TIDMFXPO
RNS Number : 6505R
Ferrexpo PLC
10 March 2016
10 March 2016
FERREXPO plc
("Ferrexpo", the "Group" or the "Company")
2015 Full Year Results
Ferrexpo plc, currently the third largest exporter of iron ore
pellets to the global steel industry, today announces its financial
results for the year ended 31 December 2015.
Michael Abrahams, Non-Executive Chairman, said:
"Ferrexpo is one of the lowest cost pellet producers in the
world enabling it to remain profitable and cash generative during
the current commodities downturn. The Group's production and
marketing operations continue to perform very well, producing
record levels of pellets, notably a significant increase in the
output of the Group's premium 65% Fe pellets, and increasing
Ferrexpo's presence in key markets. In 2015, Ferrexpo's price
realisations outperformed the Platts 62% Fe iron ore fines price by
11 percentage points and its cost of production reduced by 30%.
This performance has been underpinned by the relative stability of
pellet premiums over the Platts iron ore fines price, which
declined 42% compared to 2014, and the completion of the Group's
four year investment programme which has increased product quality,
boosted operating efficiencies and contributed to lower costs.
For the year ended 2015, Ferrexpo has reported an EBITDA, before
special items, of US$313 million (2014: US$496 million) and an
EBITDA margin of 33% (2014:36%).Trading in 1Q 2016 has been
encouraging. The Platts Atlantic pellet premium has firmed in March
2016 to US$30 per tonne compared US$26 per tonne in January 2016
and US$28.5 per tonne in February 2016. While, the spot pellet
premium in China, according to Mysteel, has also strengthened from
approximately US$11 per tonne at the end of 2015 to currently US$16
per tonne.
The increase in pellet premiums reflects a shortage of supply of
pellets in the seaborne market which is underpinned by continuing
demand for pellets from steel mills. In contrast, there is expected
to be an oversupply of iron ore fines in 2016, which is likely to
maintain pressure on the iron ore fines price, despite some
recovery seen so far this year due to seasonally weaker supply.
The Group's C1 cash cost has further reduced to an average of
US$24.3 per tonne in February 2016 (average December 2015: US$26.4
per tonne) further strengthening its position on the global pellet
cost curve.
Net debt at the end of the 2015 amounted to US$868 million (31
December 2014: US$678 million), the increase was principally due to
the insolvency of Bank Finance and Credit ('Bank F&C'), the
Group's transactional bank in Ukraine, in September 2015, which
resulted in a US$175 million reclassification of cash held at Bank
F&C as restricted. Cash on hand as of 31 December 2015 was
US$35 million (31 December 2014: US$627 million). Cash as of 29
February 2016, was US$36 million following the repayment of US$39
million of debt in January and February 2016.
Lastly, I would like to welcome Sir Malcom Field as a new
non-executive independent director to the Board. Also as announced
in 2015, I will be standing down later this year as your Chairman.
Following a long search we are now in advanced discussions with a
candidate, who is expected to succeed me as Chairman following a
suitable handover period of no more than a few months. The
candidate is expected to join the Board in the near future."
Extract of 2015 Financial Performance:
US$ million (unless otherwise Year ended Year Change
stated) 31.12.15 ended
31.12.14
------------------------------- ----------- ---------- -------
Total pellet production
(kt) 11,662 11,021 5.8%
------------------------------- ----------- ---------- -------
Sales volumes (kt) 11,330 11,167 1.5%
------------------------------- ----------- ---------- -------
Average CFR 62% fines price
(US$/t) 56 97 (42%)
------------------------------- ----------- ---------- -------
Revenue 961 1,388 (31%)
------------------------------- ----------- ---------- -------
C1 cash cost (per tonne) 32 46 (30%)
------------------------------- ----------- ---------- -------
EBITDA 313 496 (37%)
------------------------------- ----------- ---------- -------
EBITDA margin 33% 36% (8%)
------------------------------- ----------- ---------- -------
Profit after tax before
special items 142 267 (47%)
------------------------------- ----------- ---------- -------
Special items after tax (110) (84) 32%
------------------------------- ----------- ---------- -------
Diluted EPS before special
items (US cents per share) 23.86 44.63 (47%)
------------------------------- ----------- ---------- -------
Net cash flow from operating
activities 128 288 (56%)
------------------------------- ----------- ---------- -------
Capital investment 65 235 (72%)
------------------------------- ----------- ---------- -------
Net debt (868) (678) 28%
------------------------------- ----------- ---------- -------
Cash 35 627 (94%)
------------------------------- ----------- ---------- -------
Net debt to EBITDA 2.78x 1.37x 103%
------------------------------- ----------- ---------- -------
Summary of 2015 Operational and Financial Results:
-- No work related fatalities (2014: three)
-- Record production volume up 6% to a record 11.7 MT (2014: 11.0 MT)
-- Record production of 65% Fe pellets, up 79% to 10.4 MT (2014: 5.8 MT)
-- Average C1 cash cost reduced 30% to US$32 per tonne, further
reducing to US$24.30 per tonne in February 2016
-- Platts 62% Fe CFR iron ore fines price 42% lower in 2015,
average US$56 per tonne vs. US$97 per tonne in 2014
-- Ferrexpo realised price (FOB) outperformed Platts index by
11%, declining 31% compared to 2014 due to relatively stable pellet
premiums year on year, increased revenue from additional 65% Fe
pellets sales and lower C3 freight
-- Sales volumes increased 1.5% to 11.3 MT (2014: 11.2 MT)
reflecting higher sales to Germany and Japan as well as first
shipments to South Korea
-- EBITDA margins remained strong at 33% (2014: 36%) due premium
product offering and low positioning on pellet cost curve
-- Special items reflect:
-- Allowance for restricted cash at Bank F&C of US$146 million after expected tax relief
-- Disposal proceeds from Ferrous Resources of US$42 million
-- Impaired assets of US$5.6 million
-- Capex reduced to US$65 million (2014: US$235 million)
reflecting the completion of the Group's investment programme, to
increase quality and volume of output, as well the low iron ore
price environment
-- Net debt at 31 December 2015 US$868 million (31 December
2014: US$678 million) principally reflecting the US$175 million
reclassification of cash held at Bank F&C. During the year the
Group repaid US$394 million of debt
-- Net debt to EBITDA of 2.78x (31 December 2014:1.37x) below the Group's target of 3x
-- Cash balance as of 31 December 2015 US$35M, cash balance as
of 29 February 2016 US$36M after US$39M of debt repayments year to
date
There is an analyst and investor meeting at 09.00 GMT today at
the offices of J.P. Morgan at 60 Victoria Embankment London EC4Y
0JP (entrance from Victoria Embankment). 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 Zhevago (CEO) and Chris Mawe (CFO).
Webcast link: http://edge.media-server.com/m/p/vtxsnni2
For further information contact:
Ferrexpo:
Ingrid McMahon +44 203 705 5458
Maitland:
James Isola +44 207 379 5151
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 40 years.
Ferrexpo's resource base is one of the largest iron ore deposits in
the world. The Group is currently the third largest supplier of
pellets to the global steel industry and the largest exporter of
pellets from the CIS. In 2015, it produced a record 11.7 million
tonnes of pellets, a 6% increase compared to 2014. 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
CHAIRMAN'S STATEMENT
Michael Abrahams CBE DL Chairman
Ferrexpo is a long established iron ore pellet exporter to the
global steel industry.
Ferrexpo produces a pelletized iron ore product, which receives
a premium over the Platts 62% Fe iron ore fines price. The Group
sells to high quality steel mills that produce predominantly
sophisticated steel products. Ferrexpo's operations are centrally
located in Europe enabling it to reliably supply customers in both
central and Western Europe, by rail and barge, and in Asia, by cape
size vessel via its port facilities on the Black Sea.
The Group has and continues to build on its position as a key
supplier to premium steel mills around the world. Most recently
developing long-term relationships in Germany and Japan. In 2015 it
made its first shipments to South Korea.
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According to CRU[1], in 2015, Ferrexpo was the lowest cost
pellet producer in the world, enabling it to remain profitable
during the current downturn, and the fourth largest exporter of
pellets to the global steel industry. The Group operates a long
life and well invested asset base. The mining operations are in the
Poltava region of central Ukraine, remote from the area of conflict
in the east of the country. Operations continue to be unaffected by
the ongoing unrest.
Economic conditions in Ukraine, however, have remained fragile
in 2015. The National Bank of Ukraine ('NBU') estimates that GDP
declined by 10% following a 7% decline in 2014.
Iron Ore Market
The supply of iron ore requires periods of large scale capital
investment while demand from steel mills is heavily influenced by
global economic growth, which has recently been primarily
determined by China. A mis-match between new supply which takes
time to displace higher costs sources of iron ore, and slowing
world demand for steel has led to further iron ore price weakness
in 2015.
In 2015, the average Platts 62% Fe iron ore fines price index
declined 42% from US$97 per tonne to US$56 per tonne. Ferrexpo's
average realised price, however, outperformed the index by 11
percentage points, reducing 31% compared to 2014. This reflects the
premium that Ferrexpo, as a pellet producer, receives in addition
to the iron ore fines price, as well as improved product and
customer mix and lower international freight costs.
Ferrexpo Operations
In 1Q 2015, Ferrexpo completed its four year investment
programme to increase the volume and quality of output. In addition
to the new Ferrexpo Yeristovo mine completed earlier, Ferrexpo
completed the multi-year programme in the processing facilities
increasing concentrate grade and quantity with the commissioning of
the final flotation circuits. As a result, pellet output increased
to record levels for the third consecutive year, up 6% to 11.7
million tonnes of pellets (2014: 11.0 million tonnes) while
production of premium 65% Fe pellets grew by almost 80% to 10.4
million tonnes (2014: 5.8 million tonnes).
The cost to produce and rail pellets to Ukrainian border points
for dispatch was reduced in the year and is now below 2007 levels
in US Dollar terms. This has been as a result of a combination of
local currency weakness against the US Dollar, lower input prices
of commodities, such as oil and gas, and productivity gains from
mining and processing improvements. These operating improvements
have led to a reduction in controllable costs, achieved through the
consistent execution of the Group's strategy, namely the
modernisation of FPM's mining and processing facilities, the
development of the FYM mine with associated best in class
infrastructure, and a focus to improve operational KPI's to world
class levels.
([1]) CRU pellet cost curve analysis January 2016
2015 Financial Result
The weak iron ore price environment was reflected in a lower
Group EBITDA of US$313 million (2014: US$496 million).
Significantly reduced iron ore prices were partly offset by higher
sales volumes, relatively stable premiums for pellets over the iron
ore fines price, an improvement in sales mix towards 65% Fe
pellets, which receive a price premium over 62% Fe pellets, lower
freight costs and significantly reduced costs. Accordingly, despite
the challenging circumstances for both the iron ore industry and
Ukraine, the Group was able to report operating profit, before
special items, of US$251 million (2014: US$409 million).
Special items totalled US$110 million after an expected tax
relief credit (2014: US$84 million). Further details can be found
below, see Bank F&C, as well as in the Performance Review on
page 9 and in notes 10, 14, 15, 16 and 18 to the financial
statements.
Delivery of Strategy
In 2015, the Group continued to advance its strategy to become
the lowest cost and largest producer of blast furnace iron ore
pellets to the global market. Ferrexpo's operational progress,
since its IPO in 2007, shows steady volume growth, cost control and
development of a global marketing presence and logistics network
supplying an increasingly high quality customer base. Total pellet
output has increased 29% since 2007 and so too have its logistics
capacity allowing Ferrexpo to competitively ship, rail and barge
product to customers around the world.
Since 2007, Ferrexpo has generated US$3.3 billion in free cash
flow from operations. Shareholders have received US$572 million in
dividends and capital returns whilst, at the same time, Ferrexpo
has invested approximately US$2.0 billion into its Ukrainian
operations making it one of the largest investors in the country
over that period.
Bank F&C
On the 18 September 2015, Bank Finance and Credit JSC ('Bank
F&C'), the Group's main transactional bank in Ukraine, entered
temporary administration on the order of the Deposits Guarantee
Fund of Ukraine, following a decision by the NBU on 17 September
2015 that Bank F&C was insolvent.
The decision by the NBU was following recapitalisation of the
bank during 2015 by its owner, Kostyantin Zhevago, for
approximately UAH2.6 billion together with several agreed funding
tranches of UAH1.45 billion from the NBU. On 18 December 2015,
after a search for suitable investors during the temporary
administration, the NBU announced that Bank F&C's banking
licence had been revoked and that the bank would be liquidated in
due course.
The liquidation process is now underway and in accordance with
applicable procedures, the Group submitted its claims in January
2016. This included US$175 million, which reflects the funds held
at Bank F&C on 17 September 2015, and which has been recorded
as a charge in the income statement, as well as a claim for
approximately US$10 million which relates to funds that have not
been released back to the Group as applicable legislation requires.
FPM filed a court claim against Bank F&C, under the management
of the Deposit Guarantee Fund, for the release of the c.US$10
million. At a hearing on 4 December 2015, it was ruled that the
cash should be returned to FPM. This was subsequently appealed and
a new hearing is expected to take place in April 2016. For further
information see notes 16 and 18 to the financial statements.
Once made, claims are converted into local currency at the
exchange rate prevailing at the date of the liquidation decision of
the NBU, which in Bank F&C's case was 17 December 2015. In
total this amounted to UAH4,269,301,945.
Due to the uncertainty of the liquidation process and the
potential length of time involved in realising the assets and
making any distributions to creditors, the Group has recognised, as
a special item, an allowance for an amount held with Bank F&C.
Under the applicable regulations, the Liquidator is required to
report provisionally on the status of Bank F&C's assets
compared to its liabilities. This is currently expected in 2Q 2016
at which time the Group will make a further assessment of the
position.
If ultimately no recovery is forthcoming, this will result in a
loss of cash, after expected tax relief, of US$146 million.
The Board of Ferrexpo were surprised and deeply concerned by the
temporary administration following the ongoing recapitalization of
Bank F&C with the support of the NBU. The Ukrainian banking
sector has experienced several such unexpected events in 2015 with
45 banks placed into temporary administration and the number of
operational banks falling from 163 to 117 by the end of the year.
The Board fully recognizes the risks involved in operating in
Ukraine and is in the process of reviewing its local banking
arrangements whilst still recognizing the need to maintain an
acceptable proportion of operational liquidity in country.
Bank F&C was ultimately controlled by Ferrexpo's largest
shareholder and CEO Kostyantin Zhevago. The relationship between
Ferrexpo and Bank F&C was overseen by Ferrexpo's Committee of
Independent Directors and governed by the relationship agreement
between Kostyantin Zhevago and the Company.
For further information on Bank F&C see Ukrainian Banking
Sector Risk on page 24 and notes 16 and 18 to the financial
statements.
Ukrainian Banking Relationships
Bank F&C had been an effective transactional bank for the
Group for over fifteen years, notwithstanding an unpredictable
economic and political backdrop in Ukraine throughout that time,
including a fragile banking sector which between 2008 and October
2015 was regarded as having a negative outlook by Moody's credit
rating agency. In November 2015, post the completed sovereign
US$15.3 billion restructuring deal in August 2015, Moody's upgraded
the outlook to stable for seven Ukrainian banks. However, Moody's
also expressed that the macro profile for the Ukrainian banking
sector "remains very weak".
The Group is now in the process of developing alternative
banking relationships and currently uses Ukrsibbank, a local bank
owned by BNP Paribas and the European Bank for Reconstruction and
Development, as its main transactional bank.
For further information on the Ukrainian Banking Sector see
Ukrainian Banking Sector Risk on page 24.
Corporate Governance and Risk Management
The Board of Ferrexpo has constantly managed the risks facing
the business. This includes taking into account the country of
operation and all associated counterparty risks such as the
recovery of VAT, the requirement to prepay corporate profit tax and
the management of legal and other related claims, amongst
others.
The Board of Ferrexpo is disappointed by the potential loss
resulting from the insolvency of Bank F&C, but notes the
overall reduction achieved in exposure to total counterparty risk
in Ukraine, through the substantial decline in the outstanding VAT
balance and the elimination of the requirement to prepay corporate
profit tax. The Board of Ferrexpo is also pleased to finally see
progress in the resolution of the long standing legal claim for
approximately 40% of Ferrexpo Poltava Mining which was being
contested actively between 2010 and early 2015.
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The Board continues to actively manage local counterparty risk
whilst taking into consideration that the productive base of the
Group resides exclusively in Ukraine, currently rated Caa3 by
Moody's, and thus carries inherent risks both in terms of operation
and financial management. For further information see the Risk
Section on page 21.
Debt Amortisation Schedule and Liquidity
In 2015, the Group repaid US$394 million of debt and as of 31
December 2015 gross debt had declined 31% to US$904 million
compared to 31 December 2014 (US$1.3 billion). US$154 million of
the debt repayment related to a prepayment to extend the Group's
US$500 million Eurobond from April 2016 to April 2019, reflecting
the Group's active management during the year to match its cashflow
generation to its debt amortisation schedule.
Net debt as of 31 December 2015, increased to US$868 million (31
December 2014: US$678 million) principally reflecting the US$175
million reclassification of cash held at Bank F&C, for which an
allowance was made.
As of 29 February 2016, the Group has a US$346 million bond
maturing in equal parts in April 2018 and April 2019, a US$350
million pre export financing ('PXF') facility maturing in eight
equal quarterly instalments starting in November 2016, and a US$420
million PXF facility, of which the remaining US$88 million is due
to be repaid in five monthly amounts completing in July 2016. Cash
on hand as of 29 February 2016 was US$36 million following the
repayment of US$39 million of debt year to date.
Dividends
The Board is pleased by the continued strong operational
performance of the Group, its lower costs and the recent strength
in the iron ore market. The Board is not recommending a final
dividend for the year, in view of the uncertain iron ore pricing
outlook and current gearing levels, although it is very pleased
with progress to date in 2016. The Board will keep returns to
shareholders under review and will return to dividend payments at
an appropriate time which takes into account the strength of the
business following over US$2 billion of investment and its
financial position.
Board Succession
As part of the board refreshment process started in 2013, we
have been developing succession planning for the non-executive
directors in order to conform to the Corporate Governance Code and,
in particular, to ensure that the Board is provided with the
necessary breadth of experience and expertise.
Ferrexpo appointed two new Directors during the year following
the appointment of Bert Nacken in 2014. Mary Reilly was appointed
in May 2015 and brings extensive audit and financial experience
from her previous career as a partner of Deloitte LLP. She became
Chairman of the Audit Committee in November. In October 2015, David
Frauman was appointed to provide additional experience on a short
term basis. Having done so, he is now standing down and I am
grateful to him for the wise counsel he has provided to the
Board.
I am pleased to announce today that Sir Malcolm Field has been
appointed as an independent non-executive director to the Board
with immediate effect.
Mike Salamon, who joined the Board in March 2009, will not be
standing for re-election at the Group's AGM in May 2016. On behalf
of the Company, I would very much like to thank Mike for his
outstanding contribution to the Company's affairs over the last
seven years.
In view of the provisions of the Corporate Governance Code, the
Board intends that when an independent director has completed a
nine year term he will no longer be viewed as independent and will
therefore retire from the Board once a suitable successor has been
found. Wolfram Kuoni and Oliver Baring, who joined the Board in
June and December 2007 respectively, will accordingly seek
re-election at the AGM on the understanding that they will retire
from the Board once appropriate successors have been found. A
Ukrainian successor to Ihor Mitiukov, who also joined the Board in
June 2007, is expected to be announced shortly and at that time
Ihor will retire from the Board. Meanwhile, he also seeks
re-election at the AGM.
In line with our previously stated intention that I should stand
down as your Chairman at the 2016 AGM, we are now in advanced
discussions with a candidate who is expected to succeed me,
following a suitable handover period of no more than a few months.
The candidate is expected to join the Board in the near future. I
will seek re-election at the AGM in order to facilitate the
handover.
OUTLOOK
The iron ore price has currently recovered from the low point
reached in December 2015 of US$38.50 per tonne to around US$62 per
tonne (as of 8 March 2016). In addition, since the start of the
year, pellet premiums have increased while freight rates have
fallen, both of which are improving the Group's received price on
an FOB basis. The Group has also continued to reduce its cash cost
of production which has declined from an average of US$26.40 per
tonne in December 2015 to an average of US$24.30 per tonne in
February 2016.
As a result of a forecast oversupply of iron ore fines in 2016,
however, prices are expected to fall further in the present
macroeconomic environment, while industry participants take
additional measures to reduce costs or curtail production.
Ferrexpo sells iron ore pellets which, in contrast to iron ore
fines, are forecast to be in under supply, and demand is expected
to grow in the period to 2020. The Group's operations are
positioned at the bottom of the global pellet cost curve, and it is
well placed to remain profitable in the current challenging market
conditions as it has consistently been throughout its 40 year
history.
PERFORMANCE REVIEW
Kostyantin Zhevago Chief Executive Officer
Chris Mawe Chief Financial Officer
FINANCIAL RESULTS
In 2015 Ferrexpo responded to the challenging environment with a
strong marketing and operational performance which helped offset
the impact of the lower iron ore price.
Revenue
Group revenue for the period decreased by 31% to US$961 million
compared to US$1,388 million in 2014. This reflected a 42% decline
in the average Platt's 62% Fe iron ore fines price which reduced
Ferrexpo's revenue by US$467 million.
Ferrexpo's net realised DAP/FOB price, outperformed the Platts
iron fines index by 11%. This was due to relatively stable pellet
premiums year-on-year, higher revenue received for additional 65%
Fe pellet sales (compared to 62% Fe pellet sales) and lower C3
freight (which led to a higher net back FOB price for the Group).
Together these factors added US$146 million to 2015 revenue. Lower
freight costs charged to customers as well as lower revenue from
the Group's barging business and other reduced total revenue by
US$108 million compared to 2014. Group sales volume increased 1.5%
to 11.3 million tonnes (2014:11.2 million tonnes). For further
information see Market Review, Marketing and Logistics on pages
(11, 14 and 15).
Costs
While revenue declined by US$428 million the Group was able to
reduce costs by US$294 million, before operating foreign exchange
gains, in 2015 compared to 2014.
The majority of the cost savings were driven by a 30% decline in
the Group's C1 cash cost of production to US$31.9 per tonne (2014:
US$45.9 per tonne) as well as lower rail and international freight
costs. The lower costs were due to a combination of a weaker
Hryvnia against the US Dollar, operating efficiency gains, lower
oil prices and weak international freight rates. For further
information see Currency, Logistics, Production Costs and Mining
and Production Efficiencies on pages 10, 15, 16 and 17.
Operating Profit before Adjusted Items
Operating profit from continuing operations before adjusted
items was US$251 million in 2015 compared to US$409 million in
2014. This includes a non-cash operating foreign exchange gain of
US$26 million. (2014: US$76 million). For further information see
Currency on page 10 below.
EBITDA
EBITDA for the period was US$313 million compared to US$496
million in 2014. The decline reflected the fall in iron ore prices
during the period offset by an improved sales mix, higher sales
volumes and significant cost reductions.
Special Items
Total special items for the year, after expected tax relief
credit, amounted to US$110 million (2014: US$84 million).
The Group has recorded an allowance for US$175 million held at
Bank F&C at the time the bank was placed into administration by
the National Bank of Ukraine ('NBU') in September 2015. If this
amount is ultimately not recovered, this would result in a loss,
after an expected tax relief credit, of US$146 million. For further
information on Bank F&C see the Chairman's Statement on page 4,
Ukrainian Banking Sector Risk on page 24 and notes 10, 12 and 16 to
the financial statements.
During the year the Group disposed of its stake in Ferrous
Resources resulting in a gain on disposal of US$41 million. In 2014
a US$84 million impairment of the Group's holding in Ferrous
Resources was recorded.
In 2015, the Group impaired assets with a value of US$5.6
million. This principally related to the write-off of US$4.6
million.
Interest
Finance expense was US$72 million (2014: US$68 million). The
average cost of debt for the period was 5.97% compared to an
average cost of 4.85% in 2014. The increase reflected a gradual
rise in US LIBOR as well as the amortisation of the Group's lower
cost US$420 million pre-export banking facility commencing in 2H
2014 while the Group was required to pay a higher coupon on its
Eurobond (partly offset by a lower principal amount outstanding).
56% of the Group's debt is floating with the remaining 44% fixed.
For further information on the Group's debt see Cash Flows below on
page 11 and Financial Management on page 20.
Tax
In 2015, the Group's underlying tax charge, before special
items, was US$22 million resulting in an effective tax rate of
13.7% compared to 20.9% in 2014 or US$70 million.
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Ferrexpo has recognised a US$28 million deferred tax asset
related to the allowance booked for restricted cash. Overall the
Group has recorded a tax credit of US$6 million for the year
compared to a US$70 million tax charge in 2014.
The balance of prepaid corporate profit tax in Ukraine decreased
to US$54 million as of 31 December 2015, compared to US$74 million
as of 31 December 2014. The decrease was mainly driven by the
devaluation of the Hryvnia against the US Dollar.
Further details see note 12 of the financial statements.
Currency
Ferrexpo prepares its accounts in US Dollars. The functional
currency of the Ukrainian operations is the Hryvnia. During 2015
the Hryvnia devalued from UAH15.77 per US Dollar as of 1 January
2015 to UAH24.00 per US Dollar as of 31 December 2015. The average
rate for the period was UAH21.86 per US Dollar (2014 average:
UAH11.89 per US Dollar). Balances at 31 December 2015 are converted
at the prevailing rate. The devaluation of the currency since 31
December 2014 has resulted in a US$472 million reduction in the net
assets of the Group and has been reflected in the translation
reserve. Since 31 December 2015, the Hryvnia has further
depreciated to approximately UAH27 per US Dollar.
Capital Expenditure
Capital expenditure reduced significantly in 2015 to US$65
million (2014: US$235 million) as the Group completed, in 1Q 2015,
its major investment programme to increase the production of 65% Fe
pellets as well as overall production volumes. Following this
completion and given the low iron ore price environment, Ferrexpo
has reduced its discretionary capital expenditure. For further
information see Capital Investment on page 18.
The table below presents the breakdown of capital expenditures
in 2015 and 2014.
Capital expenditure breakdown:
US$ million 2015 2014
----------------------------- ---- ----
FPM 34 136
----------------------------- ---- ----
Sustaining (incl. logistics) 32 43
----------------------------- ---- ----
Capacity upgrade project - 37
----------------------------- ---- ----
Mine life extension - 12
----------------------------- ---- ----
Quality upgrade project 2 44
----------------------------- ---- ----
FYM 25 73
----------------------------- ---- ----
Stripping and infrastructure 24 62
----------------------------- ---- ----
Concentrator 1 11
----------------------------- ---- ----
FBM, other deposits 2 9
----------------------------- ---- ----
Logistics 4 17
----------------------------- ---- ----
Total 65 235
----------------------------- ---- ----
Cash Flows
Net cash flows from operating activities in 2015 totalled US$128
million compared to US$288 million in 2014. The reduction
principally reflected the lower iron ore price environment, partly
offset by lower costs together with a US$73 million increase in
working capital during the year. The increase in working capital
primarily reflected higher levels of pellet stocks held due to
lower prevailing prices at the year-end compared to expectations
for 1Q 2016.
Capital expenditure decreased significantly to US$65 million
(2014: US$235 million), for further details see Capital Investment
on page 18.
Dividends paid during the period were US$78 million in line with
2014 at US$77 million. The Group received US$42 million from the
sale of Ferrous Resources.
During the period the Group's cash position, before the
reclassification of cash held at Bank F&C as restricted,
reduced by US$406 million. The reduction was primarily a result of
the repayment of US$394 million of debt (2014: US$119 million) of
which US$154 million related to Eurobonds to extend the tenor from
April 2016 to 2018 and 2019, US$210 million related to the
amortisation of a US$420 million banking facility and the remainder
related to repayment of Export Credit Agency funding.
For further details see Financial Management on page 20.
Net debt as of 31 December 2015, increased to US$868 million (31
December 2014: US $678 million) principally reflecting the US$175
million reclassification of cash held at Bank F&C, for which an
allowance was made.
For further information see the Chairman's statement on page 4,
Financial Management on page 20 and notes 15, 16 and 18 of the
financial statements).
MARKET REVIEW
In 2015, total world steel production declined by 2.5% to 1.68
billion tonnes (2014: 1.73 billion tonnes). China, the world's
largest steel producer, reduced its steel output by 2.2% to 873
million tonnes. The fall in global steel output resulted in a 1.8%
decline in total iron ore consumption, and the Platts 62% Fe iron
ore fines price, CFR China declined by 42% from an average of US$97
per tonne in 2014 to US$56 per tonne.
Steel and iron ore statistics 2015 vs. 2014
Million tonnes 2014 2015 Change
--------------------------- ----- ----- ------
World steel production 1,725 1,683 -2.5%
--------------------------- ----- ----- ------
China steel production 893 873 -2.2%
--------------------------- ----- ----- ------
Total iron ore consumption 2,117 2,078 -1.8%
--------------------------- ----- ----- ------
Iron ore exports:
Fines 1,032 1,024 -0.8%
--------------------------- ----- ----- ------
Lump 201 219 8.9%
--------------------------- ----- ----- ------
Pellet 145 151 4.3%
--------------------------- ----- ----- ------
Pellet feed 74 79 7.1%
--------------------------- ----- ----- ------
Source: CRU iron ore market outlook January 2016 statistical
review
Exports of iron ore fines declined by approximately 1% in 2015
(see table above), however, the market share of the four largest
iron ore fines suppliers, increased to 85% (2014: 80%) at the
expense of high cost suppliers who could not remain cash generative
at the price levels experienced in 2015.
Geographic export of iron ore fines 2015 vs. 2014
Million tonnes 2014 2015 Change
---------------------------------- ----- ----- ------
Australia 600 630 5.0%
---------------------------------- ----- ----- ------
Brazil 227 239 5.3%
---------------------------------- ----- ----- ------
Rest of the world 206 154 -25.2%
---------------------------------- ----- ----- ------
Total exports of iron ore fines 1,033 1,023 -0.8%
---------------------------------- ----- ----- ------
Australia and Brazil market share 80% 85% 6.3%
---------------------------------- ----- ----- ------
Source: CRU iron ore market outlook January 2016 statistical
review
Iron ore fines supply from Australia and Brazil increased 5.0%
and 5.3% respectively while supply from the rest of the world
decreased 25.2%.
Exports of pellets grew 4.3% in 2015 to 151 million tonnes. This
growth was due to new supply from market leaders Vale and Samarco.
In contrast to the sharp decline in the iron ore fines price of
42%, the long-term contract premium paid for pellets in the key
markets of Western Europe and North East Asia declined
approximately 13% in 2015 from US$38 per tonne in 2014. According
to Mysteel data, Chinese spot pellet premiums in 2015 declined on
average by approximately 16% from US$27 per tonne in 2014 to US$23
per tonne reflecting available pellet feed from higher cost
domestic iron ore producers.
The link below highlights the top exporters of pellets to the
global blast furnace and direct reduction steel markets in 2015 and
the FOB cost curve which shows the cost of pellet production,
including in-country distribution costs, for the major pellet
producers in 2015. Ferrexpo was the fourth largest exporter to the
blast furnace pellet market and the lowest cost pellet producer in
2015, according to CRU.
http://www.rns-pdf.londonstockexchange.com/rns/6505R_-2016-3-10.pdf
Pellets are a niche subsector of the iron ore market. The table
below shows that historically there has been limited supply growth
in pellets with exports of pellets increasing by only 45 million
tonnes since 2000 (including Samarco pellet capacity, which is
currently idled, of 30 million tonnes).
This compares to an increase of 759 million tonnes since 2000 in
the iron ore fines segment. The limited availability of pellets
reflects the highly capital intensive nature of installing
beneficiation and pelletising facilities. A greenfield pellet
project from mine to end product would likely cost in the region of
US$1 billion to US$3 billion.
The tragic failure of a Samarco tailings dam in November 2015
resulted in the shutdown of its operations. Samarco produced
approximately 30 million tonnes or around 20% of the pellet export
market which is currently absent from the market. As a result
capacity utilisation rates of other pellet producers are expected
to increase in 2016. There is a possibility that higher cost idled
pellet capacity of up to 7 million tonnes could re-enter the market
if pellet premiums provide an acceptable return, however, overall
pelletising capacity is not expected to increase significantly in
the coming years due to high capital barriers to entry.
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Limited historic growth in pellet capacity due to high barriers
to entry
Exports of iron ore MT 2000 2015 Increase CAGR
----------------------- ---- ----- -------- -----
Pellets 106 151 45 2.4%
----------------------- ---- ----- -------- -----
Lump 93 219 126 5.9%
----------------------- ---- ----- -------- -----
Sinter fines 265 1,024 759 9.4%
----------------------- ---- ----- -------- -----
Total 464 1,394 930 10.5%
----------------------- ---- ----- -------- -----
Source: CRU iron ore market outlook January 2016 statistical
review.
Demand for pellets is expected to show the strongest growth in
the period to 2020 as the table below from CRU highlights with
pellets forecast to grow by 4.1% on CAGR basis, while demand for
iron ore fines is expected to decline by 1.2%. The decline in
demand for iron ore fines is due to lower steel demand, tighter
emission controls as well as improved blast furnace utilisation
rates, as more expensive uneconomic steel capacity is closed, which
is expected to favour pellet use over sinter fines.
Pellet demand to show strongest growth in iron ore
Consumption MT 2015 2020 Increase CAGR
--------------- ----- ----- -------- -----
Pellets 408 498 90 4.1%
--------------- ----- ----- -------- -----
Lump 268 309 41 2.9%
--------------- ----- ----- -------- -----
Sinter fines 1,198 1,128 -70 -1.2%
--------------- ----- ----- -------- -----
Total 2,078 2,162 84 0.8%
--------------- ----- ----- -------- -----
Source: CRU iron ore market outlook January 2016 statistical
review.
Ferrexpo believes that the above market dynamics favor large
scale, low cost efficient producers of sinter fines or high quality
niche producers of pellets (not considered as the core business of
larger producers). Ferrexpo is in the niche segment which is shown
in the chart below and represents 250 million tonnes of supply out
of the total world market nearing two billion tonnes of iron ore
products.
The Group's past investment strategy of improving the quality of
its product together with its low cost base and premium customer
portfolio should ensure that Ferrexpo's operations can withstand
the current cyclical downturn and emerge as a stronger and fitter
Group.
MARKETING
Ferrexpo's realised price for its 65% Fe iron ore pellets is
calculated by taking the average Platts iron ore fines CFR China
index, adjusting for quality and adding a pellet premium. For sales
to the Far East, delivery is made on CFR terms with the resulting
FOB netback determined by the actual cost of freight. For sales to
European and regional markets, the resulting FOB/ DAP netback is
determined by deducting transparent freight market indices (such as
C3) and adding appropriate freight costs for the relevant point of
sale.
The C3 freight index, as published by the Baltic Exchange,
represents the industry benchmark price to transport goods by sea
from Tubarao, Brazil to Qingdao, China. The C3 index declined
dramatically during the year following the substantial fall in the
oil price. On average C3 freight reduced by US$9.4 per tonne to
US$11.2 per tonne in 2015 (2014: US$20.6 per tonne) resulting in a
higher net back price for the Group.
Due to relatively stable pellet premiums under long-term
contracts (see Market Review), the additional iron premium received
for selling a higher proportion of 65% Fe pellets and lower freight
rates, the Group's average received price in 2015 outperformed the
Platts 62% Fe iron ore fines CFR index by 11%, declining on average
by 32% compared to the 42% decline of the Platts index.
The Group typically negotiates pellet premiums annually,
half-yearly or quarterly while a monthly or three month average is
usually used to determine the average iron ore fines index price,
as can be seen from the table below. The sales made at a fixed
price on a particular day reflects efforts to secure margins in a
falling market.
Sales volume by pricing terms:
Year ended Year ended
31.12.15 31.12.14
------------------------------------ ---------- ----------
Monthly spot index 79% 79%
------------------------------------ ---------- ----------
Current quarter spot index 5% 5%
------------------------------------ ---------- ----------
Lagging 3 month spot index 8% 8%
------------------------------------ ---------- ----------
Spot sales fixed on day 8% 8%
------------------------------------ ---------- ----------
Total sales volume (million tonnes) 11,330 11,167
------------------------------------ ---------- ----------
In 2015, Ferrexpo increased sales volumes by 1.5% to 11.3
million tonnes of pellets compared to 11.2 million tonnes in 2014.
The Group sold 9.9 million tonnes of 65% Fe pellets, up 74%
compared to 5.7 million tonnes in 2014. Importantly, the high
quality pellets also enabled the Group to improve the sales mix by
penetrating further into premium markets and away from low end
markets.
The table below shows the breakdown of sales by key market
regions. Overall tonnages delivered to Western Europe and North
East Asia increased due to increased marketing focus in these
markets, following the increase in 65% Fe pellet production. The
increase in sales volumes in 2015 was lower than the increase in
production volumes due to a larger number of discrete delivery
points utilised during the year to service the changing sales
portfolio.
Sales volume by market regions:
Year ended Year ended
31.12.15 31.12.14
------------------------------------ ---------- ----------
Central & Eastern Europe 49% 49%
------------------------------------ ---------- ----------
China 22% 25%
------------------------------------ ---------- ----------
North East Asia 12% 10%
------------------------------------ ---------- ----------
Western Europe 11% 8%
------------------------------------ ---------- ----------
Turkey, Middle East, India 6% 8%
------------------------------------ ---------- ----------
Total sales volume (million tonnes) 11,330 11,167
------------------------------------ ---------- ----------
LOGISTICS
Selling and distribution costs decreased by 27% to US$226
million (2014: US$312 million) as a result of the devaluation of
the local currency and lower international freight rates.
Costs to transport the Group's pellets to border points for
international dispatch were US$112 million (2014: US$145 million).
The 23% reduction was mainly due to the Hryvnia depreciation
against the US Dollar, as 100% of rail costs are in local currency,
as well as cost actions taken by management. Rail tariffs did
increase by approximately 30% year-on-year, however, the increase
was offset by the Hryvnia devaluation.
International freight costs reduced significantly to US$75
million in 2015 compared to US$123 million in 2014. This was driven
by lower oil prices and depressed market conditions in the shipping
industry. For further information on C3 freight see Marketing on
page 14. Ferrexpo loaded 23 capesize vessels during the year (2014:
22).
MINING AND PRODUCTION
Ferrexpo is pleased to report an excellent year of operational
improvement in 2015 with the Group delivering its strategy to
increase the volume and quality of its output while remaining a low
cost, efficient producer. The Group increased total pellet
production by 5.8% to a record 11.7 million tonnes (2014: 11.0
million tonnes). Importantly, as planned, it increased the output
of premium 65% Fe pellets by 78.6% to 10.4 million tonnes, another
record for the Group. This compares to 5.8 million tonnes of 65% Fe
pellets produced in 2014. In the 4Q 2015, the Group produced at or
close to 1 million tonnes per month, of which 95% of production was
65% Fe pellets. The Group's current nameplate capacity is 12
million tonnes per annum. In 2016, Ferrexpo has planned for
approximately 92% of its production to be premium 65% Fe pellets
with the remaining production of 62% Fe pellets in line with
existing customer requirements.
Health and Safety
The Group is pleased to be able to report that there were no
work related fatalities during the year (2014: three). The lost
time injury frequency rate ('LTIFR') however increased during the
period to 0.96 per million man hours (2014: 0.86 per million man
hours).
The LTIFR at Ferrexpo Poltava Mining ('FPM') (including
contractors) increased to 0.75 per million man hours in 2015 (2014:
0.47 per million man hours) while Ferrexpo Yeristovo Mining's
('FYM') LTIFR increased to 0.74 per million man hours (2014: nil).
Ferrexpo believes the increase in LTIFRs was due to a failure to
correctly follow safety procedures and a lack of safety standard
enforcement by team leaders.
This has been addressed across the Group's operating
subsidiaries with retraining and instruction processes completed
with all staff that access mobile equipment, along with increased
auditing and observations by team leaders during periods of high
activity, such as shift change overs and meal breaks.
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LTIFR for the Group's barging operation, DDSG, including leased
crews, was 4.93 per million man hours worked (2014: 9.08 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.
DDSG has seen a significant improvement in LTIFR since a new
provider of leased crews was appointed during the year who
prioritises health and safety training.
Lost time injury frequency rate 2015 2014
-------------------------------- ---- ----
Mining operations 0.75 0.47
-------------------------------- ---- ----
Barging operations 4.93 9.08
-------------------------------- ---- ----
Total Group 0.96 0.86
-------------------------------- ---- ----
Production Statistics
(000't unless otherwise stated) 2015 2014 Change %
--------------------------------------------- ------ ------ --------
Iron ore processed from FPM & FYM 30,168 29,957 0.7%
--------------------------------------------- ------ ------ --------
Average Fe content 33.65% 33.38% 0.8%
--------------------------------------------- ------ ------ --------
Concentrate produced ('WMS') 14,378 13,726 5%
--------------------------------------------- ------ ------ --------
Weighted average Fe content % 62.35% 62.70% (0.6%)
--------------------------------------------- ------ ------ --------
Pellets produced from FPM & FYM 11,258 10,670 6%
--------------------------------------------- ------ ------ --------
Higher grade 9,969 5,544 80%
--------------------------------------------- ------ ------ --------
Average Fe content % 64.90% 64.90% 0%
--------------------------------------------- ------ ------ --------
Lower grade 1,289 5,126 (75%)
--------------------------------------------- ------ ------ --------
Average Fe content % 62.45% 62.20% 0.4%
--------------------------------------------- ------ ------ --------
Purchased concentrate 466 405 15%
--------------------------------------------- ------ ------ --------
Average Fe content % 66.33% 65.80% 0.8%
--------------------------------------------- ------ ------ --------
Pellets produced from purchased concentrate 403 351 15%
--------------------------------------------- ------ ------ --------
Higher grade 397 259 53%
--------------------------------------------- ------ ------ --------
Average Fe content % 64.85% 64.90% (0.1%)
--------------------------------------------- ------ ------ --------
Lower grade 6 92 (94%)
--------------------------------------------- ------ ------ --------
Average Fe content % 62.36% 62.20% 0.3%
--------------------------------------------- ------ ------ --------
Total pellet production 11,662 11,021 6%
--------------------------------------------- ------ ------ --------
Pellet sales volume 11,330 11,167 2%
--------------------------------------------- ------ ------ --------
Gravel output 1,757 1,819 (4%)
--------------------------------------------- ------ ------ --------
Total Group stripping volume (million m(3) ) 26,933 49,697 (46%)
--------------------------------------------- ------ ------ --------
Production Costs
Costs
C1 Cash Cost of Production
The Group's C1 cash cost of production reduced by US$14.0 per
tonne to US$31.9 per tonne compared to US$45.9 per tonne in 2014.
Of this 30% cost reduction, approximately US$8.0 per tonne was due
to the Hryvnia devaluation against the US Dollar, while US$4.1 per
tonne was driven by increased production volumes, efficiency gains
and reduced stripping volumes (see Mining and Production
Efficiencies below) and US$2.7 per tonne was due to lower oil
prices. Higher levels of production of the Group's 65% Fe pellet,
which requires additional grinding and beneficiation, increased
costs by US$0.8 per tonne.
In 2015, the average exchange rate of the Hryvnia per US Dollar
was 21.9 compared to 11.7 in 2014. The higher rate in 2015 reduced
the C1 cost by 17% as approximately 50% of the Group's cost to
produce a pellet is in Hryvnia. For further information on the
impact of the Hryvnia devaluation see Currency on page 10.
Local C1 cost inflation during the period was primarily driven
by wage inflation (+23% vs. average 2014) and electricity price
increases (+41% vs. average 2014) following the large devaluation
of the Hryvnia in February 2015. These costs, however, are still
significantly lower in US Dollar terms than the prior period. The
table below shows the month on month change in CPI for the year.
Inflation rose strongly in March and April following the
devaluation in February and thereafter the rate of increase started
to slow with some months showing deflation. For further information
see Update on Risks: Inflation on page 25.
Ukrainian 2015 Month-on-Month CPI
Jan Feb March April May June July Aug Sep Oct Nov Dec
2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015
------------ ----- ----- ----- ----- ----- ----- ---- ---- ----- ---- ----- -----
Ukraine CPI 103.1 105.3 110.8 114.0 102.2 100.4 99.0 99.2 102.3 98.7 102.0 100.7
------------ ----- ----- ----- ----- ----- ----- ---- ---- ----- ---- ----- -----
Source: www.ukrstat.gov.ua
The following table shows the % breakdown of the Group's cost
base by category:
% of C1
Input cash cost
---------------- ---------
Electricity 28%
---------------- ---------
Gas 16%
---------------- ---------
Fuel 8%
---------------- ---------
Materials 13%
---------------- ---------
Personnel 8%
---------------- ---------
Grinding bodies 8%
---------------- ---------
Maintenance 6%
---------------- ---------
Spares 5%
---------------- ---------
Royalties 5%
---------------- ---------
Explosives 3%
---------------- ---------
Mining and Production Efficiencies
In 2015, the Group optimised output from the FPM and FYM pits so
that it could maximise production, and minimise costs per tonne.
This resulted in a significant reduction in stripping volumes as
the revised mine plan more closely correlated with the Group's
production requirement. Since implementation in January 2015, this
has resulted in a 36% decrease in the amount of waste material
moved compared to 2014.
The Group also implemented several productivity improvements
during the year which led to improved truck efficiency and a
greater amount of material movement per truck. On average, together
FPM and FYM increased the amount of material moved per truck in
operation by 50% from 302 tonnes per truck per hour to 452 tonnes
per truck per hour. This was achieved through a combination of hot
seating, faster changeovers and improved fleet management.
Another focus area during the year was improved drilling and
blasting which led to increased excavator productivity. For
example, excavator productivity at FYM increased by over 25% during
the year.
Overall, the above actions reduced the C1 cash cost by
approximately US$4.1 per tonne or US$46 million in 2015.
Business Improvement Programme
The BIP aims to increase process efficiencies and reduce
consumption norms in the production process thereby reducing the
total cost of production by up to 2% per annum.
Focus areas included increasing plant throughput, increasing
mobile mining fleet utilisation, debottlenecking processing
activities, and improving process control. FPM undertook 27 BIP
projects during the year while FYM undertook 11 projects.
In 2015, the BIP projects generated cost savings and efficiency
improvements of an estimated UAH68 million or US$3 million.
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.
In September 2015, Ferrexpo began using sunflower husks as a
natural gas replacement for one of its four pelletising lines.
Ukraine is the largest producer of sunflower seeds in the world and
the Group sourced the husks from a local company in the Poltava
region. FPM saved over three million cubic metres of natural gas
providing a cost saving of US$0.2 million. In December 2015, line
number two of the pelletiser began to use husks. The Group intends
to replace up to 30% of its total natural gas consumption in the
pelletiser with sunflower husks.
Environmental Impact
As in previous years, the Group is able to report there were no
incidents regarding emissions or discharges that exceeded
permissible environmental limits during the year.
CO(2) Emissions
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The table below shows that the Group's carbon intensity ratio in
2015 was in line with 2014. 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.
Emissions in tonnes 2015 2014
-------------------- --------- ---------
CO(2) emissions 2,728,313 2,732,587
-------------------- --------- ---------
Pellets produced kt 11,661 11,021
-------------------- --------- ---------
Intensity ratio 0.234 0.238
-------------------- --------- ---------
Note: 2014 data has been restated due to an incorrect factor
applied to the conversion of natural gas from cubic metres into
tonnes.
CO(2) emissions directly generated by the operations were 0.68
million tonnes in 2015 compared to 0.80 million tonnes in 2014. The
reduction in direct emissions is as a result of a 36% reduction in
stripping volumes and a corresponding 31% decline in diesel
consumption. Emissions generated from indirect sources, such as
electricity purchased from Ukraine's national grid were 2.05
million tonnes in 2015 compared to 1.93 million tonnes in 2014.
CAPITAL INVESTMENTS
In 1Q 2015, the Group commissioned the final sections of the new
flotation units allowing the production facilities to produce a
greater proportion of premium 65% Fe pellets while also increasing
overall production volumes. This was the final part of a four year
investment programme to modernise and increase the volume and
quality of the Group's output. As such capital expenditure reduced
significantly in 2015 to US$65 million (2014: US$235 million).
In the current iron ore price environment capital expenditure is
expected to be between US$25 million to US$75 million per annum.
The actual amount of expenditure will be determined by the iron ore
price and the Group's cash generation ability as well as Ferrexpo's
aim to balance capital expenditure with net debt reduction. If
appropriate, capital investment could include small scale, high
return projects that will incrementally increase production
capacity.
The Group has spent over US$2 billion since its IPO in 2007
developing additional iron ore mining capacity at FYM and
modernising FPM's mining and production facilities to increase
pelletising output to 12 million tonnes of nameplate capacity per
annum. The Group now has a well invested asset base which is
efficient and low cost.
CSR
Ferrexpo is an important contributor to the Ukrainian economy
and has been consistently so for many years despite commodity
cycles. Since its IPO on the London Stock Exchange in June 2007,
the Group has paid approximately US$507 million in income and other
taxes as well as US$105 million for royalty payments. According to
the State Statistics Service of Ukraine, it is the largest exporter
of pellets in the CIS and in 2015 the Group's revenue was 1.8% of
the country's total export revenue.
The Group is also a major customer of state run infrastructure.
For example in 2015, FPM was the number one customer of the
Ukrainian rail network.
Ferrexpo is the largest employer in Komsomolsk, Poltava
employing approximately one fifth of the population as employees or
contractors. In 2015, according to the State Statistics Service of
Ukraine, the average wage at Ferrexpo was 72% higher than the
national average and 15% higher than the average wage received in
the Ukrainian mining industry.
Due to Ukraine's weak public finances and fragile economy as
well as the ongoing unrest in the east of the country, the Group
continued its support for local and regional communities during the
period. Community support donations were US$26 million in 2015
compared to US$39 million in 2014. The majority of this expenditure
was paid to a Charity organisation called Blooming Land who then
distributed the Funds to three separate charities called "Ukraine -
Healthy Country (Diabetes A to Z)", "Healthy Sight (To see it all)"
and "Institute of social programmes (Happy old age)" to be used on
projects within Ukraine.
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.
As of 31 December 2015, the Group employed 9,469 staff and 1,547
contractors (31 December 2014: 9,658 staff and 1,927
contractors).
Average personnel costs at the Group's Ukrainian operations
accounted for 8% of the cash cost of production per tonne of
pellets (2014: 10%). In 2015, the Group experienced wage inflation
of approximately 23% in local currency.
Ferrexpo believes it is important to attract, retain and develop
skilled workers. In 2015, approximately 79% 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 2015's financial results and for
their continued dedication during a challenging time in the country
and in the iron ore industry.
UKRAINE
In 2015, Ukraine's economy continued to contract, although to a
lesser extent as the year progressed. Real GDP decreased by 17.2%,
14.6% and 7.2% in the first, second and third quarters of 2015
respectively. The NBU estimates that GDP will fall by 10% for the
year following a 7% decline in 2014. A significant proportion of
the country's productive capacity is located in the eastern part of
Ukraine which is experiencing ongoing conflict. This has affected
GDP growth as well as the banking sector which has continued to
face an increase in non-performing loans. The banking sector has
also been impacted by the Hryvnia devaluation against the US Dollar
as a high proportion of the financial system is Dollar based. Due
to these events, the banking system is experiencing severe
liquidity constraints and is regarded as significantly
undercapitalised by all rating agencies.
Access to external financing in this environment has been
limited for Ukrainian companies given the weak economy, the
challenging geopolitical environment as well as uncertainty as to
whether the coalition government has the political support to
implement policies that are necessary to restore macroeconomic
stability, promote sustainable growth, and strengthen governance
and transparency.
In March 2015, Ukraine received a new four year US$17.5 billion
rescue package from the IMF to help stabilise the country's weak
financial position. To date US$6.7 billion of this has been
disbursed. Further disbursements are contingent upon implementation
of comprehensive economic reforms. In particular, it requires a
further reform of Ukrainian tax legislation to bring a substantial
portion of the shadow economy into the formal economy, continued
reform of the energy sector through the introduction of uniform
market-based energy prices, and reform of social benefits and
pensions.
The country secured a debt restructuring in August 2015 for
US$15.3 billion of government debt, thereby avoiding a sovereign
default with private creditors, although Russia has filed a lawsuit
against it for defaulting on a US$3 billion bond.
Although this has been a difficult time for Ukraine, Ferrexpo
has avoided disruptions to its operations and has continued to
trade profitably. As an exporter it has benefited from the
devaluation of Hryvnia against the US dollar.
For further information see Risks Relating to Ukraine on page
24.
FINANCIAL MANAGEMENT
Net debt as of 31 December 2015, increased to US $868 million
(31 December 2014: US $678 million) principally reflecting the
US$175 million reclassification of cash held at Bank F&C, for
which an allowance was made. Net debt to EBITDA as of 31 December
2015 was 2.78x (31 December 2014: 1.4x).
In 2015, the Group repaid US$394 million of debt and as of 31
December 2015 gross debt had declined 31% to US$904 million
compared to 31 December 2014 (US$1.3 billion). US$154 million of
the debt repayment related to a prepayment to extend the Group's
US$500 million Eurobond from April 2016 to April 2018 and 2019,
reflecting the Group's active management during the year to match
its cashflow generation to its debt amortisation schedule.
As of 29 February 2016, the Group has a US$420 million pre
export financing ('PXF') facility, of which US$88 million is
remaining and due to be repaid in five monthly amounts completing
in July 2016, a US$350 million PXF facility, maturing in eight
equal quarterly instalments starting in November 2016, and the
above US$346 million Eurobond maturing in equal parts in April 2018
and April 2019. Cash on hand as of 29 February 2016 was US$36
million following the repayment of US$39 million of debt year to
date.
As a result of the forecast cash flows of the business, the
large reserve base and the competitive positioning of the business
on the global iron ore and pellet cost curves, the accounts have
been drawn up on a going concern basis, however attention is drawn
to the Going Concern section of the financial statements, note 2,
on page 36 and the risks facing the business on page 21.
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 THE GROUP'S STRATEGY
DEBT MATURITY PROFILE
Possible Impact
Due to the weak iron ore price, Ferrexpo has been reviewing its
debt facilities with a view to better matching the positive cash
flow generation of the business to its debt amortisation
profile.
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Ferrexpo remains in compliance with all relevant conditions in
its financing agreements. In a continuing weak iron ore price
environment there is a risk that the Group may not able to comply
with some or all financial covenants.
For further information see the Going Concern note on page 36 of
the financial statements.
Mitigation
-- In 2015 the Group successfully extended the maturity of its
2016 Eurobond to 2018 and 2019 (see Financial Management on page
20).
-- The Group intends to maintain an open and constructive
dialogue with its existing and potential new lenders, including, if
appropriate, regarding refinancing of both its shorter and longer
dated debt maturities in order to ensure that the Group has
additional headroom, following the repayment of its debt
facilities, to withstand a downturn in prices from current
levels.
-- In 2015, Ferrexpo was the lowest cost pellet producer in the world, according to CRU.
INTEREST RATE RISK
Possible Impact
A portion of the Group's debt facilities are linked to US Dollar
LIBOR rates. An increase in interest rates will increase the
Group's funding costs. An extension to the Group's maturity
profile, as referred to above, could also result in higher interest
rates.
Mitigation
-- The Group has a mix of debt facilities at fixed and floating
interest rates. As of 31 December 2015, the debt facilities subject
to fixed interest rates represented approximately 44% of the
Group's outstanding debt. The Group's average cost of debt for the
year ended 31 December 2015 was 5.97%.
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.
RISKS RELATED TO THE IRON ORE MARKET
GLOBAL MACROECONOMIC GROWTH
Possible Impact
The demand for steel, and hence iron ore, is driven by global
economic growth trends, which in the recent past has been largely
determined by Chinese economic growth, and for the past 7 years
China has produced more than 45% of the world's steel output. A
reduction in world or Chinese GDP growth could impact demand for
steel and iron ore. Conversely the supply of iron ore requires long
periods of large scale, capital intensive investment. A miss-match
between increasing supply of iron ore and lower demand has led to
further iron ore price weakness in 2015.
Mitigation
-- Ferrexpo's marketing strategy is to supply high quality
pellets to established steel mills who produce premium steel
products through the commodities cycle.
-- Ferrexpo does not sell to commodity steel producers whose demand is likely to fluctuate.
-- Pellets are a niche iron ore product that have high capital barriers to entry.
-- Due to the characteristics of pellets, demand growth is
expected to be strongest compared to other types of iron ore
products.
-- The Group has a logistics infrastructure which can service
regional and seaborne markets. This provides flexibility should a
particular region experience a decline in demand.
IRON ORE PRICES AND PELLET PREMIUMS
Possible Impact
Fluctuations in iron ore prices as well as in demand have
negatively impacted the financial results of the Group in 2015. The
Platts price for 62% Fe fines CFR China declined 40% from US$72 per
tonne as of 2 January 2015 to US$43 per tonne as of 31 December
2015. The average price was 42% lower at US$56 per tonne compared
to an average of US$97 per tonne in 2014. The average price for the
two months ended February 2016 was US$44 per tonne.
Ferrexpo receives a pellet premium in addition to the iron ore
fines price. Currently, a substantial portion of the Group's profit
is due to this premium the Group receives from its customers.
Long-term contract pellet premiums have ranged historically from
US$12.40 per tonne to US$61.70 per tonne, while spot market pellet
premiums in China have fallen to approximately US$10 per tonne in
the past.
The average long-term contract premium paid for pellets in the
key markets of Western Europe and North East Asia declined to
US$33.6 per tonne in 2015 from US$37.4 per tonne in 2014 while
Chinese spot pellet premiums declined on average from US$26.4 per
tonne in 2014 to US$22.7 per tonne in 2015. Chinese spot premiums
were, however, weaker in the second half of 2015 closing the year
at approximately US$11 per tonne. Overall, the pellet premium
currently represents a high proportion of the underlying iron ore
fines price.
Mitigation
-- Ferrexpo is the lowest cost pellet producer in the world according to CRU.
-- Over 90% of the Group's sales are based on pellet premiums agreed under long-term contracts.
-- Ferrexpo has a well invested modern asset base that does not
require high levels of sustaining capex in a low price
environment.
-- Ferrexpo's competitive cost base has enabled it to produce at
full capacity and remain profitable throughout past commodities
cycles. It has successfully operated for over 40 years.
-- 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.
C3 FREIGHT
Possible Impact
C3 freight, as published by the Baltic Exchange, represents a
transparent index reflecting the market freight rate for ocean
transportation of iron ore from the Brazilian port of Tubarao
(where Ferrexpo's largest pellet competitors are based) to Qingdao,
China. For sales to the Far East, delivery is made on CFR terms
with the resulting FOB netback determined by the actual cost of
freight. For sales to European and regional markets, the resulting
FOB/DAP netback is determined by deducting transparent freight
market indices (such as C3) and adding appropriate freight costs
for the relevant point of sale.
In times of low oil prices and lower cost time charter rates,
the benefit of Ferrexpo's shorter duration trade against C3 are
diminished. The high proportion of fixed costs for Ukraine loading
and Suez Canal transits mean that the Group's actual freight costs
may at times exceed that of C3.
Mitigation
-- Global freight rates are heavily influenced by oil prices and
market conditions in the shipping industry.
-- Ferrexpo has freight and distribution specialists to analyse
and price freight competitively on behalf of the Group.
RISKS RELATING TO UKRAINE
POLITICAL AND LEGAL
Possible Impact
The ongoing conflict in Eastern Ukraine and political
instability have negatively impacted the economy, notably the
banking sector, and relations with the Russian Federation.
The economic recession has also impacted the Government's
ability to fund usual social services and could lead to social
upheaval and political tension within local communities.
The above factors 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 impacted as a result of decreased appetite for
Ukrainian credit exposure. Any continuing or escalating conflict 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.
Other risks 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 judgment.
For further details see the Chairman's Statement on page 4 and
notes 15, 16 and 18 to the financial statements.
Mitigation
-- The Group holds liquidity offshore to ensure smooth
operations should the economic weakness of the country disrupt the
financial system.
-- At the time of writing, Ferrexpo's operations have remained
largely unaffected by the current situation within the country.
UKRAINIAN BANKING SECTOR
Possible Impact
From 2008 to October 2015, Moody's maintained a negative outlook
on Ukraine's banking sector due to the steep depreciation of the
Hryvnia against the US Dollar in 2008, 2014 and 2015 as well as a
substantial increase in non-performing loans materially worsening
the sector's asset quality, profitability and capital adequacy
indicators.
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In November 2015, following the improvement in the
creditworthiness of the Sovereign following its US$15.3 billion
debt restructuring completed in August 2015, Moody's upgraded the
outlook for seven Ukrainian banks to stable from negative.
Nevertheless Moody's expressed the view that the macro profile for
Ukrainian banks remains "Very Weak". This is due to the highly
fragile macroeconomic conditions in Ukraine and that the country's
adverse operating environment will continue to exert pressure on
the Ukrainian banking system.
Since 2014, the Ukrainian banking sector has been subject to a
series of stress tests by the National Bank of Ukraine ('NBU').
Throughout 2014 and 2015, the Board of the NBU declared 62 banks
insolvent and subsequently revoked their banking licenses and
placed the banks into liquidation. As such, the number of operating
banks in Ukraine has fallen to 118 as of 31 December 2015 compared
to 180 at the start of 2014.
On 17 September 2015, the NBU declared that Bank Finance and
Credit JSC ('Bank F&C'), ultimately controlled by Ferrexpo's
largest shareholder Kostyantin Zhevago, was insolvent. At the time
Ferrexpo held approximately US$175 million in funds at the bank.
For further details see the Chairman's Statement on page 4 and Note
16 and 18 to the financial statements.
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 arrangements, and
the stability, service and reliability of its providers, in the
context of the overall banking sector within the country.
-- The Group is developing alternative banking relationships and
currently uses Ukrsibbank, a local bank owned by BNP Paribas and
the European Bank for Reconstruction and Development, as its main
transactional bank.
-- Ferrexpo holds funds in Ukraine to fund immediate operational
expenditures and scheduled commitments such as debt servicing.
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 UAH15.8 per US Dollar
as of 31 December 2014 to UAH24.0 per US Dollar as of 31 December
2015. The average rate during the year was UAH21.9 per US Dollar.
Balances at the year-end are converted at the prevailing rate. The
devaluation reduced the Group's local costs, net of inflation, by
US$125 million during the year, however, it also reduced the net
assets of the Group as of 31 December 2015 by US$477 million
compared to 31 December 2014 (for further information see Statement
of Other Comprehensive Income).
Conversely, if the Hryvnia were to strengthen against the US
Dollar this could increase the Group's cost base and impact its
ability to remain a low cost operator.
For further detail of the impact of the Hryvnia on the economy
please see Ukrainian Banking Sector risk on page 24.
Mitigation
-- Historic weakness of the Hryvnia in times of low commodity
prices has provided a natural cost hedge during downturns in the
commodity cycle.
-- All of the Group's revenue is received in US Dollars while
over 50% of the Group's costs to deliver a tonne of pellets to
border 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 over 50% 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 2015,
PPI increased by 36% compared to 2014. The two areas of greatest
cost inflation for the Group were wages (+23% vs. 2014) and
electricity tariffs (+41% vs. 2014). All local costs, however, in
2015 were lower in US Dollar terms but this situation could reverse
over time due to inflationary, or even hyperinflationary,
pressures.
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$6.8
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 2016.
-- It is usual for cost inflation to correspond to rising prices
in a commodity cycle. Iron ore is currently in a down cycle as
prices are trading at levels last seen in 2003. The current outlook
for iron ore prices remains subdued.
-- Month-on-month PPI trends in 2015 were more benign e.g. PPI
in December 2015 compared to November 2015 was just 0.3%.
UKRAINIAN VAT RECEIVABLE
Possible Impact
As nearly all of the Group's output is exported, Ferrexpo does
not receive 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.
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 Hryvnia.
As of 31 January 2016, Ferrexpo had received all outstanding VAT
repayments for 2015 in full from the government. Full details of
the movement on VAT is included in Note 14 to the financial
statements.
Mitigation
-- The Group maintains an open dialogue with the government and
operates to best international standards, ensuring the validity of
the VAT claims.
-- Where possible, Ferrexpo plans working capital requirements
to help ensure sufficient liquidity headroom.
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 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, and or increasing
costs, changes in tax legislation or financial difficulties
experienced by the country, may lead to the Group not recovering or
being able to offset these amounts against future profits.
As Ukrainian taxes are paid in local currency the balance in US
Dollar terms is exposed to the devaluation of the Hryvnia.
As of 31 December 2015, Ferrexpo's prepaid corporate profit tax
balance was US$54million compared to US$73 million as of 31
December 2014. The reduction in the balance was driven by the
devaluation of the Hryvnia against the US Dollar during the
year.
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.
-- As of 29 February 2016, Ferrexpo had received all outstanding
VAT repayments for 2015 from the government. As of December 2015,
the Group is no longer required to prepay corporate profit tax
('CPT') in return for VAT refunds. It is estimated that all
corporates in Ukraine have an outstanding prepaid CPT balance of at
least UAH15 billion (or approximately US$600 million). The
government is considering resolving the issue of prepaid CPT
through the issue of local currency bonds.
COUNTERPARTY RISK
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 2014, the Group placed an order for 300 rail cars. Due to the
ongoing conflict in eastern Ukraine, where the rail cars are
manufactured, only 52 rail cars were received by the Group during
the financial years 2014 and 2015. The full amount of the
prepayment for the rail cars was provided for in the 2014 financial
year. As the situation did not improve in 2015 the full amount of
US$3.6 million (at 31 December 2015 exchange rates) was fully
written off. For further information see Related Party Disclosure
note 19.
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.
For further details see note 19 of the financial statements.
Mitigation
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-- 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
MINING AND PROCESSING 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 Chief Operating Officer, the Executive Committee and
the Board.
-- Through its capital investment programme Ferrexpo has
modernised 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.
-- Active management of operational risk register to ensure predictable volumes and quality.
ENERGY COSTS
Possible Impact
Energy costs account for a large portion of production costs
(approximately 45% in 2015) and are greater for pellets than for
other forms of iron. An increase in oil prices and other energy
related costs may affect Ferrexpo's production costs
disproportionately. Oil prices also heavily influence international
freight rates which is likely to impact the net price the Group
receives for its pellets (for further information see risk:
Logistics and C3 Freight Rates).
Mitigation
The Group continually looks to reduce its energy consumption
through the Business Improvement Programme. For example, in 2015
Ferrexpo has been investigating methods to turn waste product into
power.
Ukraine is the largest producer of sunflower seeds and in
September 2015, Ferrexpo began using sunflower husks as a natural
gas replacement for one of the four pelletising lines. It sourced
the husks from a local company in the Poltava region and saved over
3 million cubic metres of natural gas providing a cost saving of
US$200,000. In December, line number 2 of the pelletiser began to
use husks as well. The Group intends to replace up to 30% of its
total natural gas consumption in the pelletiser with sunflower
husks.
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 a small loss of 144 thousand tonnes of pellet
production. To date, these disruptions have not continued in 2015
or in 2016.
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$6.8 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 (see Political and Legal risk on page 24).
-- Ferrexpo is diversifying its natural gas supplier base.
-- Recent reforms to the Ukrainian gas sector have increased
competition and improved pricing transparency.
-- Energy efficiency improvements and lower domestic consumption
of gas has reduced Ukraine's reliance on gas imports.
-- 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.
Mitigation
-- The Group continues to maintain, and where appropriate, and
subject to funding availability, invest, its logistics capabilities
to ensure available capacity to better service its customers, lower
costs and reduce reliance on third-party providers. Beside
considerable investment in the rail car fleet over recent years,
Ferrexpo owns 135 barges operating on the Danube/Rhine River
corridor. It also owns a 48.6% interest in the port of TIS Ruda
which guarantees the Group independent access to the seaborne
markets avoiding reliance on the state port.
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
9 March 2016
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Consolidated Income Statement
Before Before
special Special Year ended special Special Year ended
US$'000 Notes items items 31.12.15 items items 31.12.14
Revenue 4 961,003 - 961,003 1,388,285 - 1,388,285
Cost of sales 3/5 (446,756) - (446,756) (647,960) - (647,960)
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Gross profit 514,247 - 514,247 740,325 - 740,325
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Selling and
distribution
expenses 6 (226,222) - (226,222) (311,514) - (311,514)
General and
administrative
expenses 7 (37,103) - (37,103) (48,642) - (48,642)
Other income 6,852 - 6,852 9,094 - 9,094
Other expenses 8 (32,726) - (32,726) (57,014) - (57,014)
Operating foreign
exchange gains 9 26,025 - 26,025 76,372 - 76,372
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Operating profit
from continuing
operations before
adjusted items 251,073 - 251,073 408,621 - 408,621
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Allowance for
restricted cash
and deposits 16 - (174,579) (174,579) - - -
Under-recovery and
write-down of VAT
receivable 14 - - - (6,790) - (6,790)
Write-offs and
impairment losses 10 - (5,555) (5,555) - (83,534) (83,534)
Gain on disposal of
available-for-sale
investment - 41,385 41,385 - - -
Share of profit
from associates 4,620 - 4,620 4,878 - 4,878
Losses on disposal
of property, plant
and equipment (4,541) - (4,541) (4,825) - (4,825)
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Profit/(loss) before
tax and finance
from continuing
operations 251,152 (138,749) 112,403 401,884 (83,534) 318,350
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Finance income 11 2,494 - 2,494 19,250 - 19,250
Finance expense 11 (71,797) - (71,797) (68,472) - (68,472)
Non-operating
foreign exchange
(losses) 9 (17,750) - (17,750) (14,846) - (14,846)
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Profit/(loss)
before tax 164,099 (138,749) 25,350 337,816 (83,534) 254,282
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Income tax
(expense)/credit 12 (22,312) 28,420 6,108 (70,442) - (70,442)
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Profit/(loss) for
the year from
continuing
operations 141,787 (110,329) 31,458 267,374 (83,534) 183,840
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Profit/(loss)
attributable to:
Equity shareholders
of Ferrexpo plc 140,030 (106,993) 33,037 261,850 (83,534) 178,316
Non-controlling
interests 1,757 (3,336) (1,579) 5,524 - 5,524
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Profit/(loss) for
the year from
continuing
operations 141,787 (110,329) 31,458 267,374 (83,534) 183,840
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Earnings/(loss) per
share:
Basic (US cents) 13 23.92 (18.27) 5.65 44.73 (14.27) 30.46
Diluted (US cents) 13 23.86 (18.23) 5.63 44.63 (14.24) 30.39
---------------------- ------ ------------ ------------- ------------- ------------ ------------- -------------
Consolidated Statement of Comprehensive Income
US$ 000 Notes Year ended 31.12.15 Year ended 31.12.14
Profit for the year 31,458 183,840
Items that may subsequently be reclassified to profit or loss:
Exchange differences on translating foreign operations (472,492) (1,205,667)
Current income tax effect 12 28,811 80,394
Deferred income tax effect 12,167 -
Net gains on available-for-sale investments 41,767 -
Income tax effect - -
------------------------------------------------------------------ ------ -------------------- --------------------
Net other comprehensive loss before reclassification of items to
profit and loss (389,747) (1,125,273)
------------------------------------------------------------------ ------ -------------------- --------------------
Reclassification to profit or loss relating to
available-for-sale investments sold or impaired (41,767) (712)
------------------------------------------------------------------ ------ -------------------- --------------------
Net other comprehensive loss to be reclassified to profit or
loss in subsequent periods (431,514) (1,125,985)
------------------------------------------------------------------ ------ -------------------- --------------------
Items that will not be reclassified subsequently to profit or
loss:
Remeasurement gains on defined benefit pension liability 3,878 1,649
Income tax effect 12 (722) (195)
------------------------------------------------------------------ ------ -------------------- --------------------
Net other comprehensive income not being reclassified to profit
or loss in subsequent periods 3,156 1,454
------------------------------------------------------------------ ------ -------------------- --------------------
Other comprehensive loss for the year, net of tax (428,358) (1,124,531)
------------------------------------------------------------------ ------ -------------------- --------------------
Total comprehensive loss for the year, net of tax (396,900) (940,691)
------------------------------------------------------------------ ------ -------------------- --------------------
Total comprehensive (loss) attributable to:
Equity shareholders of Ferrexpo plc (387,958) (926,422)
Non-controlling interests (8,942) (14,269)
------------------------------------------------------------------ ------ -------------------- --------------------
(396,900) (940,691)
------------------------------------------------------------------ ------ -------------------- --------------------
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Consolidated Statement of Financial Position
As at As at
US$'000 Notes 31.12.15 31.12.14
Assets
Property, plant and equipment 654,392 926,433
Goodwill and other intangible assets 40,024 60,468
Investments in associates 5,801 8,569
Available-for-sale financial assets 9 46
Inventories 98,802 81,987
Other non-current assets 4,652 18,211
Income taxes recoverable and prepaid 12 54,482 73,782
Other taxes recoverable and prepaid 14 - 1,519
Deferred tax assets 71,096 32,358
-------------------------------------------------------------- ------ ------------- ------------
Total non-current assets 929,258 1,203,373
-------------------------------------------------------------- ------ ------------- ------------
Inventories 96,021 124,722
Trade and other receivables 83,379 87,226
Prepayments and other current assets 18,952 21,057
Income taxes recoverable and prepaid 12 2,829 -
Other taxes recoverable and prepaid 14 50,482 71,982
Cash and cash equivalents 15 35,330 626,509
Restricted cash and deposits 16 9,308 -
-------------------------------------------------------------- ------ ------------- ------------
296,301 931,496
-------------------------------------------------------------- ------ ------------- ------------
Assets classified as held for sale 18 26
-------------------------------------------------------------- ------ ------------- ------------
Total current assets 296,319 931,522
-------------------------------------------------------------- ------ ------------- ------------
Total assets 1,225,577 2,134,895
-------------------------------------------------------------- ------ ------------- ------------
Equity and liabilities
Issued capital 121,628 121,628
Share premium 185,112 185,112
Other reserves (1,876,624) (1,452,988)
Retained earnings 1,814,598 1,855,690
-------------------------------------------------------------- ------ ------------- ------------
Equity attributable to equity shareholders of Ferrexpo plc 244,714 709,442
-------------------------------------------------------------- ------ ------------- ------------
Non-controlling interests (783) 8,159
-------------------------------------------------------------- ------ ------------- ------------
Total equity 243,931 717,601
-------------------------------------------------------------- ------ ------------- ------------
Interest-bearing loans and borrowings 3/17 700,351 1,056,253
Defined benefit pension liability 17,034 28,557
Provision for site restoration 975 2,345
Deferred tax liabilities 382 841
-------------------------------------------------------------- ------ ------------- ------------
Total non-current liabilities 718,742 1,087,996
-------------------------------------------------------------- ------ ------------- ------------
Interest-bearing loans and borrowings 3/17 203,299 248,374
Trade and other payables 27,566 32,351
Accrued liabilities and deferred income 16,188 34,191
Income taxes payable 12 8,161 5,898
Other taxes payable 7,690 8,484
-------------------------------------------------------------- ------ ------------- ------------
Total current liabilities 262,904 329,298
-------------------------------------------------------------- ------ ------------- ------------
Total liabilities 981,646 1,417,294
-------------------------------------------------------------- ------ ------------- ------------
Total equity and liabilities 1,225,577 2,134,895
-------------------------------------------------------------- ------ ------------- ------------
The financial statements were approved by the Board of Directors
on 9 March 2016.
Kostyantin Zhevago Christopher Mawe
Chief Executive Officer Chief Financial Officer
Consolidated Statement of Cash Flows
Year ended
US$'000 Notes 31.12.15 Year ended 31.12.14
Profit before tax 25,350 254,282
Adjustments for:
Depreciation of property, plant and equipment and amortisation of
intangible assets 56,596 82,269
Interest expense 11 68,917 64,166
Under-recovery and write-down of VAT receivable 14 - 6,790
Interest income 11 (2,494) (19,250)
Share of profit from associates (4,620) (4,878)
Movement in allowance for doubtful receivables 114 8,011
Allowance for restricted cash 16 174,579 -
Loss on disposal of property, plant and equipment 4,541 4,825
Gain on disposal of available-for-sale investment (41,385) -
Write-offs and impairment losses 10 5,555 83,534
Site restoration provision (634) 1,180
Employee benefits 3,543 6,531
Share-based payments 515 530
Operating foreign exchange gains 9 (26,025) (76,372)
Non-operating foreign exchange gains 9 17,750 14,846
--------------------------------------------------------------------------- ------ ----------- --------------------
Operating cash flow before working capital changes 282,302 426,464
--------------------------------------------------------------------------- ------ ----------- --------------------
Changes in working capital:
Decrease in trade and other receivables 2,341 5,395
Increase in inventories (63,965) (96,554)
Decrease in trade and other accounts payable (14,787) (11,083)
(Increase)/decrease in VAT recoverable and other taxes prepaid (1) 14 (113) 86,950
--------------------------------------------------------------------------- ------ ----------- --------------------
Cash generated from operating activities 205,778 411,172
--------------------------------------------------------------------------- ------ ----------- --------------------
Interest paid (65,080) (61,307)
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Income tax paid 12 (11,054) (58,077)
Post-employment benefits paid (1,778) (3,340)
--------------------------------------------------------------------------- ------ ----------- --------------------
Net cash flows from operating activities 127,866 288,448
--------------------------------------------------------------------------- ------ ----------- --------------------
Cash flows from investing activities
Purchase of property, plant and equipment (64,739) (232,809)
Proceeds from sale of property, plant and equipment and intangible
assets 242 5,322
Purchases of intangible assets (645) (1,711)
Acquisition of subsidiary/purchase of available-for-sale investment - (17)
Proceeds from sale of available-for-sale investment 41,767 -
Reclassification to restricted cash and deposits 16 (184,523) -
Interest received 2,056 2,376
Dividends from associates 1,716 2,755
--------------------------------------------------------------------------- ------ ----------- --------------------
Net cash flows used in investing activities (204,126) (224,084)
--------------------------------------------------------------------------- ------ ----------- --------------------
Cash flows from financing activities
Proceeds from borrowings and finance - 392,515
Repayment of borrowings and finance (393,876) (119,009)
Arrangement fees paid (15,308) (3,580)
Dividends paid to equity shareholders of Ferrexpo plc (77,548) (76,904)
Net cash flows from financing activities (486,732) 193,022
--------------------------------------------------------------------------- ------ ----------- --------------------
Net (decrease)/increase in cash and cash equivalents (562,992) 257,386
Cash and cash equivalents at the beginning of the year 626,509 390,491
Currency translation differences (28,187) (21,368)
--------------------------------------------------------------------------- ------ ----------- --------------------
Cash and cash equivalents at the end of the year 15 35,330 626,509
--------------------------------------------------------------------------- ------ ----------- --------------------
(1) The movement in the prior 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 Total
of Treasury benefit unrealised capital
Issued Share interest share trust gains Translation Retained and Non-controlling Total
US$000 capital premium reserve reserve reserve reserve reserve earnings reserves interests equity
At 1 January
2014 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
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ----------- --------------- -----------
Profit for the
period - - - - - - - 33,037 33,037 (1,579) 31,458
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ----------- --------------- -----------
Other
comprehensive
(loss)/income - - - - - - (424,151) 3,156 (420,995) (7,363) (428,358)
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ----------- --------------- -----------
Total
comprehensive
(loss)/income
for the
period - - - - - - (424,151) 36,193 (387,958) (8,942) (396,900)
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ----------- --------------- -----------
Equity
dividends
paid
to
shareholders
of Ferrexpo
plc - - - - - - - (77,285) (77,285) - (77,285)
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ----------- --------------- -----------
Share-based
payments - - - - 515 - - - 515 - 515
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ----------- --------------- -----------
At 31 December
2015 121,628 185,112 31,780 (77,260) (5,497) - (1,825,647) 1,814,598 244,714 (783) 243,931
-------------- ------- ------- -------- -------- -------- ---------- ----------- --------- ----------- --------------- -----------
Notes to the Consolidated Financial Statements
Note 1: Corporate information
The financial information for the year ended 31 December 2015
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 2014 have been delivered to the Registrar of
Companies and those for 2015 will be delivered following the
Company's annual general meeting convened for Thursday, 19 May
2016.
The auditor's report was unqualified, but included an emphasis
of matter paragraph highlighting material uncertainties in respect
of the Group's ability to continue as a going concern.
Ferrexpo plc will publish on or around 31 March 2016 its Annual
Report and Accounts for the year ended 31 December 2015 on its
corporate website www.ferrexpo.com.
Organisation and operation
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Ferrexpo plc (the "Company") is incorporated in the United
Kingdom, which is considered to be the country of domicile, with
its registered office at 23 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, Dubai, Japan, China, Singapore
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% (2014: 50.3%) of
Ferrexpo plc's issued share capital.
At 31 December 2015, the Group also holds through OJSC Ferrexpo
Poltava Mining an interest of 48.6% (2014: 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
Wednesday, 9 March 2016. 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 2015, the Ukrainian Hryvnia
has devalued by 52% (2014: 97%) compared to the US Dollar; from
15.769 as at 31 December 2014 to 24.001 as at 31 December 2015. As
a result of this devaluation, the total equity decreased by
US$472,492 thousand as of 31 December 2015 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 21 to
29. The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the Performance
Review on pages 9 to 11.
Going Concern Basis
Over the next year from the approval of the accounts, debt
facilities in the amount of US$203,181 thousand fall due for
repayment. At certain iron ore pricing levels, without associated
cost relief, the Group's operating cash flow generation although
positive might not be sufficient to meet these debt amortisations
or be sufficient to remain within financial covenants triggering
cross default across part or all of its debt facilities.
The Group expects to be able to repay its facilities as they
fall due based on current forecasts and remain within its financial
covenants and also expects, that if necessary, it would be able to
agree amendments to relevant facilities. As a result the accounts
have been drawn up on a going concern basis. However, the impact of
the volatility in the future level of the iron ore price and
operating cost inputs are material uncertainties that may cast
significant doubt upon the Group's ability to meet its debt
amortisation obligations and to continue as a going concern.
Under these circumstances, and absent appropriate financing, the
Group may be unable to continue to realise assets and discharge
liabilities in the normal course of business and it will be
necessary to restate amounts in the balance sheet to reflect these
circumstances which will materially change the amounts and
classification of figures contained in the financial
statements.
Changes in accounting policies
The accounting policies and methods of computation adopted in
the preparation of the consolidated financial statements are
consistent with those followed in the preparation of the Group's
annual financial statements for the year ended 31 December 2014
except for the adoption of new amendments and improvements to IFRSs
effective as of 1 January 2015. These new standards and
interpretations had no effect on reported results, financial
position or disclosure in the financial statements:
Annual Improvements to IFRSs - 2010-2012 Cycle
Annual Improvements to IFRSs - 2011-2013 Cycle
IFRIC 21 Levies
New standards and interpretations not yet adopted
The Group has elected not to early adopt any revised and amended
standards, which are not yet mandatory in the EU.
The standards below 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 2018. 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 16 Leases
The new standard was issued in January 2016 replacing the
previous leases Standard, IAS 17 Leases, and related
Interpretations. IFRS 16 establishes the principles for the
recognition, measurement, presentation and disclosure of leases for
the customer ('lessee') and the supplier ('lessor'). IFRS 16
eliminates the classification of leases as either operating or
finance as is required by IAS 17 and, instead, introduces a single
lessee accounting model requiring a lessee to recognise assets and
liabilities for all leases unless the underlying asset has a low
value or the lease term is twelve months or less. This new standard
applies to annual reporting periods beginning on or after 1 January
2019 subject to EU endorsement. The Group will review its
arrangements in place in order to evaluate the potential impact of
the new standard.
The Group does not expect an impact on its consolidated
financial statements from all other standards, interpretations and
amendments issued at the reporting date, but not yet to be adopted
for these financial statements.
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 31.12.15 Year ended 31.12.14
Profit before tax and finance 112,403 318,350
Allowance for restricted cash 16 174,579 -
Under-recovery and write-down of VAT receivable 14 - 6,790
Write-offs and impairment losses 10 5,555 83,534
Gain on disposal of available-for-sale investment (41,385) -
Share-based payments 515 530
Losses on disposal of property, plant and equipment 4,541 4,825
Depreciation and amortisation 56,596 82,269
------------------------------------------------------- ------ ----------- --------------------
EBITDA 312,804 496,298
------------------------------------------------------- ------ ----------- --------------------
'C1' costs
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'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$'000 Year ended 31.12.15 Year ended 31.12.14
Cost of sales - pellet production 405,863 586,653
Depreciation and amortisation (42,750) (64,137)
Purchased concentrate and other items for resale (21,142) (27,110)
Inventory movements 20,163 10,127
Other (2,539) (15,546)
----------------------------------------------------- -------------------- --------------------
C1 cost 359,595 489,987
----------------------------------------------------- -------------------- --------------------
Own ore produced (tonnes) 11,258,446 10,670,445
----------------------------------------------------- -------------------- --------------------
C1 cash cost per tonne US$ 31.9 45.9
----------------------------------------------------- -------------------- --------------------
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 31.12.15 31.12.14
Cash and cash equivalents 15 35,330 626,509
Interest bearing loans and borrowings - current 17 (203,299) (248,374)
Interest bearing loans and borrowings - non-current 17 (700,351) (1,056,253)
------------------------------------------------------- ------ ---------- ------------
Net financial indebtedness (868,320) (678,118)
------------------------------------------------------- ------ ---------- ------------
The Group's net financial indebtedness was reduced by the
insolvency of the Group's transactional bank in Ukraine resulting
in a reduction of the balance of cash and cash equivalents
available in Ukraine (see Note 16).
The Group's cash and cash equivalents balance was further
reduced by debt repayments of US$393,876 thousand, of which
US$153,613 thousand were related to a bond exchange completed in
February and July 2015 and were prepaid in respect of the bonds
falling due in April 2016 (see note 17).
Disclosure of revenue and non-current assets
The Group does not generate significant revenues from external
customers attributable to the United Kingdom, the Company's country
of domicile. The information on the revenues from external
customers attributed to the individual foreign countries is given
in Note 4. The Group does not have any significant non-current
assets that are located in the country of domicile of the Company.
The vast majority of the non-current assets are located in
Ukraine.
Note 4: Revenue
Revenue for the year ended 31 December 2015 consisted of the
following:
US$ 000 Year ended 31.12.15 Year ended 31.12.14
Revenue from sales of iron ore pellets and concentrate:
Export 895,520 1,290,695
--------------------------------------------------------------- -------------------- --------------------
Total revenue from sale of iron ore pellets and concentrate 895,520 1,290,695
--------------------------------------------------------------- -------------------- --------------------
Revenue from logistics and bunker business 61,247 90,661
Revenue from other sales and services provided 4,236 6,929
Total revenue 961,003 1,388,285
--------------------------------------------------------------- -------------------- --------------------
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$'000 31.12.15 31.12.14
Traditional Market 431,429 594,045
----------------------- ----------- -----------
Austria 188,284 318,707
Slovakia 96,211 132,958
Others 146,934 142,380
----------------------- ----------- -----------
Growth market 312,736 493,964
----------------------- ----------- -----------
China 193,566 327,579
Japan 86,343 166,385
Others 32,827 -
---------------------- ----------- -----------
Natural Market 151,355 202,686
----------------------- ----------- -----------
Germany 102,985 103,494
Turkey 45,497 99,192
Others 2,873 -
Total exports 895,520 1,290,695
----------------------- ----------- -----------
During the year ended 31 December 2015 sales made to three
customers accounted for 41.7% of the revenues from export sales of
ore pellets (2014: 45.2%).
Sales to customers that individually represented more than 10%
of total sales in either current or prior year are as follows:
US$'000 Year ended 31.12.15 Year ended 31.12.14
Customer A 188,284 318,707
Customer B 96,211 132,958
Customer C 69,255 131,613
--------------- -------------------- --------------------
Note 5: Cost of sales
Cost of sales for the year ended 31 December 2015 consisted of
the following:
US$'000 Year ended 31.12.15 Year ended 31.12.14
Energy 186,312 262,936
Personnel 28,773 50,851
Materials 72,653 85,043
Repairs and maintenance 37,388 59,780
Depreciation and amortisation 42,750 64,137
Royalties and levies 19,653 22,801
Purchased concentrate and other items for resale 21,142 27,110
Inventory movements (20,163) (10,127)
Logistics and bunker business 40,893 61,307
Other 17,355 24,122
Total cost of sales 446,756 647,960
----------------------------------------------------- -------------------- --------------------
Thereof for pellet production 405,863 586,653
Thereof for logistics and bunker business 40,893 61,307
----------------------------------------------------- -------------------- --------------------
Note 6: Selling and distribution expenses
Selling and distribution expenses for the year ended 31 December
2015 consisted of the following:
US$'000 Year ended 31.12.15 Year ended 31.12.14
Pellet transportation 178,902 249,528
Personnel 4,472 4,833
Logistics business 18,793 26,596
Advertising 11,269 12,070
Depreciation 10,352 14,010
Other 2,434 4,477
Total selling and distribution expenses 226,222 311,514
-------------------------------------------- -------------------- --------------------
Note 7: General and administrative expenses
General and administrative expenses for the year ended 31
December 2015 consisted of the following:
US$'000 Year ended 31.12.15 Year ended 31.12.14
Personnel 22,123 28,406
Office, maintenance and security 4,788 6,780
Professional fees 5,697 6,990
Audit and non-audit fees 1,587 2,011
Depreciation and amortisation 1,540 2,084
Other 1,368 2,371
Total general and administrative expenses 37,103 48,642
---------------------------------------------- -------------------- --------------------
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Auditor remuneration
Auditor remuneration paid in respect of the audit of the
financial statements of the Group and its subsidiary companies and
for the provision of other services not in connection with the
audit is disclosed below:
US$'000 Year ended 31.12.15 Year ended 31.12.14
Audit services
Ferrexpo plc Annual Report 1,106 1,106
Subsidiary entities 302 301
----------------------------------------------------- -------------------- --------------------
Total audit services 1,408 1,407
----------------------------------------------------- -------------------- --------------------
Audit-related assurance services 156 186
----------------------------------------------------- -------------------- --------------------
Total audit and audit-related assurance services 1,564 1,593
----------------------------------------------------- -------------------- --------------------
Non-audit services
Assurance related services - 47
Tax advisory 22 4
Tax compliance - 4
Other services 1 363
----------------------------------------------------- -------------------- --------------------
Total non-audit services 23 418
----------------------------------------------------- -------------------- --------------------
Total auditor remuneration 1,587 2,011
----------------------------------------------------- -------------------- --------------------
Non-audit services totalling US$681 thousand (2014:US$247
thousand) in relation to assurance services for liability
management activities of the Group have been capitalised as prepaid
arrangement fees and are not included in the table above.
Assurance related services in the comparative period include
fees paid for services provided in relation to raising of new debt
for the Group.
Note 8: Other expenses
Other expenses for the year ended 31 December 2015 consisted of
the following:
US$'000 Year ended 31.12.15 Year ended 31.12.14
Community support donations 25,820 39,077
Movements in allowance for doubtful receivables and prepayments made 114 8,011
Other personnel costs 1,261 1,601
Other 5,531 8,325
Total other expenses 32,726 57,014
------------------------------------------------------------------------ -------------------- --------------------
Information on the Group's community support donations is
provided in the CSR paragraph on page 19.
The vast majority of the movements in allowance for doubtful
receivables and prepayments in the comparative period ended 31
December 2014 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
19.
Note 9: Foreign exchange gains and losses
Foreign exchange gains and losses for the year ended 31 December
2015 consisted of the following:
US$'000 Year ended 31.12.15 Year ended 31.12.14
Operating foreign exchange gains
Revaluation of trade receivables 25,943 78,827
Revaluation of trade payables 118 (2,265)
Other (36) (190)
Total operating foreign exchange gains 26,025 76,372
------------------------------------------- -------------------- --------------------
Non-operating foreign exchange (losses)/gains
Revaluation of interest-bearing loans (39,858) (76,517)
Conversion of cash and cash equivalents 26,368 81,192
Other (4,260) (19,521)
Total non-operating foreign exchange losses (17,750) (14,846)
-------------------------------------------------- --------- ---------
Total foreign exchange gains 8,275 61,526
-------------------------------------------------- --------- ---------
During the financial year 2015, the Ukrainian Hryvnia has
devalued by approximately 52% (2014.97%) compared to the US dollar
from 15.769 as at 31 December 2014 to 24.001 as at the end of this
reporting period. This has had a significant impact on the carrying
values of property plant and equipment, income taxes recoverable
and prepaid (Note 12) and other taxes recoverable and prepaid (Note
14).
Note 10: Write-offs and impairment losses
Write-offs and impairment losses for the year ended 31 December
2015 consisted of the following:
US$'000 Notes Year ended 31.12.15 Year ended 31.12.14
Write-off of receivables and prepayments 4,598 -
Write-off of VAT receivables 14 - 1,351
Write-off of inventories (59) 48
Write-off of property, plant and equipment 992 47
Impairment of available-for-sale financial assets reclassified
from other comprehensive income - (294)
Impairment of available-for-sale financial assets 24 82,382
Total write-offs and impairment losses 5,555 83,534
----------------------------------------------------------------- ------- -------------------- --------------------
The write-off of receivables and prepayments is predominantly
related to the cancellation of contract for equipment ordered and
partially prepaid in line with the terms of the contract.
Note 11: Finance income and expense
Finance income and expense for the year ended 31 December 2015
consisted of the following:
US$'000 Year ended 31.12.15 Year ended 31.12.14
Finance income
Interest income 1,268 2,299
Other finance income 1,226 16,951
------------------------------------------------------------------------ -------------------- --------------------
Total finance income 2,494 19,250
------------------------------------------------------------------------ -------------------- --------------------
Finance expense
Interest expense on financial liabilities measured at amortised cost (61,505) (58,371)
Effect from capitalised borrowing costs 5,440 8,748
Interest on defined benefit plans (2,880) (4,306)
Bank charges (12,282) (13,490)
Other finance costs (570) (1,053)
------------------------------------------------------------------------ -------------------- --------------------
Total finance expense (71,797) (68,472)
------------------------------------------------------------------------ -------------------- --------------------
Net finance expense (69,303) (49,222)
------------------------------------------------------------------------ -------------------- --------------------
Other finance income in the comparative period 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 periods prior to the periods
disclosed above and recorded as a finance cost.
Note 12: Taxation
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The weighted average statutory corporate income tax rate 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 weighted average statutory corporate income tax rate before
special items was 12.4% for the financial year 2015 (2014: 13.6%),
which excludes the tax effect of the non-recurring charge related
to the restricted cash and deposits balances (see Note 16), which,
if included, would have resulted in a negative weighted averaged
statutory corporate income tax rate.
The income tax credit of US$6,108 thousand for the financial
year 2015 results from a deferred tax credit of US$28,420 thousand
relating to the recognition of a deferred tax asset in respect of
the allowance for the restricted cash and deposits for which the
Group expects that it will become tax deductible in a future
period.
A reconciliation between the income tax charged in the
accompanying financial information and income before taxes
multiplied by the weighted average statutory tax rate for the year
ended 31 December 2015 is as follows:
US$'000 Year ended 31.12.15 Year ended 31.12.14
Profit before tax 25,350 254,282
Notional tax charge computed at the weighted average statutory tax
rate of 12.4% (2014: 13.6%) 3,142 34,654
Effect of higher local tax rate on special items (11,987) -
Reassessment of prior year temporary differences (657) 1,489
Effect from changes in local tax rates - (3,278)
Effect from utilisation of non-recognised deferred tax assets (2,165) -
Expenses not deductible for tax purposes 7,383 37,436
Tax exempted income (5,168) (856)
Non-recognition of deferred taxes on current year losses 3,634 2,366
Tax related to prior years (189) (142)
Other (including translation differences) (101) (1,227)
------------------------------------------------------------------------ -------------------- --------------------
Total income tax (credit)/expense (6,108) 70,442
------------------------------------------------------------------------ -------------------- --------------------
Reconciliation of tax effect on special items:
Loss before tax on special items (138,749) (83,534)
Notional tax credit computed at the weighted average statutory tax
rate of 12.4% (2014: 13.6%) (17,197) (11,380)
Effect of higher local tax rate on special items (11,987) -
Effect from utilisation of non-recognised deferred tax assets (2,165) -
Expenses not deductible for tax purposes - 11,380
Effect from change in permanent differences 688 -
Non-recognition of deferred tax asset 2,241 -
------------------------------------------------------------------------ -------------------- --------------------
Tax credit on special items (28,420) -
------------------------------------------------------------------------ -------------------- --------------------
The net balance of income tax receivable changed as follows
during the financial year 2015:
US$'000 Year ended 31.12.15 Year ended 31.12.14
Opening balance 67,884 74,921
Income statement charge (33,991) (87,414)
Charge through other comprehensive income 28,811 80,394
Tax paid 11,054 58,077
Translation difference (24,608) (58,094)
Closing balance 49,150 67,884
---------------------------------------------- -------------------- --------------------
During the financial year 2015, the Ukrainian Hryvnia has
devalued by approximately 52% (2014: 97%) compared to the US
Dollar; from 15.769 as at 31 December 2014 to 24.001 as at the end
of this reporting period.
Split by:
As at As at
US$'000 31.12.15 31.12.14
Income tax receivable balance - current 2,829 -
Income tax receivable balance - non-current 54,482 73,782
Income tax payable balance (8,161) (5,898)
Net income tax receivable 49,150 67,884
------------------------------------------------ ---------- ----------
During the financial years 2014 and 2015, current VAT receivable
balances in Ukraine were mainly recovered in exchange for
prepayments of corporate profit tax. As at 31 December 2015, these
prepayments totalled US$54,482 thousand (2014: US$73,764 thousand)
and it is management's view that this balance will be either offset
with future profits or recovered through an issuance of bonds by
the Ministry of Finance as happened during the financial year 2014
for overdue VAT receivable balances (see Note 14). As at the date
of the preparation of these financial statements, there is an
uncertainty as to the timing of the recovery of this balance. In
light of this uncertainty, it was considered most appropriate to
classify the entire balance as non-current in the consolidated
statement of financial position.
Note 13: Earnings per share and dividends paid and proposed
Before Year ended Before Year ended
special items Special items 31.12.15 special items Special items 31.12.14
------------------- -------------- -------------- -------------- -------------- -------------- --------------
Earnings/(loss)
for the year
attributable to
equity
shareholders per
share
Basic (US cents) 23.92 (18.27) 5.65 44.73 (14.27) 30.46
Diluted (US
cents) 23.86 (18.23) 5.63 44.63 (14.24) 30.39
-------------------- -------------- -------------- -------------- -------------- -------------- --------------
The calculation of the basic and diluted earnings per share is
based on the following data:
US$'000 Year ended 31.12.15 Year ended 31.12.14
Weighted average number of shares
Basic number of Ordinary Shares outstanding 585,462 585,413
Effect of dilutive potential Ordinary Shares 1,422 1,258
Diluted number of Ordinary Shares outstanding 586,884 586,671
-------------------------------------------------- -------------------- --------------------
Dividends paid and proposed
No final dividend is proposed for the financial year 2015.
US$'000 Year ended 31.12.15
Dividends paid during the year
Interim dividend for 2015: 3.3 US cents per Ordinary Share 19,364
Final dividend for 2014: 3.3 US cents per Ordinary Share 19,517
Special dividend for 2014: 6.6 US cents per Ordinary Share 38,667
Total dividends paid 77,548
---------------------------------------------------------------- --------------------
US$'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
---------------------------------------------------------------- --------------------
Note 14: Other taxes recoverable
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As at 31 December 2015 other taxes recoverable comprised:
As at As at
US$'000 31.12.15 31.12.14
VAT receivable 50,395 71,859
Other taxes prepaid 87 123
------------------------------------------------------------ ---------- ----------
Total other taxes recoverable and prepaid - current 50,482 71,982
------------------------------------------------------------ ---------- ----------
VAT receivable - 1,519
------------------------------------------------------------ ---------- ----------
Total other taxes recoverable and prepaid - non-current - 1,519
------------------------------------------------------------ ---------- ----------
Total other taxes recoverable and prepaid 50,482 73,501
------------------------------------------------------------ ---------- ----------
As at 31 December 2015, US$49,339 thousand of the VAT receivable
before discount relates to the Group's Ukrainian business
operations (2014: US$72,837 thousand).
The Ukrainian Hryvnia devalued compared to the US Dollar from
15.769 as at 31 December 2014 to 24.001 as at 31 December 2015
reducing the gross balance of VAT outstanding expressed in US
Dollars by US$25,613 thousand (2014: US$126,414 thousand), which is
reflected in the translation reserve. During the second half of the
comparative period ended 31 December 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, were tradable and matured 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). No
such bonds were issued by the Ministry of Finance during the
financial year 2015.
Prior to the comparative period ended 31 December 2014, 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 2015, management expect that overdue
balances totalling US$30,613 thousand and disputed balances
totalling US$1,147 thousand currently heard in the court system to
be recovered within one year. The total VAT receivable balance
shown in the table above is net of an allowance of US$1,059
thousand (2014: US$1,710 thousand) to reflect the uncertainties in
terms of the recovery of VAT receivable balances related to one of
the Ukrainian subsidiaries with its mine still being developed.
The table below provides a reconciliation of the gross VAT
receivable balance in Ukraine:
US$'000 Notes Year ended 31.12.15 Year ended 31.12.14
Opening gross balance 72,837 318,213
Net VAT incurred 91,149 153,345
VAT received in cash (89,034) (141,126)
VAT recovered through sale of VAT bonds - (97,067)
Discount on sale of VAT bonds - (29,333)
VAT write-off through the income statement 10 - (1,351)
VAT write-off capitalised - (3,430)
Translation differences (including effect on VAT Bonds) (25,613) (126,414)
----------------------------------------------------------- ------ -------------------- --------------------
Closing balance, gross 49,339 72,837
----------------------------------------------------------- ------ -------------------- --------------------
Allowance (1,059) (1,710)
Closing balance, net 48,280 71,127
----------------------------------------------------------- ------ -------------------- --------------------
Further information on VAT is provided in the Update on Risks
section on pages 24 and 26.
Note 15: Cash and cash equivalents
As at 31 December 2015 cash and cash equivalents comprised:
As at As at
US$'000 31.12.15 31.12.14
Cash at bank and on hand 35,330 321,049
Short-term deposit - 305,460
------------------------------------ ---------- ----------
Total cash and cash equivalents 35,330 626,509
------------------------------------ ---------- ----------
The available cash and cash equivalents balance was reduced by
the insolvency of the Group's transactional bank in Ukraine (see
Note 16 below) and debt repayments of US$393,876 thousand, of which
US$153,613 thousand were related to a bond exchange completed in
February and July 2015 and were prepaid in respect of the bonds
falling due in April 2016 (see note 17).
The balance of cash and cash equivalents held in Ukraine amounts
to US$13,896 thousand as at 31 December 2015 (2014: US$161,834
thousand).
See also Note 19 for further information in respect of
transactional banking arrangements with Bank F&C.
Note 16: Restricted cash and deposits
Banking services of the Group were undertaken principally by
Bank Finance & Credit ('Bank F&C') in Ukraine which was
under common control of Kostyantin Zhevago (see note 1). On 17
September 2015, the National Bank of Ukraine ('NBU') announced that
it had adopted a decision to declare Bank F&C insolvent and the
bank was put into temporary administration by the Deposit Guarantee
Fund on the following day. Following an unsuccessful search for
investors, its banking license was revoked by the NBU on 17
December 2015 and the liquidation was initiated by the Deposit
Guarantee Fund on that day.
The level of recoverability of balances with Bank F&C cannot
be reasonably assessed at the current time due to the complexity,
uncertainties and the level of the ultimate recovery of the bank's
loan portfolio net of costs during liquidation. As a result, a full
allowance of US$168,575 thousand has been booked. This amount is
net of monies expected to be recovered in the amount of US$9,308
thousand, which were credited to the account of Ferrexpo Poltava
Mining ('FPM') post introduction of the temporary administration
and not yet returned to the Group. A positive ruling requiring the
return of the funds was received from the Kiev Commercial Court on
4 December 2015. Further information in respect of the ongoing
court proceedings is provided in Note 18.
As at 31 December 2015 restricted funds held at Bank F&C are
shown in the table below:
As at As at
US$'000 31.12.15 31.12.14
Cash balance with Bank F&C subject to liquidation process 168,575 -
Cash balance subject to ongoing court proceedings 9,308 -
Allowance on cash and deposits currently not available (1) (168,575) -
------------------------------------------------------------- ---------- ----------
Total restricted cash and deposits 9,308 -
------------------------------------------------------------- ---------- ----------
(1) Translated at the exchange rate prevailing at the reporting
date. Amounts in the income statement are translated at the
exchange rate prevailing at the date of the transaction resulting
in a charge of US$174,579 thousand. The date of the temporary
administration is considered to be the transaction date for the
translation of the charge in the income statement.
The cash balance subject to the bank's liquidation process
includes US$3,104 thousand, which was deposited for loans and
mortgages granted by Bank F&C to employees of the Group under
the Group's social loyalty programme. Further information in
respect of these deposits are provided in Note 19.
Note 17: Interest-bearing loans and borrowings
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This note provides information about the contractual terms of
Group's major finance facilities.
As at As at
US$'000 31.12.15 31.12.14
Current
Syndicated bank loans - secured 166,250 210,000
Other bank loans - secured 21,504 22,906
Other bank loans - unsecured 1,431 -
Obligations under finance leases 3,444 4,644
Interest accrued 10,670 10,824
------------------------------------------------------------ ---------- ----------
Total current interest-bearing loans and borrowings 203,299 248,374
------------------------------------------------------------ ---------- ----------
Non-current
Eurobond issued 333,536 496,392
Syndicated bank loans - secured 306,250 472,500
Other bank loans - secured 43,867 73,736
Other bank loans - unsecured 6,939 -
Obligations under finance leases 9,759 13,625
------------------------------------------------------------ ---------- ----------
Total non-current interest-bearing loans and borrowings 700,351 1,056,253
------------------------------------------------------------ ---------- ----------
Total interest-bearing loans and borrowings 903,650 1,304,627
------------------------------------------------------------ ---------- ----------
As at 31 December 2015, the Group has a syndicated US$420
million pre-export finance facility, of which US$297,500 thousand
was amortised resulting in a remaining available and drawn balance
of US$122,500 thousand for this facility, and a fully drawn
syndicated US$350 million pre-export finance facility. Both are
revolving facilities with amortisation over the final 24 months to
the final maturity dates of 31 July 2016 and 8 August 2018
respectively. The Group is currently discussing with the two
syndicates of lending banks of the aforementioned pre-export
finance facilities to align maturities with the changed cash flow
generation profile resulting from lower iron ore prices on the
global market.
As at 31 December 2015 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, which the Group exchanged and cancelled through the issuance
of new notes with at par value totalling US$346,385 thousand and
the repayment of US$153,615 thousand in cash. The exchange was
completed in two transactions on 24 February 2015 and 6 July 2015.
As a result of the two exchanges completed, the tenor of the notes
outstanding was extended from April 2016 to April 2019 with two
equal instalments of US$173,193 thousand falling due on 7 April
2018 and 2019, respectively. The new notes have a 10.375% interest
coupon payable semi-annually, compared to 7.875% for the initially
issued notes in April 2011.
Note 18: Commitments, contingencies and legal disputes
Commitments
As at As at
US$'000 31.12.15 31.12.14
Capital commitments on purchase of property, plant and equipment 32,591 108,763
--------------------------------------------------------------------- ---------- ----------
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.
Deposit Guarantee Fund and Liquidator of Bank F&C
The Group's principal subsidiary, OJSC Ferrexpo Poltava Mining
('FPM'), received a credit of US$9,984 thousand to its account with
Bank F&C following the introduction of the temporary
administration on 18 September 2015. FPM filed a claim against Bank
F&C under the management of the Administrator, as appointed by
the Deposit Guarantee Fund, on 30 October 2015 in the Kyiv City
Commercial Court for the release of this amount in accordance with
applicable legislation. The hearing on 4 December 2015 ruled in
favour of FPM. This court ruling was subsequently appealed and the
hearing is expected to take place in April 2016.
Based on legal advice and its knowledge of the matter at hand,
management of the Group is of the opinion that the Group's claim is
both well-founded as verified by the initial court ruling and
expects this amount ultimately to be recovered in full as required
under Ukrainian legislation. See also Note 15 and Note 16 for
further information.
Share dispute
The Group has been 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 of the lower
courts, which dismissed the claim for invalidation of the SPA. As
at the date of the publication of these financial statements for
the period ended 31 December 2015, the original SPA of 18 November
2002 is valid.
In October 2011, the claimants commenced further proceedings for
the restoration of their shareholding in FPM. On 20 October 2014,
the Kyiv City Commercial Court dismissed the claim in full. This
judgment was confirmed by the Kyiv Appeal Commercial Court and the
Higher Commercial Court of Ukraine on 28 January 2015 and 14 April
2015, respectively.
After having taken legal advice, the management of the Group
believes that risks related to further court proceedings commencing
before the Claimants are time barred in April 2016 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 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$1,147 thousand (2014: US$3,587
thousand) outstanding at 31 December 2015 and US$3,402 thousand
(2014: US$5,178) refunded by the tax authorities during the
financial year 2015 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 19: 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.
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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 31.12.15 Year ended 31.12.14
---------------------------------------------- -----------------------------------------------
Entities Entities
under common Associated Other related under common Associated Other related
US$ 000 control companies parties control companies parties
Sales of pellets 2,871 - - - - -
(a)
Other sales b 334 - 496 696 - 524
------------------- -------------- -------------- -------------- -------------- --------------- --------------
Total related
party
transactions
within revenue 3,205 - 496 696 - 524
------------------- -------------- -------------- -------------- -------------- --------------- --------------
Materials (c) 6,909 - 12 12,334 - 26
Purchased
concentrate and
other items for
resale (d) 277 - - 769 - -
Spare parts and
consumables (e) 1,298 - 2 2,423 - 2
Gas (f) 45,869 - - 39,259 - -
------------------- -------------- -------------- -------------- -------------- --------------- --------------
Total related
parties
transactions
within cost of
sales 54,353 - 14 54,785 - 28
------------------- -------------- -------------- -------------- -------------- --------------- --------------
Selling and
distribution
expenses (g) 10,896 22,248 5,023 11,201 24,130 5,984
General and
administration
expenses (h) 849 - 382 1,267 - -
Allowance for 174,579 - - - - -
restricted cash
and deposits (i)
------------------- -------------- -------------- -------------- -------------- --------------- --------------
Total related
parties
transactions
within expenses 240,677 22,248 5,419 67,253 24,130 6,012
------------------- -------------- -------------- -------------- -------------- --------------- --------------
Finance income (j) 2,039 - - 1,804 - -
Finance expenses
(j) (58) - - (99) - -
------------------- -------------- -------------- -------------- -------------- --------------- --------------
Net finance
income/(expenses) 1,981 - - 1,705 - -
------------------- -------------- -------------- -------------- -------------- --------------- --------------
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 Spot sales of pellets in the amount of US$2,871 thousand (2014: nil) to VA Intertrading AG.
b Sales of power, steam and water and other materials for US$78
thousand (2014: US$160 thousand) and Income from premises leased to
Kislorod PCC of US$147 thousand (2014: US$258 thousand).
c Purchases of compressed air and oxygen and metal scrap from
Kislorod PCC for US$3,918 thousand (2014: US$5,347 thousand);
c Purchases of cast iron balls from AutoKraZ Holding Co. for
US$1,063 thousand (2014: US$5,530 thousand); and
c Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas
for US$1,787 thousand (2014: US$1,209 thousand).
d Purchases of concentrate and other items for resale from
Vostok Ruda Ltd. amounting to US$277 thousand (2014: US$769
thousand).
e Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship
Repair Plant ("KSRSSZ") in the amount of US$338 thousand (2014:
US$821 thousand);
e Purchases of spare parts from Valsa GTV of US$273 thousand (2014: US$749 thousand); and
e Purchases of ferromanganese from Raw and Refined Commodities
AG for US$484 thousand (2014: US$512 thousand).
f Procurement of gas for US$45,869 thousand (2014: US$39,259
thousand) from OJSC Ukrzakordongeologia.
g Purchases of advertisement, marketing and general public
relations services from FC Vorskla of US$10,855 thousand (2014:
US$11,137 thousand).
h Insurance premiums of US$429 thousand (2014: US$574 thousand)
paid to ASK Omega for workmen's insurance and other insurances;
and
h Fees of US$273 thousand (2014: US$439 thousand) paid to Bank
Finance & Credit (Bank F&C) for bank services.
i The Group recorded an allowance for its cash and deposits
(including the deposits previously shown as non-current assets)
held at Bank F&C resulting in a charge of US$174,579 thousand
recognised in the income statement subsequent to the insolvency of
the bank declared by the National Bank of Ukraine. See also page 53
for further information
j Transactional banking services were 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 53.
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:
g Purchases of logistics services in the amount of US$22,248
thousand (2014: US$24,130 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:
b Sales of material and services to Slavutich Ruda Ltd. for
US$481 thousand (2014: US$508 thousand).
h Consulting fees paid to Nage Capital Management AG of US$382
thousand (2014: nil) controlled by former member of the board of
directors of Ferrexpo plc who resigned in August 2014. The Group
entered into this transaction within one year of his resignation
and therefore considered it to be transaction with a related
party.
g 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$5,023 thousand (2014:
US$5,984 thousand). Slavutich Rda Ltd. earned commission income of
US$434 thousand on these services (2014: US$1,350 thousand).
Purchases of property, plant and equipment
The table below details the transactions of a capital nature
which were undertaken between Group companies and entities under
common control, associated companies and other related parties
during the periods presented.
Year ended 31.12.15 Year ended 31.12.14
------------------------------------------------- -------------------------------------------------
Entities under Associated Other related Entities under Associated Other related
US$ 000 common control companies parties common control companies parties
Purchases with - - - 458 - -
independent
confirmation
Purchases with
shareholder
approval 842 - - 887 - -
Purchases in
the ordinary
course of
business 1,257 - 10 2,724 - 5
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total purchase
of property,
plant and
equipment (k) 2,099 - 10 4,069 - 5
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Entities under common control
Current year
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k During the financial year 2015, the Group entered in various
transactions of a capital nature with related parties totalling
US$1,267 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 a filter in the amount of US$958 thousand
from OJSC Berdichev Machine-Building Plant Progress for the quality
upgrade of the pelletising plant at Ferrexpo Poltava Mining and
design documentation services from OJSC DIOS totalling US$288
thousand.
In April 2015 the Group received an additional 27 rail cars
totalling US$1,431 thousand (US$842 thousand at the prevailing
exchange rate at delivery), which were ordered in February 2014
under the authority of a shareholder approval obtained on 24 May
2012. The remaining balance of the prepayment was fully written-off
as of 31 December 2015. See below and footnote (n) on page 52 for
further information.
Prior year
k During the financial year 2014, the Group entered into various
transactions of a capital nature with related parties totalling to
US$2,724 thousand, which were in the ordinary course of
business:
-- The Group procured goods and services totalling US$1,807
thousand from OJSC Berdichev Machine-Building Plant Progress for
various ongoing projects and design documentation services from
OJSC DIOS totalling US$597 thousand.
In August 2014, the Group acquired in two separate transactions
a railway line and an associated power line from LLC Vorskla Steel
totalling US$458 thousand. The transaction was not considered to be
in the ordinary course of business and an independent confirmation
was obtained and an announcement made in accordance with the UK
Listing Rules.
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 listing rules
applicable at that time and an additional 67 rail cars amounting to
US$3,551 thousand were ordered in the ordinary course of business.
A total prepayment of US$11,925 thousand (US$4,920 thousand at the
exchange rate as at 31 December 2014) was made in relation to these
rail cars. The rail cars were scheduled for delivery in the second
half of the financial year 2014. As a consequence of the conflict
in the eastern part of Ukraine only 25 rail cars totalling US$1,325
thousand (US$887 thousand at the prevailing exchange rate at
delivery) were delivered during the financial year 2014. See above
for information in respect of the developments during the financial
year 2015.
Balances with related parties
The outstanding balances, as a result of transactions with
related parties, for the periods presented are shown in the table
below:
As at 31.12.15 As at 31.12.14
---------------------------------------------- ----------------------------------------------
Entities Entities
under common Associated Other related under common Associated Other related
US$ 000 control companies parties control companies parties
Investments
available-for-sale
(l) 9 - - 46 - -
Other non-current - - - 4,726 - -
assets (m)
Prepayments for
property, plant
and equipment (n) 24 - - 604 - -
-------------------- -------------- -------------- -------------- -------------- -------------- --------------
Total non-current
assets 33 - - 5,376 - -
-------------------- -------------- -------------- -------------- -------------- -------------- --------------
Trade and other
receivables (o) 688 2,273 8 712 - 91
Prepayments and
other current
assets (p) 680 - - 164 - 595
Cash and cash - - - 161,473 - -
equivalents (q)
-------------------- -------------- -------------- -------------- -------------- -------------- --------------
Total current
assets 1,368 2,273 8 162,349 - 686
-------------------- -------------- -------------- -------------- -------------- -------------- --------------
Trade and other
payables (r) 902 2,625 91 1,429 151 490
-------------------- -------------- -------------- -------------- -------------- -------------- --------------
Current liabilities 902 2,625 91 1,429 151 490
-------------------- -------------- -------------- -------------- -------------- -------------- --------------
Entities under common control
A description of the balances over US$200 thousand in the
current or comparative period is given below.
l 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 on the previous page 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$9 thousand as at 31
December 2015 related to the investment in PJSC Stakhanov Railcar
Company (2014: US$46 thousand).
m As at the end of the comparative period ended December 2014,
other non-current assets related to a deposit of US$4,726 thousand
with Bank F&C, which was deposited for loans and mortgages
granted by the bank to employees of the Group under the Group's
social loyalty programme. As at 31 December 2015, an allowance for
the full amount of US$3,104 thousand (at the exchange rate at the
end of the period) with Bank F&C was recorded subsequent to the
insolvency of Bank F&C declared by the National Bank of Ukraine
on 17 September 2015. Further information is provided below and in
Note 15 and Note 16.
n As at 31 December 2015, a prepayment in the amount of US$3,558
thousand (at current exchange rate) made to PJSC Stakhanov Railcar
Company was written off. The prepayment was made in February 2014
for 300 rail cars ordered from PJSC Stakhanov Railcar Company
(2014: US$6,007 thousand). As at 31 December 2015, the Group
received 52 rail cars of the total 300 rail cars ordered in
February 2014 and it is unlikely that the remaining number of rail
cars can be delivered or the prepaid amount can be recovered. Due
to these uncertainties caused by the conflict in the Eastern
Ukraine, the Group already recorded an allowance for the full
outstanding amount as at 31 December 2014 (see section Purchases of
property, plant, equipment and investments above for further
details). Prepayments for property, plant and equipment of the
comparative period ended 31 December 2014 included US$527 thousand
prepaid to OJSC Berdichev Machine-Building Plant Progress for
various ongoing projects.
o As of 31 December 2015, trade and other receivables included
outstanding amounts due from Vorskla Steel Ltd. of US$187 thousand
(2014: US$244 thousand) in relation to other sales and US$404
thousand (2014: US$317 thousand) from Kislorod PCC for the sale of
power, steam and water.
p The balance as at 31 December 2015 includes prepayments of
US$577 thousand made to Vostok Ruda Ltd. for purchases of
concentrate (2014: nil).
q As at the end of the comparative period ended 31 December
2014, cash and cash equivalents with Bank F&C were US$161,473
thousand. On 17 September 2015, the National Bank of Ukraine
announced that it had adopted a decision to declare Bank F&C
insolvent and the bank was put into temporary administration by the
Deposit Guarantee Fund. The bank license of Bank F&C was
revoked by the NBU on 17 December 2015 and the liquidation was
initiated by the Deposit Guarantee Fund. As a consequence, the
Group recorded an allowance for its cash and deposits (including
the deposits previously shown as non-current assets) resulting in a
charge of US$174,579 thousand recognised in the income statement
for the balances currently not available to the Group. The Group is
currently involved in a court case in respect of an amount of
US$9,308 thousand to be released by the Liquidator of the bank.
Based on the positive decisions from the Kyiv City Commercial
Court, management expect this amount to be released by the
Liquidator later this year and no allowance was recorded for this
amount. Further information on Bank F&C is provided below and
in Note 16 and Note 18.
r Trade and other payables amounting to US$475 thousand for
compressed air and oxygen purchased from Kislorod PCC (2014: US$483
thousand) . The balance as at the end of the period ended 31
December 2014 included an amount of US$397 thousand payable to PJSC
Stakhanov Railcar Company, no amounts were due as at 31 December
2015.
Associated companies
o As at 31 December 2015, trade and other receivables included
US$2,273 thousand (2014: nil) for dividends receivable from TIS
Ruda LLC.
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