is for financial years
beginning on or after 1 July 2014, the amendment becomes mandatory
in the EU at the latest for annual periods beginning on or after 1
February 2015. The amendment provides guidance in respect of the
accounting for employee contributions set out in the formal terms
of a defined benefit plan. The Group does not expect a significant
impact on its consolidated financial statements from this
amendment.
IAS 27 Separate financial statements - equity method
The amendment to the standard was issued in August 2014 and
becomes effective for financial years beginning on or after 1
January 2016. The amendment allows the use of the equity method to
account for investments in subsidiaries, associates and joint
ventures in an entity's separate IFRS financial statements if local
regulation requires using the equity method. This amendment applies
only to the separate financial statements of the parent entity and
is irrelevant for the consolidated financial statements of the
Group.
IFRIC 21 Levies
The new interpretation clarifies when to recognise a liability
for a levy imposed by governments (including government agencies
and similar bodies) in accordance with laws and regulations. The
IASB implementation date is for periods beginning on or after 1
January 2014 whereas the interpretation becomes mandatory in the EU
at the latest for annual periods beginning on or after 17 June
2014. Income taxes in accordance with IAS 12, fines and other
penalties and liabilities arising from trading schemes are not
covered by this interpretation. The Group does not expect a
significant impact on its consolidated financial statements from
this new interpretation.
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. While the revenue generated by the
Group is monitored at a more detailed level, there are no separate
measures of profit reported to the Group's Chief Operating
Decision-Maker ('CODM'). In accordance with IFRS 8 Operating
segments, the Group presents its results in a single segment which
are disclosed in the income statement for the Group.
Management monitors the operating result of the Group based on a
number of measures including EBITDA, 'C1' costs and the net
financial indebtedness.
EBITDA
The Group presents EBITDA because it believes that EBITDA is a
useful measure for evaluating its ability to generate cash and its
operating performance.
Year ended
US$ 000 Notes 31.12.14 Year ended 31.12.13
Profit before tax and finance 318,350 359,218
Write-down of VAT receivable 14 6,790 36,421
Write-offs and impairment losses 10 83,534 854
Share-based payments 530 1,266
Losses on disposal of property, plant and equipment 4,825 8,492
Depreciation and amortisation 82,269 99,645
------------------------------------------------------- ------ ----------- --------------------
EBITDA 496,298 505,896
------------------------------------------------------- ------ ----------- --------------------
'C1' costs
'C1' costs represents the cash costs of production of iron
pellets from own ore divided by production volume of own ore, and
excludes non-cash costs such as depreciation, pension costs and
inventory movements, costs of purchased ore and concentrate, and
production cost of gravel.
US$'000 Year ended 31.12.14 Year ended 31.12.13
Cost of sales - pellet production 586,653 726,960
Depreciation and amortisation (64,137) (78,690)
Purchased concentrate and other items for resale (27,110) (34,805)
Inventory movements 10,127 25,476
Other (15,546) (13,213)
----------------------------------------------------- -------------------- --------------------
C1 cost 489,987 625,728
----------------------------------------------------- -------------------- --------------------
Own ore produced (tonnes) 10,670,445 10,465,606
----------------------------------------------------- -------------------- --------------------
C1 cash cost per tonne US$ 45.9 59.8
----------------------------------------------------- -------------------- --------------------
Net financial indebtedness
Net financial indebtedness as defined by the Group comprises
cash and cash equivalents, term deposits, interest-bearing loans
and borrowings and amounts payable for equipment.
As at As at
US$ 000 Notes 31.12.14 31.12.13
Cash and cash equivalents 626,509 390,491
Interest bearing loans and borrowings - current 15 (248,374) (101,043)
Interest bearing loans and borrowings - non-current 15 (1,056,253) (928,196)
------------------------------------------------------- ------ ------------ ----------
Net financial indebtedness (678,118) (638,748)
------------------------------------------------------- ------ ------------ ----------
Disclosure of revenue and non-current assets
The Group does not generate significant revenues from external
customers attributable to the United Kingdom, the Company's country
of domicile. The information on the revenues from external
customers attributed to the individual foreign countries is given
in note 4.
The Group does not have any significant non-current assets that
are located in the country of domicile of the Company. The vast
majority of the non-current assets are located in Ukraine.
Note 4: Revenue
Revenue for the year ended 31 December 2014 consisted of the
following:
US$ 000 Year ended 31.12.14 Year ended 31.12.13
Revenue from sales of iron ore pellets and concentrate:
Export 1,290,695 1,494,899
--------------------------------------------------------------- -------------------- --------------------
Total revenue from sale of iron ore pellets and concentrate 1,290,695 1,494,899
--------------------------------------------------------------- -------------------- --------------------
Revenue from logistics and bunker business 90,661 76,321
Revenue from other sales and services provided 6,929 10,165
Total revenue 1,388,285 1,581,385
--------------------------------------------------------------- -------------------- --------------------
Export sales of iron ore pellets and concentrate by geographical
destination showing separately countries that individually
represented more than 10% of export sales in either current or
prior year were as follows:
Year ended Year ended
US$'000 31.12.14 31.12.13
Traditional Market 594,045 663,951
----------------------- ----------- -----------
Thereof Austria 318,707 381,675
Thereof Slovakia 132,958 127,029
Thereof Others 142,380 155,247
----------------------- ----------- -----------
Growth market 493,964 565,900
----------------------- ----------- -----------
Thereof China 327,579 435,471
Thereof Japan 166,385 130,429
----------------------- ----------- -----------
Natural Market 202,686 265,048
----------------------- ----------- -----------
Thereof Turkey 99,192 184,234
Thereof Others 103,494 80,814
Total exports 1,290,695 1,494,899
----------------------- ----------- -----------
During the year ended 31 December 2014 sales made to three
customers accounted for 45.2% of the revenues from export sales of
ore pellets (2013: 47.2%).
Sales to customers that individually represented more than 10%
of total sales in either current or prior year are as follows:
US$'000 Year ended 31.12.14 Year ended 31.12.13
Customer A 318,707 381,675
Customer B 132,958 127,029
Customer C 131,613 139,774
Customer D 61,908 184,234
--------------- -------------------- --------------------
Note 5: Cost of sales
Cost of sales for the year ended 31 December 2014 consisted of
the following:
US$'000 Year ended 31.12.14 Year ended 31.12.13
Energy 262,936 315,530
Personnel 50,851 66,194
Materials 85,043 107,530
Repairs and maintenance 59,780 88,220
Depreciation and amortisation 64,137 78,690
Royalties and levies 22,801 23,162
Purchased concentrate and other items for resale 27,110 34,805
Inventory movements (10,127) (25,476)
Logistics and bunker business 61,307 46,262
Other 24,122 38,304
Total cost of sales 647,960 773,221
----------------------------------------------------- -------------------- --------------------
Thereof for pellet production 586,653 726,960
Thereof for logistics and bunker business 61,307 46,261
----------------------------------------------------- -------------------- --------------------
Note 6: Selling and distribution expenses
Selling and distribution expenses for the year ended 31 December
2014 consisted of the following:
US$'000 Year ended 31.12.14 Year ended 31.12.13
Pellet transportation 249,528 266,730
Personnel 4,833 5,130
Logistics business 26,596 32,991
Advertising 12,070 12,192
Depreciation 14,010 14,135
Other 4,477 4,540
Total selling and distribution expenses 311,514 335,718
-------------------------------------------- -------------------- --------------------
Note 7: General and administrative expenses
General and administrative expenses for the year ended 31
December 2014 consisted of the following:
US$'000 Year ended 31.12.14 Year ended 31.12.13
Personnel 28,406 31,972
Office, maintenance and security 6,780 6,962
Professional fees 6,990 6,715
Audit and non-audit fees 2,011 2,506
Depreciation and amortisation 2,084 4,022
Other 2,371 2,662
Total general and administrative expenses 48,642 54,839
---------------------------------------------- -------------------- --------------------
Auditor remuneration
Auditor remuneration paid in respect of the audit of the
financial statements of the Group and its subsidiary companies and
for the provision of other services not in connection with the
audit is disclosed below:
US$'000 Year ended 31.12.14 Year ended 31.12.13
Audit services
Ferrexpo plc Annual Report 1,292 1,252
Subsidiary entities 301 354
------------------------------- -------------------- --------------------
Total audit services 1,593 1,606
------------------------------- -------------------- --------------------
Non-audit services
Assurance related services 47 708
Tax advisory 4 125
Tax compliance 4 -
Other services 363 67
------------------------------- -------------------- --------------------
Total non-audit services 418 900
------------------------------- -------------------- --------------------
Total auditor remuneration 2,011 2,506
------------------------------- -------------------- --------------------
Non-audit services totalling US$247 thousand in relation to
assurance services for liability management activities of the Group
have been capitalised as prepaid arrangement fees and are not
included in the table above.
Assurance related services in the comparative period include
fees paid for services provided in relation to raising of new debt
for the Group.
Note 8: Other expenses
Other expenses for the year ended 31 December 2014 consisted of
the following:
US$'000 Year ended 31.12.14 Year ended 31.12.13
Community support donations 39,077 10,116
Movements in allowance for doubtful receivables and prepayments made 8,011 661
Other personnel costs 1,601 2,469
Other 8,325 10,211
Total other expenses 57,014 23,457
------------------------------------------------------------------------ -------------------- --------------------
Information on the Group's community support donations is
provided in the CSR paragraph in the Performance Review on page
16.
The vast majority of the movements in allowance for doubtful
receivables and prepayments is related to an allowance recorded for
prepayments made for 300 rail cars ordered, but not yet fully
delivered due to the ongoing conflict in the eastern part of
Ukraine. See also note 16.
Note 9: Foreign exchange gains and losses
Foreign exchange gains and losses for the year ended 31 December
2014 consisted of the following:
US$'000 Year ended 31.12.14 Year ended 31.12.13
Operating foreign exchange gains
Revaluation of trade receivables 78,827 1
Revaluation of trade payables (2,265) 30
Other (190) 591
Total operating foreign exchange gains 76,372 622
------------------------------------------- -------------------- --------------------
Non-operating foreign exchange (losses)/gains
Revaluation of interest-bearing loans (76,517) 2,892
Conversion of cash and cash equivalents 81,192 7,329
Other (19,521) (466)
Total non-operating foreign exchange (losses)/gains (14,846) 9,755
-------------------------------------------------------- --------- -------
Total foreign exchange gains 61,526 10,377
-------------------------------------------------------- --------- -------
During the financial year 2014, the Ukrainian Hryvnia has
devalued by approximately 97% compared to the US dollar; from 7.993
as at 31 December 2013 to 15.769 as at the end of this reporting
period. This has had a significant impact on the carrying values of
property plant and equipment, income taxes recoverable and prepaid
(note 12) and other taxes recoverable and prepaid (note 14).
Note 10: Write-offs and impairment losses
Write-offs and impairment losses for the year ended 31 December
2014 consisted of the following:
US$'000 Notes Year ended 31.12.14 Year ended 31.12.13
Write-off of VAT receivables 14 1,351 -
Write-off of inventories 48 528
Write-off of property, plant and equipment 47 326
Impairment of available-for-sale financial assets reclassified (294) -
from other comprehensive income
Impairment of available-for-sale financial assets 82,382 -
Total write-offs and impairment losses 83,534 854
----------------------------------------------------------------- ------- -------------------- --------------------
Note 11: Finance income and expense
Finance income and expense for the year ended 31 December 2014
consisted of the following:
US$'000 Year ended 31.12.14 Year ended 31.12.13
Finance income
Interest income 2,299 2,062
Other finance income 16,951 310
------------------------------------------------------------------------ -------------------- --------------------
Total finance income 19,250 2,372
------------------------------------------------------------------------ -------------------- --------------------
Finance expense
Interest expense on financial liabilities measured at amortised cost (58,371) (53,340)
Effect from capitalised borrowing costs 8,748 8,966
Interest on defined benefit plans (4,306) (5,487)
Bank charges (13,490) (10,976)
Other finance costs (1,053) (5,116)
------------------------------------------------------------------------ -------------------- --------------------
Total finance expense (68,472) (65,953)
------------------------------------------------------------------------ -------------------- --------------------
Net finance expense (49,222) (63,581)
------------------------------------------------------------------------ -------------------- --------------------
Other finance income includes a US$16,497 thousand release of a
discount recorded in the prior years to reflect changes in the
estimated timing of receipts for VAT in dispute that was previously
expected to be recovered over a protracted period of time. Further
information is provided in note 14. This discount was built up in
prior periods and recorded as a finance cost (2013: US$3,695
thousand). No such effect is included in the finance expense for
the financial year ended 31 December 2014.
Note 12: Taxation
The effective income tax rate differs from the statutory
corporate income tax rates. The weighted average statutory rate was
13.6% for 2014 (2013: 8.3%). This is calculated as the average of
the statutory tax rates applicable in the countries in which the
Group operates, weighted by the profits and losses before tax of
the subsidiaries in the respective countries, as included in the
consolidated financial information. The effective tax rate is 27.7%
(2013: 13.6%). The increase is a result of the change in the profit
mix between the different local jurisdictions and the level of
non-deductible expenses for tax purposes according to the enacted
local tax legislations. The non-deductible expenses include the
impairment in an equity investment, community support donations as
well as the discount on VAT bonds sold prior to its maturities (see
note 14).
A reconciliation between the income tax charged in the
accompanying financial information and income before taxes
multiplied by the weighted average statutory tax rate for the year
ended 31 December 2014 is as follows:
US$'000 Year ended 31.12.14 Year ended 31.12.13
Profit before tax 254,282 305,392
Notional tax computed at the weighted average statutory tax rate of
13.6% (2013: 8.3%) 34,654 25,329
Derecognition of deferred tax asset - 101
Reassessment of prior year temporary differences 1,489 -
Effect from changes in local tax rates (3,278) 2,312
Effect from utilisation of non-recognised deferred tax assets - 94
Expenses not deductible for tax purposes 37,436 8,485
Tax exempted income (856) (1,396)
Non-recognition of deferred taxes on current year losses 2,366 4,084
Tax related to prior years (142) 2,011
Other (including translation differences) (1,227) 588
------------------------------------------------------------------------ -------------------- --------------------
Total income tax expense 70,442 41,608
------------------------------------------------------------------------ -------------------- --------------------
The net balance of income tax receivable changed as follows
during the financial year 2014:
US$'000 Year ended 31.12.14 Year ended 31.12.13
Opening balance 74,921 11,197
Income statement charge (87,372) (46,562)
Charge through other comprehensive income 80,394 -
Tax paid 58,070 108,321
Reclassification - 1,876
Translation difference (58,129) 89
Closing balance 67,884 74,921
---------------------------------------------- -------------------- --------------------
During the financial year 2014, the Ukrainian Hryvnia has
devalued by approximately 97% compared to the US dollar; from 7.993
as at 31 December 2013 to 15.769 as at the end of this reporting
period.
Split by:
As at As at
US$'000 31.12.14 31.12.13
Income tax receivable balance - current - 33,233
Income tax receivable balance - non-current 73,782 54,242
Income tax payable balance (5,898) (12,554)
Net income tax receivable 67,884 74,921
------------------------------------------------ ---------- ----------
During the financial years 2013 and 2014, current VAT receivable
balances in Ukraine were mainly recovered in exchange for
prepayments of corporate profit tax. As at 31 December 2014, these
prepayments totalled US$82,442 thousand (2013: US$87,514 thousand)
and it is management's view that this balance will be either offset
with future profits or recovered through an issuance of bonds by
the Ministry of Finance as happened during the financial year 2014
for overdue VAT receivable balances (see note 14). As at the date
of the preparation of these financial statements, there is an
uncertainty as to the timing of the recovery of this balance. In
light of this uncertainty, it was considered most appropriate to
classify the entire balance as non-current in the consolidated
statement of financial position.
Note 13: Earnings per share and dividends paid and proposed
US$'000 Year ended 31.12.14 Year ended 31.12.13
Profit for the year attributable to equity shareholders
Basic earnings per share (US cents) 30.46 44.76
Diluted earnings per share (US cents) 30.39 44.69
------------------------------------------------------------ -------------------- --------------------
The calculation of the basic and diluted earnings per share is
based on the following data:
US$'000 Year ended 31.12.14 Year ended 31.12.13
Weighted average number of shares
Basic number of Ordinary Shares outstanding 585,413 585,294
Effect of dilutive potential Ordinary Shares 1,258 926
Diluted number of Ordinary Shares outstanding 586,671 586,220
-------------------------------------------------- -------------------- --------------------
Dividends paid and proposed
US$'000 Year ended 31.12.14
Dividends proposed
Final dividend for 2014: 3.3 US cents per Ordinary Share 19,320
Special dividend for 2014: 6.6 US cents per Ordinary Share 38,640
---------------------------------------------------------------- --------------------
Total dividends proposed 57,960
---------------------------------------------------------------- --------------------
Dividends paid during the year
Interim dividend for 2014: 3.3 US cents per Ordinary Share 19,011
Final dividend for 2013: 3.3 US cents per Ordinary Share 19,279
Special dividend for 2013: 6.6 US cents per Ordinary Share 38,614
Total dividends paid 76,904
---------------------------------------------------------------- --------------------
US$'000 Year ended 31.12.13
Dividends proposed
Final dividend for 2013: 3.3 US cents per Ordinary Share 19,317
Special dividend for 2013: 6.6 US cents per Ordinary Share 38,633
---------------------------------------------------------------- --------------------
Total dividends proposed 57,950
---------------------------------------------------------------- --------------------
Dividends paid during the year
Interim dividend for 2013: 3.3 US cents per Ordinary Share 19,692
Final dividend for 2012: 3.3 US cents per Ordinary Share 19,441
Special dividend for 2012: 6.6 US cents per Ordinary Share 38,749
Total dividends paid 77,882
---------------------------------------------------------------- --------------------
Note 14: Other taxes recoverable
As at 31 December 2014 other taxes recoverable comprised:
As at As at
US$'000 31.12.14 31.12.13
VAT receivable 71,859 182,628
Other taxes prepaid 123 235
------------------------------------------------------------ ---------- ----------
Total other taxes recoverable and prepaid - current 71,982 182,863
------------------------------------------------------------ ---------- ----------
VAT receivable 1,519 78,281
------------------------------------------------------------ ---------- ----------
Total other taxes recoverable and prepaid - non-current 1,519 78,281
------------------------------------------------------------ ---------- ----------
Total other taxes recoverable and prepaid 73,501 261,144
------------------------------------------------------------ ---------- ----------
As at 31 December 2014, US$72,837 thousand of the VAT receivable
before discount relates to the Group's Ukrainian business
operations (2013: US$318,213 thousand).
The Ukrainian Hryvnia devalued compared to the US Dollar from
7.993 as at 31 December 2013 to 15.769 as at 31 December 2014
reducing the gross balance of VAT outstanding expressed in US
dollar by US$156,913 thousand and the associated provision of
US$36,421 thousand by US$11,798 thousand. These net differences are
reflected in the translation reserve. During the second half of the
financial year 2014, bonds were received by the Group with a face
value of UAH1,607,101 thousand (US$135,573 thousand at the exchange
rates applicable at issuance) in settlement for VAT due of the same
amount. The bonds were issued by the Ministry of Finance to settle
certain accumulated VAT liabilities, are tradable and mature over a
period of five years in 10 equal instalments carrying a 9.5% annual
coupon payable semi-annually. At the date of issuance, the bonds
traded with a discount of 22% to face value. All VAT bonds received
during the financial year 2014 were subsequently sold at an average
discount of 21.8% resulting in net proceeds totalling UAH1,256,800
thousand (US$97,067 thousand at the exchange rate at the date of
sale).
As at the end of the comparative period ended 31 December 2013,
part of the VAT balance was in the court system and management
estimated that these balances would be recovered over a protracted
period of time. As a result a discount of US$23,696 thousand was
recorded and charged to finance expense during the financial years
2012 and 2013. From this balance, US$16,497 was released to finance
income in 2014 (note 11) with the remainder reflected in the
translation reserve. As at 31 December 2014, management expect
amounts in the court system to be recovered inside one year through
a further issuance of bonds which will trade at a similar discount
to face value and a provision of US$1,710 thousand has been
recorded in the income statement to reflect this.
The table below provides a reconciliation of the gross VAT
receivable balance in Ukraine:
US$'000 Notes Year ended 31.12.14 Year ended 31.12.13
Opening gross balance 318,213 301,536
Net VAT incurred 153,345 187,645
VAT received in cash (141,126) (170,967)
VAT recovered through sale of VAT bonds (97,067) -
Discount on sale of VAT bonds (29,333) -
VAT write-off through income statement 10 (1,351) -
VAT write-off capitalised (3,430) -
Translation differences (including effect on VAT Bonds) (126,414) -
Closing gross balance 72,837 318,213
----------------------------------------------------------- ------ -------------------- --------------------
Further information on VAT is provided in the Update on Risks
section on pages 21 and 22.
Note 15: Interest-bearing loans and borrowings
This note provides information about the contractual terms of
Group's major finance facilities.
As at As at
US$'000 31.12.14 31.12.13
Current
Syndicated bank loans - secured 210,000 70,000
Other bank loans - secured 22,906 16,775
Obligations under finance leases 4,644 4,523
Interest accrued 10,824 9,745
------------------------------------------------------------ ---------- ----------
Total current interest-bearing loans and borrowings 248,374 101,043
------------------------------------------------------------ ---------- ----------
Non-current
Eurobond issued 496,392 493,810
Syndicated bank loans - secured 472,500 350,000
Other bank loans - secured 73,736 66,129
Obligations under finance leases 13,625 18,257
------------------------------------------------------------ ---------- ----------
Total non-current interest-bearing loans and borrowings 1,056,253 928,196
------------------------------------------------------------ ---------- ----------
Total interest-bearing loans and borrowings 1,304,627 1,029,239
------------------------------------------------------------ ---------- ----------
As at 31 December 2014 the Group has a syndicated US$420 million
pre-export finance facility, of which US$332.5 million is available
and drawn, and a new fully drawn syndicated US$350 million
pre-export finance facility. Both are revolving facilities with
commitment amortisation over the final 24 months and the maturities
are 31 July 2016 and 8 August 2018 respectively. Subject to
additional bank commitments, the new US$350 million facility can be
further increased up to an amount of US$500 million within one year
of the effective date, which was 8 August 2014.
As at 31 December 2014 the major bank debt facilities were
guaranteed and secured as follows:
-- Ferrexpo AG and Ferrexpo Middle East FZE assigned the rights
to revenue from certain sales contracts;
-- OJSC Ferrexpo Poltava Mining assigned all of its rights of
certain export contracts for the sale of pellets to Ferrexpo AG and
Ferrexpo Middle East FZE; and
-- the Group pledged bank accounts of Ferrexpo AG and Ferrexpo
Middle East FZE into which sales proceeds from certain assigned
sales contracts are exclusively received.
In addition to the Group's major bank debt facilities listed
above, an unsecured US$500 million Eurobond was issued on 7 April
2011 and is due for repayment on 7 April 2016. The bond has a
7.875% coupon and interest is payable on a semi-annual basis.
See note 18 in respect of a bond exchange subsequent to the end
of the reporting period.
Note 16: Related party disclosure
During the periods presented, the Group entered into arm's
length transactions with entities under the common control of the
majority owner of the Group, Kostyantin Zhevago, with associated
companies and with other related parties. Management considers that
the Group has appropriate procedures in place to identify, control,
properly disclose and obtain independent confirmation, when
relevant, for transactions with the related parties.
Entities under common control are those under the control of
Kostyantin Zhevago. Associated companies refer to TIS Ruda LLC, in
which the Group holds an interest of 48.6%. This is the only
associated company of the Group. Other related parties are
principally those entities controlled partially by Anatoly
Trefilov. Anatoly Trefilov is a member of the supervisory board of
OJSC Ferrexpo Poltava Mining.
Related party transactions entered into by the Group during the
periods presented are summarised in the following tables:
Revenue, expenses, finance income and expense
Year ended 31.12.14 Year ended 31.12.13
------------------------------------------ -------------------------------------------
Entities
under Other Entities Other
common Associated related under common Associated related
US$ 000 control companies parties control companies parties
Other sales (a) 696 - 524 647 - 491
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Total related party
transactions within
revenue 696 - 524 647 - 491
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Materials (b) 12,334 - 26 13,897 - 43
Purchased concentrate and
other items for resale
(c) 769 - - 7,053 - -
Spare parts and
consumables (d) 2,423 - 2 2,838 - 2
Gas (e) 39,259 - - 33,581 - -
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Total related parties
transactions within cost
of sales 54,785 - 28 57,369 - 45
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Selling and distribution
expenses (f) 11,201 24,130 5,984 11,183 22,582 8,335
General and administration
expenses (g) 1,267 - - 1,747 - 12
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Total related parties
transactions within
expenses 67,253 24,130 6,012 70,299 22,582 8,392
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Finance income (h) 1,804 - - 1,673 - -
Finance expenses (h) (99) - - (184) - -
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Net finance
income/(expenses) 1,705 - - 1,489 - -
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Entities under common control
The Group entered into various related party transactions with
entities under common control. A description of the most material
transactions which are in aggregate over US$200 thousand in the
current or comparative period is given below. All transactions were
carried out on an arm's length basis in the normal course of
business.
a Sales of power, steam and water and other materials for US$160
thousand (2013: US$149 thousand) and Income from premises leased to
Kislorod PCC of US$258 thousand (2013: US$238 thousand).
b Purchases of compressed air and oxygen and metal scrap from
Kislorod PCC for US$5,347 thousand (2013: US$5,988 thousand);
b Purchases of cast iron balls from AutoKraZ Holding Co. for
US$5,530 thousand (2013: US$6,865 thousand); and
b Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas
for US$1,209 thousand (2013: 711 thousand).
c Purchases of concentrate and other items for resale from
Vostok Ruda Ltd. amounting to US$769 thousand (2013: US$7,053
thousand).
d Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship
Repair Plant ('KSRSSZ') in the amount of US$821 thousand (2013:
US$864 thousand);
d Purchases of spare parts from Valsa GTV of US$749 thousand (2013: US$1,226 thousand); and
d Purchases of ferromanganese from Raw and Refined Commodities
AG for US$512 thousand (2013: US$354 thousand).
e Procurement of gas for US$39,259 thousand (2013: US$33,581
thousand) from OJSC Ukrzakordongeologia.
f Purchases of advertisement, marketing and general public
relations services from FC Vorskla of US$11,137 thousand (2013:
US$11,000 thousand).
g Insurance premiums of US$574 thousand (2013: US$728 thousand)
paid to ASK Omega for workmen's insurance and other insurances;
and
g Fees of US$439 thousand (2013: US$433 thousand) paid to Bank
Finance & Credit (Bank F&C) for bank services.
h Transactional banking services are provided to certain
subsidiaries of the Group by Bank F&C. Finance income and
expense relate to these transactional banking services. Further
information is provided under transactional banking arrangements on
page 47.
Associated companies
The Group entered into related party transactions with its
associated company TIS Ruda LLC, which were carried out on an arm's
length basis in the normal course of business for the members of
the Group. These are described below:
f Purchases of logistics services in the amount of US$24,130
thousand (2013: US$22,582 thousand) relating to port operations,
including port charges, handling costs, agent commissions and
storage costs.
Other related parties
The Group entered into various transactions with related parties
other than those under the control of the majority owner of the
Group. Descriptions of the material transactions are below:
a Sales of material and services to Slavutich Ruda Ltd. for
US$508 thousand (2013: US$491 thousand).
f Purchases of logistics management services from Slavutich Ruda
Ltd. relating to customs clearance services and the coordination of
rail transit. Total billings amounted to US$5,984 thousand (2013:
US$8,335 thousand). Slavutich Ruda Ltd. earned commission income of
US$1,350 thousand on these services (2013: US$979 thousand).
Purchases of property, plant and equipment
The table below details the transactions of a capital nature
which were undertaken between Group companies and entities under
common control, associated companies and other related parties
during the periods presented.
Year ended 31.12.14 Year ended 31.12.13
------------------------------------------------- -------------------------------------------------
Entities under Associated Other related Entities under Associated Other related
US$ 000 common control companies parties common control companies parties
Purchases with 458 - - - - -
independent
confirmation
Purchases with
shareholder
approval 887 - - 18,141 - -
Purchases in
the ordinary
course of
business 2,724 - 5 3,741 - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total purchase
of property,
plant and
equipment(i) 4,069 - 5 21,882 - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Entities under common control
Current year
i in August 2014, the Group acquired in two separate
transactions a railway line and an associated power lines from LLC
Vorskla Steel totaling US$458 thousand. An independent confirmation
was obtained and the transaction was announced in accordance with
the UK Listing Rules as the transaction was not considered to be in
the ordinary course of business.
During the financial year 2014, the Group entered in various
transactions of a capital nature with related parties totalling to
US$2,724 thousand. These transactions were in the ordinary course
of business. Individual transactions of a capital nature which
exceeded US$200 thousand are listed below:
The Group procured goods and services totaling US$1,807 thousand
from OJSC Berdichev Machine-Building Plant Progress for various
ongoing projects and design documentation services from OJSC DIOS
totaling US$597 thousand.
In February 2014, the Group ordered 300 rail cars from PJSC
Stakhanov Railcar Company, of which 233 rail cars amounting to
US$12,349 thousand were under the authority of the shareholder
approval obtained on 24 May 2012 obtained under the previous
listing rules (see below).A further 67 rail cars amounting to
US$3,551 thousand were ordered in the ordinary course of business.
A prepayment of US$5,863 thousand was made in relation to these
rail cars. The rail cars were due for delivery in the second half
of the financial year 2014. However, as a consequence of the
ongoing conflict in the Eastern part of Ukraine, only 25 rail cars
were delivered and put into operation during the financial year
2014. These purchased rail cars are under the authority of the
shareholder approval mentioned above.
Prior year
During the financial year 2013, the Group entered into various
transactions of a capital nature with related parties totalling
US$3,741 thousand. These transactions were in the ordinary course
of business and on an arm's length basis. Individual transactions
which exceeded US$200 thousand are listed below:
In January 2013, the Group procured three railway platforms in
the amount of US$218 thousand from PJSC Stakhanov Railcar
Company.
In April 2013, the Group entered into a contract with OJSC
Berdichev Machine-Building Plant Progress and OJSC Uzhgorodsky
Turbogas for the production and supply of deslimers for a new
flotation section in the amount of US$585 thousand.
In June and September 2013, the Group procured metal works from
OJSC Berdichev Machine-Building Plant Progress in the amount of
US$1,297 thousand and US$1,054 thousand in connection with the
construction of a new crushing section.
The Group received shareholder approval on 24 May 2012 for an
option to purchase up to 500 rail cars from PJSC Stakhanov Railcar
Company between the date of the approval and 31 December 2014. In
February 2013, the Group exercised the right under this option to
order 267 rail cars. These rail cars, amounting to US$18,141
thousand, were delivered and taken into operation during the
financial year 2013 and increased the total fleet of rail cars from
1,933 units to 2,200 units as at 31 December 2013.
Balances with related parties
The outstanding balances, as a result of transactions with
related parties, for the periods presented are shown in the table
below:
As at 31.12.14 As at 31.12.13
------------------------------------------ -------------------------------------------
Entities
under Other Entities Other
common Associated related under common Associated related
US$ 000 control companies parties control companies parties
Investments
available-for-sale(j) 46 - - 396 - -
Other non-current
assets(k) 4,726 - - 7,438 - -
Prepayments for property,
plant and equipment(l) 604 - - 1,548 - -
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Total non-current assets 5,376 - - 9,382 - -
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Trade and other
receivables(m) 712 - 91 1,150 - 31
Prepayments and other
current assets(n) 164 - 595 136 1,172 186
Cash and cash
equivalents(o) 161,473 - - 143,005 - -
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Total current assets 162,349 - 686 144,291 1,172 217
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Trade and other
payables(p) 1,429 151 490 3,099 - 275
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Current liabilities 1,429 151 490 3,099 - 275
--------------------------- ------------ ------------- ------------- ------------- ------------- -------------
Entities under common control
A description of the most material balances which are over
US$200 thousand in the current or comparative period is given
below.
j The balance of the investments available-for sale comprised
shareholdings in PJSC Stakhanov Railcar Company (1.10%) and Vostok
Ruda Ltd. (1.10%). The ultimate beneficial owner of these companies
is Kostyantin Zhevago. PJSC Stakhanov Railcar Company is further
listed on the Ukrainian stock exchange. The changes of the values
in the table above are related to fair value adjustments recorded
during the respective reporting periods. The shareholdings for all
investments remained unchanged during the periods disclosed above.
The balance of US$46 thousand as at 31 December 2014 related to the
investment in PJSC Stakhanov Railcar Company (2013: US$396
thousand).
k As of 31 December 2014, other non-current assets related to a
deposit of US$4,726 thousand with Bank F&C (2013: US$7,438
thousand) as security in respect of loans made to employees under
the Group's social loyalty programme. Further information is
provided under transactional banking arrangements on page 47.
l The balance as at 31 December 2014 includes prepayments of
US$6,007 thousand made in relation to rail cars purchased from PJSC
Stakhanov Railcar Company (31 December 2013: nil). The prepayments
made as at 30 December 2014 are in relation to 300 rail cars
ordered. The rail cars were due for delivery in the second half of
the financial year 2014. However, as a consequence of the ongoing
conflict in the Eastern part of Ukraine, only 25 rail cars were
delivered and put into operation. Due to the uncertainty
surrounding the delivery of rail cars or recovery of the
prepayment, the Group recorded an allowance for the full amount as
at 31 December 2014. Prepayments of US$527 thousand were made to
OJSC Berdichev Machine-Building Plant Progress (2013: US$1,397
thousand) for various ongoing projects.
m As of 31 December 2014, trade and other receivables included
outstanding amounts due from Vorskla Steel Ltd. of US$244 thousand
(2013: US$387 thousand) in relation to other sales and US$317
thousand (2013: US$540 thousand) from Kislorod PCC for the sale of
power, steam and water.
o As of 31 December 2014, cash and cash equivalents with Bank
F&C were US$161,473 thousand (2013: US$143,005 thousand).
Further information is provided under transactional banking
arrangements below.
p Trade and other payables amounting to US$483 thousand for
compressed air and oxygen purchased from Kislorod PCC (2013: US$639
thousand). US$192 thousand (2013: US$215 thousand) are due to
AutoKraZ Holding Co. and US$1 thousand (2013: US$258 thousand) OJSC
Berdichev Machine-Building Plant Progress for the procurement of
spare parts. Trade and other payables also include US$397 (2013:
nil) thousand for rail cars received from PJSC Stakhanov Railcar
Company. The balance as at end of the period 31 December 2013
included an amount US$1,690 thousand for procurement of gas from
OJSC Ukrzakordongeologia.
Associated companies
n The prepayments and other current assets balance as at end of
the period 31 December 2013 included an amount of US$1,172 thousand
made to TIS Ruda LLC for transshipment services.
Other related parties
n Prepayments and other current assets include an amount of
US$595 thousand (2013: US$186 thousand) made to Slavutich Ruda Ltd.
for distribution services.
p Trade and other payables amounting to US$490 thousand as of 31
December 2014 are in respect of distribution services provided by
Slavutich Ruda Ltd. (2013: US$275 thousand).
Transactional banking arrangements
The Group has transactional banking arrangements with Bank
Finance & Credit (Bank F&C) in Ukraine which is under
common control of the majority shareholder of Ferrexpo plc. Finance
income and expense are disclosed in the table on page 44.
The transactional banking services provided by Bank F&C
include also the conversion of US dollar receipts into Ukrainian
Hryvnia for the settlement of liabilities incurred as part of
operational activities in local currency.
On 25 May 2013, the Group entered into a new uncommitted
multicurrency revolving loan facility agreement and a documentary
credit facility agreement with Bank F&C which will expire on 29
May 2016. The aggregate maximum limit of these facilities amounts
to UAH80 million (US$5,073 thousand at the exchange rate as of 31
December 2014) and, as required under Ukrainian legislation, fixed
assets are pledged. The total value of pledges under the terms of
the loan facility agreements is US$3,990 thousand as of 31 December
2014. The terms and conditions of both facilities were the subject
of independent confirmation.
US$'000 Year ended 31.12.14 Year ended 31.12.13
Loan facilities 5,073 10,009
Amount drawn - -
Letter of credit facility outstanding - 153
Bank guarantee facility outstanding - -
------------------------------------------ -------------------- --------------------
Bank F&C provides mortgages and loans to employees of the
Group for the acquisition, construction and renovation of
apartments in Ukraine. This is part of a social loyalty programme
introduced by the Group in December 2011 allowing certain key local
employees of the Group to borrow at preferential interest rates.
OJSC Ferrexpo Poltava Mining and LLC Ferrexpo Yeristovo GOK act as
guarantors for the bank's loans to the employees of the Group and
have deposited US$4,726 thousand at Bank F&C as security for
loans granted or to be granted by Bank F&C to employees of the
Group (2013: US$7,438 thousand). The interest rate margin earned by
Bank F&C covers the costs of administrating the mortgages and
loans.
Cash and cash equivalent balances held with Bank F&C are in
the normal course of business and are held on call or from time to
time on overnight deposit. Interest is paid on balances held on
current accounts and overnight deposits. The interest rates
received by the Group were in line with relevant comparable market
rates throughout the year.
Note 17: Commitments, contingencies and legal disputes
Commitments
As at As at
US$'000 31.12.14 31.12.13
Capital commitments on purchase of property, plant and equipment 108,763 102,958
--------------------------------------------------------------------- ---------- ----------
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.
The Group is currently involved in a share dispute which
commenced in 2005 and has been disclosed in its various public
documents since IPO in 2007. The main chronology of the dispute is
below:
On 21 April 2010, the Higher Commercial Court of Ukraine
invalidated the share sale and purchase agreement ('SPA') pursuant
to which a 40.19% stake in OJSC Ferrexpo Poltava Mining ('FPM') was
sold on 18 November 2002 to nominee companies that were previously
ultimately controlled by Kostyantin Zhevago, which ultimately sold
the shares to Ferrexpo AG.
On 2 December 2014, the Supreme Court of Ukraine set aside the
judgement of the Higher Commercial Court of Ukraine delivered in
April 2010 and remitted the case for review to the Higher
Commercial Court of Ukraine. On 16 February 2015, the Higher
Commercial Court of Ukraine confirmed the decisions. As at the date
of the publication of these annual financial statements for the
period ended 31 December 2014, the original SPA from 18 November
2002 is now valid.
After having taken legal advice, the management of the Group
believes that risks related to further court proceedings in respect
of this case are remote. In light of the risks surrounding the
operation and independence of Ukrainian courts, including those
associated with the Ukrainian legal system in general, however the
claimants may ultimately prevail in this dispute and the Group's
ownership of the relevant interest in FPM may be successfully
challenged.
Tax and other regulatory compliance
Ukrainian legislation and regulations regarding taxation and
customs 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. This includes also a new transfer pricing
law which significantly increased the power of the tax authorities.
The Group does not believe that these risks are any more
significant than those of similar enterprises in Ukraine.
Recoverable VAT amounting to US$3,587 thousand (2013: US$101,977
thousand) outstanding at 31 December 2014 and US$5,178 thousand
(2013: nil) refunded by the tax authorities during the financial
year are in the process of being considered by the Ukrainian court
system in several different cases. As the VAT is fully recoverable
under the relevant Ukrainian legislation, the Group expects to
receive positive court decisions for these ongoing court
proceedings and expect these amounts to be recovered in a further
issuance of bonds. Consequently, the VAT is recorded at its full
amount in the financial statements, net of an estimated discount to
reflect the expected difference to the bonds. See also disclosure
made in note 14. No provision has been made for any related
penalties and fines, which would in the case of a final negative
ruling become payable.
Note 18: Events after the reporting period
As part of legal proceedings instigated in 2005, the sale and
purchase agreement by which the sale of shares in OJSC Ferrexpo
Poltava Mining, subsequently acquired by Ferrexpo AG, was declared
invalid on 21 April 2010. On 2 December 2014, this decision was
reversed by the Supreme Court of Ukraine and the case was remitted
for re-consideration to the Higher Commercial Court of Ukraine. On
16 February 2015, the Higher Commercial Court of Ukraine rejected
the claimants' case leaving the share sale and purchase agreement
valid. As at the date of the publication of these annual financial
statements for the period ended 31 December 2014, the original
share sale and purchase agreement remains valid and risk
surrounding this legal case and associated legal cases which have
been commenced as a result are now very remote. See note 17 for
further information on this share dispute.
On 4 February 2015, the National Bank of Ukraine ceased their
interventions in the foreign exchange market. As a consequence, the
Ukrainian Hryvnia has devalued by 38% compared to the US dollar,
from 15.769 as of 31 December 2014 to 21.736 as of the date of the
publication of these accounts. The Group has assets and liabilities
denominated in this currency, which when translated at the current
prevailing rates would reduce the reported net assets of the Group.
A devaluation of 1% of the Ukrainian Hryvnia reduces the Group's
reported net assets by approximately US$13,000 thousand. This
effect would decrease proportionately with further devaluation of
the Hryvnia to the US Dollar. The underlying US dollar value of the
assets and their ability to generate cash flows is not
affected.
On 24 February 2015, the Group exchanged US$214,331 thousand of
its US$500 million Eurobond against 25% cash repayment totalling
US$53,583 thousand and issued new bonds in the amount of US$160,724
thousand in order to extend the tenor to April 2018 and April 2019.
The remaining balance of US$285,669 thousand of the 2016 Eurobond
will become repayable in April 2016. See also note 15.
Subsequent to the year end, the Group proposed dividends as
disclosed in note 13. Other than disclosed above, no material
adjusting or non-adjusting events have occurred.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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