TIDMFXPO
RNS Number : 1500A
Ferrexpo PLC
22 March 2017
22 March 2017
Ferrexpo plc
("Ferrexpo", the "Group" or the "Company")
2016 Full Year Results: strong cash generation, strengthened
balance sheet and reinstatement of dividends
Ferrexpo plc today announces its financial results for the year
ended 31 December 2016.
Steve Lucas, Non-Executive Chairman, said:
"In 2016, Ferrexpo demonstrated the strength of its business
model and management team. In very challenging market conditions,
where the iron ore price traded at eight year lows, the Group
increased its net cash flows from operations by over 1.5 times to
US$332 million compared to 2015. This allowed it to significantly
reduce its financial leverage and strengthen its balance sheet. Net
debt to EBITDA for the last 12 months was 1.57x compared to 2.78x
as of 31 December 2015. Due to the Group's strong financial
performance together with a positive outlook for 2017, I am pleased
to announce a return to dividends.
The iron ore pellet industry continues to have high barriers to
entry given the capital intensity of new investment while demand
for high grade ore, including pellet, remains strong. Ferrexpo is
one of the largest iron ore pellet exporters in the world by volume
and benefits from a well-invested asset base, a competitive cost
position and a diversified high quality customer portfolio.
The average 62% Fe iron ore fines price in 1Q 2017 (as of 20
March 2017) was approximately US$86 per tonne compared to the
average of US$58 per tonne in 2016, while Ferrexpo's average pellet
premium for 2017 is expected to be in line with the PLATTS Atlantic
long-term contract pellet premium less adjustments for quality. The
pellet premium has steadily recovered from lows seen in 1Q 2016 and
now reflects tight market conditions. Costs remain subject to
commodity prices, the Hryvnia exchange rate and inflation levels in
Ukraine. Cash generation to date in 2017, has been strong and we
expect the Group's net debt to EBITDA to improve further during the
year. On the whole, these factors underpin a positive outlook for
2017."
Extract of 2016 Financial Performance:
US$ million (unless otherwise stated) Year ended Year ended Change
31.12.16 31.12.15
------------------------------------------------ ----------- ----------- -------
Total pellet production (kt) 11,200 11,662 -4%
------------------------------------------------ ----------- ----------- -------
Sales volumes(A) (kt) 11,697 11,330 3%
------------------------------------------------ ----------- ----------- -------
Average CFR 62% iron ore fines price(A)
(US$/t) 58.3 55.6 5%
------------------------------------------------ ----------- ----------- -------
Revenue 986 961 3%
------------------------------------------------ ----------- ----------- -------
C1 cash cost(A) (per tonne) 27.7 31.9 -13%
------------------------------------------------ ----------- ----------- -------
EBITDA(A) 375 313 20%
------------------------------------------------ ----------- ----------- -------
EBITDA margin 38.0% 32.5% 17%
------------------------------------------------ ----------- ----------- -------
Profit for the year from continuing operations
after special items 189 32 491%
------------------------------------------------ ----------- ----------- -------
Special items after tax (9) (110) -92%
------------------------------------------------ ----------- ----------- -------
Diluted EPS before special items (US cents) 33.51 23.86 40%
------------------------------------------------ ----------- ----------- -------
Dividend per share (US cents) 6.6 3.3 100%
------------------------------------------------ ----------- ----------- -------
Net cash flow from operating activities 332 128 159%
------------------------------------------------ ----------- ----------- -------
Capital investment(A) 48 65 -26%
------------------------------------------------ ----------- ----------- -------
Net debt(A) 589 868 -32%
------------------------------------------------ ----------- ----------- -------
Cash 145 35 314%
------------------------------------------------ ----------- ----------- -------
Net debt to EBITDA (A) 1.57x 2.78x -44%
------------------------------------------------ ----------- ----------- -------
Summary of 2016 Operational and Financial Results:
-- We regret to report two work related fatalities in 2016
(2015: nil). The Group continues to work towards zero harm in its
operations.
Financial
-- EBITDA up 20% to US$375M (2015: US$313M) on higher revenues and lower costs
-- Operating profit, excluding foreign exchange gains, up 36% to US$307M (2015 US$225M)
-- Profit before tax up US$206M to US$231M (2015: US$25M)
-- Net cash flows from operating activities up 159%, or US$204M, to US$332M (2015: US$128M)
-- Balance sheet significantly strengthened
-- Net debt reduced 32% to US$589M as of 31 December 2016 (31 December 2015: US$868M)
-- Net debt to EBITDA(A) 1.57x as of 31 December 2016 (as of 31 December 2015: 2.78x)
-- Cash balance increased by US$110M to US$145M as of 31
December 2016 (31 December 2015: US$35M)
-- Dividend reinstated - final ordinary dividend of 3.3 US cents
per share proposed (2015: nil) and special dividend of 3.3 US cents
per share (2015: nil) payable on the 11 April 2017
Operational
-- Record production of 65% Fe pellets(A) to 10.5 MT,
approximately 94% of total production volumes (2015 65% Fe pellet
production: 10.4 MT)
-- Record sales volumes(A) increasing 3% to 11.7 MT (2015: 11.3
MT) reflecting higher sales to Western Europe and North East
Asia
-- Average realised pellet premium below 2015 levels, however,
have now recovered strongly in 1Q 2017
-- C1 cash cost of production(A) reduced 13% to US$27.7 per
tonne, a ten year low (1H 2015: US$33.4 per tonne)
Growth Projects
-- Capital expenditure(A) limited to sustaining capex of US$48M
(2015: US$65M) reflecting low iron ore price environment and focus
on debt reduction
-- Development capex increasing in 2017 to expand concentrate output
-- Other modest growth projects under review
Alternative Performance Measures
Words with the symbol (A) are defined in the Alternative
Performance Measures section on page 51.
For further information contact:
Ferrexpo:
Ingrid McMahon +44 207 389 8304
Maitland:
James Isola +44 207 379 5151
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 (1 John Carpenter Street entrance). 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 Steve Lucas (Chairman),
Kostyantin Zhevago (CEO) and Chris Mawe (CFO).
Webcast link: http://edge.media-server.com/m/p/zf8fupq4
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 3(rd) largest exporter of
pellets to the global steel industry and the largest exporter of
pellets from the Former Soviet Union. In 2016, it produced 11.2
million tonnes of pellets reflecting a 2% increase in production of
the Group's highest quality pellets to a record 10.5 million
tonnes. 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
Steve Lucas, Non-executive Chairman
In 2016, Ferrexpo demonstrated the strength of its business
model and management team.
Introduction
In very challenging market conditions, where the iron ore price
traded at eight year lows, the Group was able to increase its net
cash flows from operations by over 1.5 times compared to 2015 to
US$332 million allowing it to significantly reduce its financial
leverage and strengthen its balance sheet.
Ferrexpo's strategy is founded on reliably producing and selling
a high quality iron ore product to the best steel mills in the
world while remaining competitively placed on the cost curve.
I joined the Ferrexpo Board in May 2016 and was appointed
Chairman on 28 November 2016. I am very positive about the future
of this Group as I have been most impressed with the quality and
depth of the executive team as well as the talent and enthusiasm of
all the Group's employees, most notably in Ukraine, together with
the high quality of the Group's assets. The Group has an enviable
track record of achieving its stated targets and delivering strong
operational performance over decades despite operating in a
challenging emerging market and a volatile commodity industry.
Testimony to this is the high quality of the customer base who rely
on Ferrexpo to supply a premium input into their production
process. These customers are significant economic contributors to
their respective countries of operations and produce a top quality
product with relatively inelastic demand which, in turn, provides
Ferrexpo with a high degree of reliability regarding its sales
volumes.
I would like to thank all of Ferrexpo's employees for
contributing to a successful 2016 through their dedication and hard
work. We can look back with pride at what we have achieved during
the year.
Health and Safety
Most regrettably there were two fatalities at the operations in
2016 (2015: nil). These deaths have been investigated in detail and
Ferrexpo's goal remains firmly focused on achieving zero fatalities
or injuries.
For further information on health and safety performance see
page 15.
Financial Results
2016 can be characterised as a year of two halves. The first
half followed a weak ending to 2015 and the average PLATTS 62% Fe
iron ore fines price was US$51.87 per tonne for the six months
ending 30 June 2016. This was the lowest first half average in ten
years (1H 2015: US$60.49 per tonne) while the second half of 2016
saw a recovery in the iron ore price with an average for the period
of US$64.64 per tonne (2H 2015: US$50.83 per tonne). Overall the
average iron ore price in 2016 was in line with 2015 at US$58.26
per tonne (2015: US$55.66 per tonne).
The pellet premium that the Group received, in addition to the
62% Fe iron ore fines price, improved throughout the year,
recovering from lows seen at the start of the year to finish the
year strongly. In China, the spot pellet premium published by
PLATTS fell to a low of US$11 per tonne in January 2016 before
recovering to US$23 per tonne by year end. While the PLATTS
Atlantic long-term contract pellet premium improved from US$26 per
tonne in January 2016 to US$35 per tonne in December 2016.
Record production of Ferrexpo's premium 65% Fe pellet, record
sales volumes of 11.7 million tonnes (2015: 11.3 million tonnes)
and a 13% reduction in the Group's C1 cash cost of production(A) to
US$27.7 per tonne (2015: US$31.9 per tonne) underpinned a strong
financial result for the Group.
Revenue increased 3% to US$986 million (2015: US$961 million)
while EBITDA(A) increased 20% to US$375 million (2015: US$313
million). Although 2016 was characterised in general by a weak iron
ore price environment, this was also reflected in the Group's lower
cost base due to a fall in the price of commodity inputs and a
depreciation of the Hryvnia against the US Dollar. Diluted earnings
per share was 31.91 US cents compared to 5.63 US cents in 2015.
Significantly, net cash flows from operating activities
increased by US$204 million, or 159%, to US$332 million (2015:
US$128 million). The Group repaid US$196 million of debt and
increased its cash balance by US$110 million to US$145 million
(2015: US$35 million). As a result, net debt decreased by US$279
million, or by 32%, to US$589 million as of 31 December 2016 (31
December 2015: US$868 million). Ferrexpo's net debt to EBITDA(A)
was 1.57 times as of 31 December 2016 compared to 2.78 times as of
31 December 2015.
Financial Management
Ferrexpo's balance sheet strengthened materially in 2016 as the
Group reduced its debt levels and increased its cash balance.
Ferrexpo routinely assess various funding options, including the
bank debt and Eurobond markets, against its expected cash flow
generation and debt repayment obligations as well as capital
investment priorities. The Board believes an average net debt to
EBITDA(A) target of around 1.0 times with a debt amortisation
profile repayable through own generated cash flows is appropriate.
This will provide a strong platform for the Group going forward
while continuing to make cash available for investment and
facilitating cash returns to shareholders.
With continued strong cash generation in 2017 to date, the
Group's net debt to EBITDA(A) is set to improve further from 2016
levels.
Returns to shareholders
The strength of the Company's performance in 2016, together with
the strong demand outlook for pellets in 2017, gives the Board
confidence to announce a return to paying dividends to
shareholders. A final ordinary dividend of 3.3 US cents per share
is being proposed which amounts to approximately US$19 million
(2015 final ordinary dividend: nil). The Board will also be paying
a special dividend of 3.3 US cents per share or approximately US$19
million (2015 special dividend: nil).
If the final dividend is approved by shareholders, the dividend
pay-out relating to the financial performance of 2016 will total
US$38 million (2015: US$20 million) in line with the full year
ordinary dividend of previous years prior to the suspension of the
dividend at the end of 2015.
The special dividend will be paid on 11 April 2017 to
shareholders on the register at the close of business on 31 March
2017. Subject to approval at the Group's AGM, payment of the final
ordinary dividend will be made on 31 May 2017 to shareholders on
the register at the close of business on 5 May 2017. The dividend
will be paid in UK Pounds Sterling with an election to receive US
Dollars.
Ferrexpo's dividend policy is to pay a base level of sustainable
dividends through the commodities cycle of approximately US$40
million per annum (or 6.6 US cents per year). The dividend will be
split equally between an interim dividend and a final dividend
payable normally in October and May following the Company's interim
results and Annual General Meeting.
Special dividends will be paid from cash flows in excess of the
Group's needs taking into account debt repayments and development
capital expenditure. If appropriate, the Group will target special
dividends of around US$40 million per financial year (or 6.6 US
cents per share) to be paid at an appropriate time in its reporting
cycle.
The Board's strategy is to maintain a balance between
sustainable and attractive shareholder returns, investment into
growth opportunities and balance sheet strength.
Capital investment
Ferrexpo is one of the lowest cost pellet producers in the
world, positioned in the bottom quartile of the global pellet cost
curve. Underpinning its cost position is over US$2 billion of
capital investment to modernise and expand the mining, production
and logistics operations since its IPO on the Main Market of the
London Stock Exchange in 2007.
Given the lower iron ore price environment in 2016 and the
Group's priority to reduce debt, capital investment focused on
maintenance capital during the year. Total capital expenditure
decreased to US$48 million (2015: US$65 million).
Ferrexpo has considerable flexibility to increase its pellet
production up to 20 million tonnes per year, and plans to increase
output incrementally towards that target. If projects meet strict
payback criteria, Ferrexpo would not expect to spend more than
US$150 million in any one year. Ferrexpo currently has one approved
project to increase concentrate output by approximately 1.5 million
tonnes at an additional cost of US$50 million, which will be
incurred in 2017 and 2018. This project was slowed down in 2016 and
has been accelerated again in 2017.
For further details see Performance Review - Capital Investment
on page 19.
Board Changes
In 2016, as part of the Board's refreshment programme, Michael
Abrahams, Mike Salamon, Wolfram Kuoni and Ihor Mitiukov retired as
Non-executive Directors. The Board is grateful to all of them for
their considerable contribution and commitment to the Company over
many years. In addition, David Frauman, who was appointed to the
Board on a short-term basis at the end of 2015, stepped down from
the Board.
I would like to record my particular gratitude to Michael
Abrahams, my predecessor, for all his years of dedicated service to
the Group. He leaves behind a strong company which is able to look
to the future with confidence.
During the year the Board was delighted to welcome Sir Malcolm
Field (as of March 2016) and Vitalii Lisovenko (as of November
2016) as Independent Directors. Sir Malcolm has extensive
experience, gained over many years in the private and public
sectors in Britain and abroad, while Vitalii has deep knowledge of
Ukraine, given his long experience of working in the Ukrainian
financial sector and public administration.
It is planned that the Senior Independent Director, Oliver
Baring, who has served nine years on the Board but who remains
independent in character and judgement, will retire and be replaced
during 2017.
I believe these changes have delivered a Board whose
Non-executive Directors have the appropriate skills, stature and
experience to oversee the Group and ensure strong corporate
governance.
Bank F&C Review
In September 2015, Bank F&C (a related party) was declared
insolvent by the National Bank of Ukraine. At the time, Ferrexpo
held the equivalent of US$175 million on deposit with Bank F&C,
which was provided for in 2015.
Sir Malcolm Field was appointed to the Board on 10 March 2016 to
chair a sub-committee responsible for reviewing matters relating to
Bank F&C ("the Sub-Committee").
As part of its work the Sub-Committee has considered the
corporate governance procedures within Ferrexpo. While the
Sub-Committee has noted some areas where there is scope for
improvement or refinement, and has put forward some corporate
governance recommendations to the Board for its consideration, the
Sub-Committee did not consider that there were significant
shortcomings in the corporate governance structures. Responsibility
for overseeing the implementation of these corporate governance
recommendations will now sit with myself and the Committee of
Independent Directors, a permanent sub-committee of the Board
chaired by the Senior Independent Director.
Ferrexpo is pursuing recovery of its funds held at Bank F&C
although this process could take many years and there is no
certainty that any funds will be recovered (for more information
see Note 17 of the Financial Statements). Oversight for this and
any other possible claims or other actions will also now sit with
the Committee of Independent Directors.
Social responsibility
For the year ended 2016, it is expected that Ferrexpo's pellet
exports will be approximately 1.9% of Ukraine's total export
revenue[1].
The Board believes it is important to ensure that Ferrexpo makes
a meaningful contribution to the society in which it operates,
assisting with the long- term development of Ukraine and creating a
stable operating environment for the Group. Ferrexpo undertakes a
broad array of social programmes in the towns and villages
surrounding the mines. Examples in 2016 included the upgrade of
school infrastructure and the modernisation of classrooms,
development and maintenance of sporting facilities, purchase of
state of the art equipment for hospitals, provision of medical care
for the elderly and the vulnerable and financial support for the
arts and other cultural events. These programmes underpin
Ferrexpo's licence to operate and ensure that the community is
supported in times when state funding is under strain.
Importantly, there have been no significant industrial actions
or labour disputes at Ferrexpo Poltava Mining ("FPM") since its
privatisation in 1995, or at Ferrexpo Yeristovo Mining ("FYM")
since its inception in 2008.
(1.) www.ukrstat.gov.ua
Outlook
The pellet industry has high barriers to entry given the capital
intensity of new investment while the demand for high grade ore,
including pellet, remains strong.
Ferrexpo is currently the third largest exporter of blast
furnace pellets in the world by volume, and benefits from a well
invested asset base, a competitive cost position and a diversified
high quality customer portfolio.
The average 62% Fe iron ore fines price in 1Q 2017 (as of 20
March 2017) has been approximately US$86 per tonne while Ferrexpo's
average pellet premium for the full year is expected to be in line
with the PLATTS Atlantic long-term contract pellet premium less
adjustments for quality. Costs remain subject to commodity prices,
the Hryvnia exchange rate and inflation levels in Ukraine.
Taken together, these factors deliver a positive outlook for
2017.
PERFORMANCE REVIEW
FINANCIAL RESULTS
Group revenue increased 2.6% in 2016 to US$986 million (2015:
US$961 million) principally reflecting higher sales volumes.
Revenue
Ferrexpo increased its sales volumes by 3% to 11.7 million
tonnes (2015: 11.3 million tonnes) while the Group's net realised
DAP/FOB price increased marginally compared to 2015 reflecting a
weak market in the first half of the year before prices recovered
(driven by improved demand for iron ore and lower pellet
availability). Turnover from international freight services
decreased to US$66 million during the year compared to US$75
million in 2015 reflecting lower freight rates of US$9.0 per tonne
compared to US$11.2 per tonne in 2015.
Costs
C1 Cost of Production(A)
The Group's C1 cost of production reduced by 13% to US$27.7 per
tonne compared to US$31.9 per tonne in 2015. Of this US$4.2 per
tonne cost reduction, approximately US$1.5 per tonne reflected the
weaker local currency compared to the US Dollar, US$1.6 per tonne
related to lower oil and gas prices, and US$1.1 per tonne was due
to cost reduction initiatives.
For further information see Production Costs on page 17.
Please see Note 3 on of the accounts for the definition of C1
cost and a reconciliation to cost of sales.
Selling and Distribution Costs
Selling and distribution costs decreased by 7% to US$210 million
(2015: US$226 million). Reduced freight costs were as a result of
the depreciation of the Hryvnia against the US Dollar together with
lower international freight rates.
Currency
Ferrexpo prepares its accounts in US Dollars. The functional
currency of the Ukrainian operations is the Hryvnia.
During 2016 the Hryvnia devalued from UAH24.00 per US Dollar as
of 1 January 2016 to UAH27.19 per US Dollar as of 31 December 2016.
Over half of the Group's total cost base, including inland
logistics costs, are denominated in Hryvnia.
Ukrainian Hryvnia vs. US Dollar
1 January 2016 31 December
2016 Average 2016 Average 2015
------------ -------------- ----------- ------------ ------------
UAH per US$ 24.00 27.19 25.55 21.86
------------ -------------- ----------- ------------ ------------
Source: National Bank of Ukraine.
Balances at 31 December 2016 are converted at the prevailing
rate. The devaluation of the currency since 31 December 2015 has
resulted in a US$125 million reduction in the net assets of the
Group and has been reflected in the translation reserve.
EBITDA(A)
EBITDA(A) for the year ended 31 December 2016 was US$375 million
compared to US$313 million in 2015, an increase of 20% reflecting
increased turnover and lower costs.
Operating foreign exchange gains of US$14 million benefitted
EBITDA(A) , reflecting the 13% devaluation of the Hryvnia against
the US Dollar during the year. In 2015 operating foreign exchange
gains were US$26 million, reflecting the 52% devaluation of the
Hryvnia against the US Dollar.
Interest and Debt
As of 31 December 2016 gross debt was US$734 million, a US$170
million reduction compared to gross debt at 31 December 2015 of
US$904 million. This reflected repayment of US$196 million of debt
over the period and a US$19 million increase in trade finance
facilities.
Finance expense was US$67 million during the period (2015: US$72
million). The average cost of debt for the period ended 31 December
2016 was 6.7% (average 2015: 5.5%). The increased average rate
reflected amortisation of the Group's pre-export banking facilities
which have a lower cost compared to the Group's outstanding US$346
million Eurobond.
Tax
In 2016, the Group's tax charge before special items was US$44
million, resulting in an effective tax rate of 18.0% compared to
13.7% in 2015, or US$22 million.
The Group has recorded a tax expense of US$42 million for the
year after special items compared to a US$6 million tax credit in
2015.
The balance of prepaid corporate profit tax in Ukraine decreased
to US$16 million as of 31 December 2016, compared to US$54 million
as of 31 December 2015. The reduction in the balance reflected a
refund of corporate profit tax of US$27 million, the devaluation of
the Hryvnia against the US Dollar amounting to US$5 million and the
utilisation of US$6 million against FPM's profits for the
period.
For further details see Note 15 of the financial statements.
Profit for the year from continuing operations
Profit for the year increased to US$189 million from US$31
million in 2015. This was driven by a strong EBITDA performance as
well as a significant reduction in write-offs and allowances
(recorded as special items) compared to 2015.
For further information on special items see Note 17 and Note 10
respectively of the financial statements.
Profit for the year from continuing operations before special
items increased by US$57 million in 2016 to US$199 million (2015:
US$142 million).
Cash Flows
Net cash flows from operating activities increased by US$204
million, or 159%, to US$332 million in 2016 compared to US$128
million in 2015. This reflected the strong EBITDA performance as
well as a US$9 million working capital inflow during the period
(2015: US$77 million working capital outflow) due to the sale of
373 thousand tonnes of pellets held on stock at the end of 2015, a
reduction in trade receivables and the recovery of overdue VAT and
prepaid corporate profit tax. Included in working capital is an
outflow of US$42 million related to the increase in stocks of lower
grade iron ore. This ore is expected to be processed once the Group
has additional beneficiation capacity in place (for further
information see Note 14 of the financial statements). The Group
secured new trade finance arrangements during the year, of which
US$19 million was utilised as of 31 December 2016, and received a
US$17 million prepayment for pellets shipped in March 2017.
Capital Investment(A)
Capital expenditure in 2016 of US$48 million focused primarily
on sustaining capital (2015: US$65 million). The Group slowed its
investment programme in 2016 and is accelerating it again in 2017.
For further information see Capital Investment in the Chairman's
Statement on page 6 and Capital Investment in the Operations Review
on page 19.
Debt Maturity Profile and Liquidity
Net debt(A) declined by US$279 million to US$589 million as of
31 December 2016 (US$868 million as of 31 December 2015).
Net debt to EBITDA(A) for the last 12 months was 1.57x compared
to 2.78x as of 31 December 2015. As of 31 December 2016, Ferrexpo's
cash and cash equivalents balance increased by US$110 million to
US$145 million compared to US$35 million at the end of December
2015.
During the year the Group repaid US$196 million of debt. This
included US$123 million of amortisations relating to a US$420
million pre-export finance facility (repaid in full as of July
2016), the first of eight quarterly instalments of US$44 million
under the US$350 million pre-export finance and US$30 million of
debt under Export Credit Agency funding lines.
In 2017, the Group has US$201 million of debt amortisations.
As of 31 December 2016 the debt facilities outstanding were
US$306 million under bank facilities with a further seven quarterly
instalments due; a US$346 million Eurobond maturing in equal parts
in April 2018 and April 2019, and US$65 million of Export Credit
Agency funding maturing over the next five years.[2]
For Ukrainian borrowers the bank and debt capital markets have
been closed since late 2013, initially as a result of political
uncertainty and more recently as a result of low iron ore prices.
These markets reopened in late 2016 following a recovery in
commodities and a more certain outlook in Ukraine. During 2016
Ferrexpo considerably strengthened its balance sheet and improved
its liquidity to target levels. Ferrexpo currently holds a
long-term credit rating of B- with a stable outlook with S&P
and Fitch, in line with the Ukraine sovereign rating, and plans to
access the bank or debt capital markets as required.
(2.) Ferrexpo may from time to time seek to actively manage its
debt portfolio. This process may include retiring or purchasing
outstanding debt through cash purchases by means of open market
purchases, privately negotiated transactions or otherwise. Such
repurchases, if any, will depend on prevailing market conditions,
Ferrexpo's liquidity requirements, contractual restrictions and
other factors. In addition, Ferrexpo may contemplate new issuances
of debt securities
Market review
Iron ore industry in 2016
A Chinese credit stimulus towards the end of 1Q 2016 as well as
curtailment of Chinese domestic iron ore production, increased
demand for steel and hence seaborne iron ore throughout the year.
By December 2016 the PLATTS CFR 62% Fe iron ore fines price(A) had
recovered to US$80 per tonne compared to an average price in
January 2016 of US$42 per tonne, an eight year low.
Overall in 2016, the World Steel Organisation reports that
Chinese steel production increased 1.2% to 808 million tonnes while
steel production in the rest of the world remained broadly stable
(see table below).
The 1.2% increase in Chinese steel production implies an
increase in demand of approximately 20 million tonnes of iron ore.
Trade data, however, shows that imports of iron ore rose by 7.5%,
or by approximately 70 million tonnes, in 2016 similar to growth
rates last seen in 2012.
According to CRU, the increase in imports reflected lower
Chinese domestic production due to environmental restrictions on
output. In addition, supply side structural reforms in the Chinese
steel industry supported demand for higher quality seaborne ore as
incumbent steel mills looked to increase output.
In total CRU believe that production of domestic Chinese iron
ore was reduced by approximately 30 million tonnes in 2016 while
approximately 20 million tonnes of seaborne imports were used to
restock inventories given weak iron ore price levels. Together with
the increase in Chinese steel output, these factors absorbed the
incremental supply of seaborne iron ore of approximately 60 million
tonnes in 2016.
Steel and iron ore statistics 2016 vs. 2015
Million tonnes 2016 2015 Change
---------------------------- ------- ------- ------
World steel production 1,628.5 1,615.4 0.8%
China steel production 808.4 798.8 1.2%
Rest of the world 820.1 816.6 0.4%
---------------------------- ------- ------- ------
Chinese imports of iron ore 1,025 953 7.5%
---------------------------- ------- ------- ------
Source: World Steel Association, Chinese Customs data.
Iron ore pellets
The pellet premium that the Group received in 2016 improved
throughout the year, recovering from lows seen at the start of the
year to finish the year more strongly. In China, the spot pellet
premium published by PLATTS fell to a low of US$11 per tonne in
January 2016 before recovering to US$23 per tonne by year end.
While the PLATTS long-term contract Atlantic pellet premium
improved from US$26 per tonne in January 2016 to US$35 per tonne in
December 2016. This recovery reflected an increasingly tight market
for pellets following the production stoppage at Samarco, which
represented approximately 20% of the seaborne pellet market in
2015, and an increase in pellet utilisation rates as steel mill
profitability recovered from lows seen in recent years. Demand for
pellet was also supported by a significant rise in coking coal
prices in the second half of the year as an increase in pellet
consumption allows for lower coke usage in the blast furnace. As
such, by the end of 2016 the pellet market was in deficit, which
was reflected in the strong recovery of pellet premiums.
Pellets are the most efficient source of iron for a blast
furnace, reducing energy requirements in the iron making process
and emitting the lowest levels of waste and emissions compared to
sinter fines or lump. Due to the high iron content of pellets (on
average between 62% Fe and 66% Fe) and their lower level of
impurities, they help to improve the quality of the final steel
product.
Given their superior performance characteristics and no need for
further processing before being charged to the blast furnace,
pellets receive a price premium over sinter fines and lump. CRU
believe the historic average annual long-term contact pellet
premium to non-Chinese markets has been approximately US$34 per
tonne since 2011 to 2016.
The following table shows that historically there has been
limited supply growth in pellets, with exports increasing by only
five million tonnes since 2000. This compares to an increase of
approximately 840 million tonnes since 2000 in the iron ore fines
market. The limited availability of pellets reflects the highly
capital intensive nature of installing beneficiation and
pelletising operations.
Limited growth in pellet capacity due to high barriers to
entry
Exports of iron ore million % of total
tonnes 2000 2016 Increase increase
---------------------------- ---- ----- -------- ----------
Pellet feed 18 71 53 5.0%
---------------------------- ---- ----- -------- ----------
Pellets 106 111 5 0.5%
---------------------------- ---- ----- -------- ----------
Lump 79 247 168 15.8%
---------------------------- ---- ----- -------- ----------
Sinter fines 265 1,105 840 78.7%
---------------------------- ---- ----- -------- ----------
Total 468 1,534 1,066 228%
---------------------------- ---- ----- -------- ----------
Source: CRU iron ore market outlook January 2017 statistical
review.
Apart from the pelletising facilities at Samarco, which are
currently not in operation and where a restart date is uncertain,
there is around seven to ten million tonnes of idled high cost
pellet capacity within the industry that could re-enter the market
if pellet premiums provide an acceptable return. Total pelletising
capacity, however, is not expected to increase significantly in the
coming years due to the high capital barriers to entry.
Looking forward, strong pellet consumption should be underpinned
by a rationalisation in Chinese steel capacity with a bias toward
larger and more environmentally efficient blast furnace operations.
These blast furnaces typically consume higher levels of pellets to
support high productivities. Furthermore, continued environmental
controls in China should limit the output of local low grade iron
ore production supporting demand for high grade imports of iron
ore, including pellets. Meanwhile in the rest of the world, demand
for pellets should continue to be supported by the production of
high quality steels requiring premium inputs.
The Group's investment strategy of improving the quality of its
product, supplying the top steel mills in the world under long-term
volume contract together with its low cost base have maintained
strong and improving EBITDA margins through the low points of the
commodity cycle.
The table below shows that demand for pellets is expected to
show the strongest growth for the period to 2021 of 4.7% while
consumption of sinter fines is expected to decline marginally.
Pellet demand to show strongest growth in iron ore
Consumption million tonnes 2016 2021 Change CAGR
--------------------------- ----- ----- ------ -----
Pellets 416 523 107 4.7%
Lump 310 352 42 2.6%
Sinter fines 1,347 1,320 -27 -0.4%
--------------------------- ----- ----- ------ -----
Total 2,074 2,195 122 1.1%
--------------------------- ----- ----- ------ -----
Source: CRU iron ore market outlook January 2017 statistical
review.
Global pellet exporters
Million tonnes 2016
--------------------------------------------- -----
Vale (Brazil + Oman) 38.0
--------------------------------------------- -----
LKAB (Sweden) 18.5
--------------------------------------------- -----
Ferrexpo (Ukraine) 11.7
--------------------------------------------- -----
Rio Tinto (IOC, Canada) 9.8
--------------------------------------------- -----
ArcelorMittal (QCM Canada) 5.8
--------------------------------------------- -----
Severstal (Russia) 4.9
--------------------------------------------- -----
Metalloinvest (Russia) 4.0
--------------------------------------------- -----
Metinvest (Ukraine) 3.1
--------------------------------------------- -----
Bahrain Steel (Bahrain) 3.0
--------------------------------------------- -----
Grange (Australia) 2.6
--------------------------------------------- -----
Cliffs (USA) 2.5
--------------------------------------------- -----
CMP (Chile) 2.4
--------------------------------------------- -----
Total pellet export market (direct reduction
and blast furnace) 120.5
--------------------------------------------- -----
Ferrexpo's market share 10%
--------------------------------------------- -----
Source: CRU, government statistics, Bloomberg, Ferrexpo
analysis.
OPERATIONAL REVIEW
Marketing
In 2016 Ferrexpo increased sales volumes to a record level of
11.7 million tonnes compared to 11.3 million tonnes in 2015,
reflecting strong global demand for the Group's pellets. The table
below shows the breakdown of sales by key market regions. Sales to
Western Europe increased to 17% of total sales volumes in 2016
compared to 11% in 2015 while sales to North East Asia increased to
16% compared to 12% in 2015. The increase in sales to targeted
customers in these regions was offset by a nine percentage point
decline in sales to China and South East Asia.
Sales Volume(A) by Market Regions
2016 2015
------------------------------------ ------ ------
Central Europe 48% 49%
Western Europe 17% 11%
North East Asia 16% 12%
China and South East Asia 13% 22%
Turkey, Middle East, India 6% 6%
------------------------------------ ------ ------
Total sales volume (million tonnes) 11,697 11,330
------------------------------------ ------ ------
Of total sales volumes, 94% represented Ferrexpo Premium Pellets
of 65% Fe compared to 88% in 2015, while 6% represented Ferrexpo
Basic Pellets of 62% Fe (2015: 12%) and 1% represented Ferrexpo
Pellet Feed (2015: 0.4%) sold together with Ferrexpo's Premium
Pellets as part of a customer development programme.
The additional premium received for selling pellets compared to
iron ore fines ensured the Group's average received price in 2016
outperformed the Platts 62% Fe iron ore fines CFR index by 26%
compared to a 30% outperformance in 2015. The price performance in
2016 reflected a weak 1Q followed by a strong recovery,
particularly in 4Q 2016 (as described above). Overall the average
premium that the Group received in 2016 was 15% lower than
2015.
The Group's long-term contracts are all based on a spot index
iron ore fines price using various reference periods and takes into
account the cost of international freight, typically the C3 index.
Pellet premiums are typically negotiated annually, half-yearly or
quarterly.
Logistics
Selling and distribution costs decreased by 7% to US$210 million
(2015: US$226 million) as a result of the devaluation of the local
currency and lower international freight rates.
Production
Health and Safety
Most regrettably there were two fatalities at the mining
operations during the year. Independent investigations were
undertaken of each incident, with remedial action taken and
findings from the investigations shared across the Group. In 2015,
there were no work-related fatalities at the Group's operations, a
goal that Ferrexpo will continue to work towards.
There were a total of 22 Lost Time Injuries ("LTIs") across the
Group in 2016 (2015: 19), equating to a LTI frequency rate
("LTIFR")(A) of 1.17 (2015: 0.96). The table below details the
LTIFR as per million man hours worked across the Company's mining
and processing operations in Ukraine and its barging subsidiary on
the River Danube for 2016 and 2015.
Lost Time Injury Frequency Rate(A)
LTIFR 2016 2015
--------- ----- -----
- FPM 1.14 0.75
- FYM 0.38 0.74
- FBM 0.00 0.00
Ukraine 1.01 0.75
--------- ----- -----
Barging 3.70 4.55
--------- ----- -----
Group 1.17 0.96
--------- ----- -----
Most of the accidents reported have been traced back to
non-compliance with internal safety procedures. The Group is
focused on implementing risk mitigation programmes to improve the
understanding of safety protocols and adherence to standards which
is being combined with training to ensure better awareness of the
consequences of risk taking in the operational environment.
Pellet Production
Pellet production from own ore in 2016 was 11.1 million tonnes
compared to 11.3 million tonnes in 2015. Production from own ore
included a 45% increase in output of the Group's higher
performance(A) FPP+ [3] pellets to 3.3 million tonnes (2015: 2.3
million tonnes). Total production of 11.2 million tonnes for the
year compared to 11.7 million tonnes in 2015 reflects a large
decrease in production of pellets from low margin third party
concentrate. Approximately 94% of total production volumes were
pellets of 65% Fe, compared to 89% in 2015.
(3) .Ferrexpo Premium Pellets plus ("FPP+") contain 65% Fe with
enhanced basicity and low temperature disintegration properties
compared to FPP pellets
The table below summarises production in 2016 and 2015.
Production statistics
(000't unless otherwise stated) 2016 2015 Change
-------------------------------- ------ ------ ------
Iron ore processed from FPM
& FYM 29,335 30,168 -2.8%
-------------------------------- ------ ------ ------
Average Fe content 33.74% 33.65% 0.3%
-------------------------------- ------ ------ ------
Concentrate produced ("WMS") 14,006 14,378 -2.6%
-------------------------------- ------ ------ ------
Weighted average Fe content 62.78% 62.35% 0.7%
-------------------------------- ------ ------ ------
Pellets produced from FPM &
FYM 11,071 11,258 -1.7%
-------------------------------- ------ ------ ------
FPP 7,070 7,662 -7.7%
-------------------------------- ------ ------ ------
Average Fe content 64.88% 64.90% -0.03%
-------------------------------- ------ ------ ------
FPP+ 3,336 2,307 44.6%
-------------------------------- ------ ------ ------
Average Fe content 3,336 2,307 44.6%
-------------------------------- ------ ------ ------
FBP 666 1,289 -48.3%
-------------------------------- ------ ------ ------
Average Fe content 62.44% 62.45% -0.0%
-------------------------------- ------ ------ ------
Purchased concentrate 149 466 -68.0%
-------------------------------- ------ ------ ------
Average Fe content 66.66% 66.33% 0.5%
-------------------------------- ------ ------ ------
Pellets produced from purchased
concentrate 129 403 -67.9%
-------------------------------- ------ ------ ------
FPP 129 397 -67.5%
-------------------------------- ------ ------ ------
Average Fe content 64.80% 64.85% -0.08%
-------------------------------- ------ ------ ------
FBP - 6 -
-------------------------------- ------ ------ ------
Average Fe content - 62.36% -
-------------------------------- ------ ------ ------
Total pellet production 11,201 11,662 -4.0%
-------------------------------- ------ ------ ------
Total production of pellet
feed for sale 123 40 208%
-------------------------------- ------ ------ ------
Average Fe content 67.49% 67.00% 0.8%
-------------------------------- ------ ------ ------
Pellet sales volume 11,697 11,290 3.2%
-------------------------------- ------ ------ ------
Pellet feed sales volume 123 40 208%
-------------------------------- ------ ------ ------
Gravel output 2,156 1,757 22.7%
-------------------------------- ------ ------ ------
Total Group stripping volume
(million m3) 22,623 26,933 -16.0%
-------------------------------- ------ ------ ------
Note: Ferrexpo Basic Pellets ("FBP"), Ferrexpo Premium Pellets
("FPP") and Ferrexpo Premium Pellets plus ("FPP+").
Production Costs
The Group's C1 cost of production(A) reduced by 13% to US$27.7
per tonne compared to US$31.9 per tonne in 2015. Of this US$4.2 per
tonne cost reduction, approximately US$1.6 per tonne was driven by
lower oil and gas prices, US$1.5 per tonne by the depreciation of
the Hryvnia against the US Dollar, and US$1.1 per tonne was due to
cost reduction initiatives.
The graph below shows how the Group's C1 cash cost of production
(A) has moved relative to the iron ore fines price since 2007.
Approximately 60% of Ferrexpo's C1 cash cost of production is
commodity related, including fuel, electricity, gas, explosives and
steel grinding media. In times of high iron ore prices the cost of
production tends to increase due to commodity cost inflation;
however, during periods of low commodity prices the cash cost is
reduced.
C1 cash cost per tonne (A) through the commodities cycle (US$
per tonne)
http://www.rns-pdf.londonstockexchange.com/rns/1500A_-2017-3-21.pdf
The chart table breaks down the Group's C1 cash cost (A) by
category and highlights local currency costs.
Breakdown of C1 cash
cost per tonne (2016) UAH US Dollar
----------------------- --- ---------
Electricity 31%
----------------------- --- ---------
Fuel 7%
----------------------- --- ---------
Gas 12%
----------------------- --- ---------
Materials 16%
----------------------- --- ---------
Spare parts 6%
----------------------- --- ---------
Maintenance 6%
----------------------- --- ---------
Personnel 6%
----------------------- --- ---------
Grinding bodies 8%
----------------------- --- ---------
Royalties 5%
----------------------- --- ---------
Explosives 3%
----------------------- --- ---------
48% 52%
----------------------- --- ---------
In 2016, the average Hryvnia per US Dollar was 25.6 compared to
21.9 in 2015, a 17% depreciation. The higher rate in 2016 reduced
the C1 cash cost by 5% as approximately 48% of the Group's cost to
produce a pellet is in Hryvnia.
Local inflation during the period was primarily driven by
electricity price increases (+11% vs. average 2015) following the
devaluation of the Hryvnia against the US Dollar. Year-on-year
Ukrainian CPI was 14% in 2016. Inflation peaked in January 2016 at
40% and thereafter the rate of increase slowed to 12% by December.
Source: ukrstat.gov.ua
As part of Ferrexpo's efforts to reduce its reliance on natural
gas to pelletise its iron ore concentrate, it has continued to
progress its Sunflower Husks Project (as previously announced in
2015). In 2016, FPM partially substituted natural gas with
sunflower husks in the heating of the kilns in its pelletiser. This
initiative helped reduce natural gas consumption by 35.7 million
m(3) , or 19%, during the year. FPM continues to pursue this
biofuel initiative for its cost savings and the associated
reduction in emissions, with the long-term goal of 30% gas
substitution.
Ferrexpo is a low cost and efficient pellet producer which has
allowed the Group to remain profitable even in a low iron ore price
environment.
The graph below shows the cost of pellet production on an
ex-works basis for most pellet producers. Ferrexpo remains
competitively placed on the curve while some of the larger
producers are placed at the top end of the cost curve.
2016 pellet conversion cost (US$ per tonne)
http://www.rns-pdf.londonstockexchange.com/rns/1500A_-2017-3-21.pdf
Note: ex-works costs include mining, processing and pelletising
costs only and excludes royalties.
Source: CRU March 2017, Ferrexpo internal analysis
Mining and Production efficiencies
The Group has several projects underway which are contributing
to cost savings and efficiency improvements. These include improved
drilling and blasting techniques which yield better ore
fragmentation and improved excavator dig rates. FPM is also looking
at increasing its concentrate yield by optimising the amount of
reagent used and varying the blend ratios of ore.
CO(2) Emissions
The table below shows the Group's CO(2) intensity ratio was
0.232 emissions per tonne in 2016 compared to 0.229 emissions per
tonne in 2015. While actual consumption of CO(2) reduced by 3%
during the year, the intensity ratio was impacted a by a 4% decline
in production.
Emissions in tonnes 2016 2015 Change
----------------------- --------- --------- ----------
* 3%
CO2 emissions 2,599,838 2,675,215
Pellets produced (kt) 11,201 11,661 * 4%
----------------------- --------- --------- ----------
Intensity ratio 0.232 0.229 1%
----------------------- --------- --------- ----------
Note: 2015 emissions data has been reduced by 53,098 tonnes and
the intensity ratio reduced accordingly. This was 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 0.55
million tonnes in 2016 compared to 0.63 million tonnes in 2015. The
reduction in direct emissions is as a result of a 19% reduction in
the volume of natural gas consumed, due to the substitution of gas
in the pelletiser with sunflower husks, and a 5% reduction in
diesel consumption. Collectively, diesel and natural gas represent
82% of direct CO(2) emissions. Emissions generated from indirect
sources, such as electricity purchased from Ukraine's national
grid, were 2.05 million tonnes in 2016 in line with 2015.
Capital Investment(A)
Ferrexpo currently has one approved project to add approximately
1.5 million tonnes of concentrate at a cost of around US$50 million
(including associated infrastructure). The Group is now
accelerating this project following a slowdown in 2016 due to low
iron ore prices.
Ferrexpo plans to develop its production capabilities and output
via investments evaluated on strict financial parameters. This is
not expected to involve investment of more than US$150 million in
any one year on expansion projects.
Ukraine
After a challenging macro-economic and political period, Ukraine
is showing positive signs of economic recovery.
GDP growth accelerated by 4.7% in 4Q 2016 (compared to 4Q 2015)
and was 2.2% for the year. In January 2017 GDP accelerated to 5.1%.
This compares to a contraction of -9.9% in 2015 and -6.6% in
2014.
In November 2016, Fitch upgraded Ukraine's credit rating from
CCC to B- with a stable outlook. The rating reflected easing
external financing pressures with an increase in international
reserves to around 3.5 months of imports as well as greater
domestic confidence, easing inflation and increased exchange rate
flexibility.
Continued structural reforms, however, are necessary to turn the
current economic stabilisation into strong and sustainable growth
so that Ukraine can catch up with its regional peers. The IMF
estimate that per capita GDP in Ukraine is still very low at
approximately 20% of the EU average, the second lowest level of all
Central and Eastern European countries.
PRINCIPAL RISKS
The list of the principal risks and uncertainties facing
Ferrexpo'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.
1. RISKS RELATED TO THE IRON ORE MARKET
1.1 GLOBAL ECONOMIC GROWTH, IRON ORE PRICES AND PELLET PREMIUMS
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 eight 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
mismatch between increasing supply of iron ore and lower demand can
lead to iron ore price weakness.
Fluctuations in the iron ore price as well as in demand can
negatively impact the financial results of the Group. The Platts
62% Fe iron ore fines CFR China price has declined from a peak of
US$193 per tonne in 2011 to a low of US$39 per tonne in 2015. In
2016 the price stabilised at an average of US$58 per tonne for the
year compared to an average of US$56 per tonne in 2015. The average
price YTD (as of 20 March 2017) has been US$86 per tonne.
Ferrexpo receives a pellet premium from its customers in
addition to the iron ore fines price. Currently, a portion of the
Group's profit is due to this premium. The historic average annual
Atlantic long-term contract pellet premium has been approximately
US$30 per tonne since 2011. Spot market pellet premiums in China
have been more volatile, reaching a low of approximately US$11 per
tonne in January 2016 before recovering to finish 2016 at
approximately US$23 per tonne.
Overall, the pellet premium currently represents a high
proportion of the underlying iron ore fines price.
Mitigation
-- The pellet market is a niche market and according to CRU is
forecast to grow at a faster rate than the underlying iron ore
fines market.
-- Ferrexpo has invested to increase production and is now the
third largest producer of pellets for the seaborne market.
-- Ferrexpo is a low cost producer and invests to maintain its
low position on the global cost curve.
-- Ferrexpo sells under long-term contracts to established steel
mills who produce premium steel products through the commodities
cycle.
-- Through the economic cycle pellet premiums have historically
been more stable than the iron ore fines price.
-- Ferrexpo has its own logistics infrastructure and a
diversified customer base. It is in close proximity to its European
customers and has port access to seaborne markets. This provides
flexibility should a particular region experience a decline in
demand.
1.2 COMPETITIVE ENVIRONMENT
Possible Impact
The international iron ore market for all types of iron is
highly competitive, with four large producers dominating the export
market and several mid-tier producers operating in selected
markets. The principal factors affecting competition are price,
quality, range of products offered, reliability and logistics
costs.
In the pellet market, Ferrexpo considers that its principal
pellet competitors are Vale, Luossavaara Kiirunavaara AB ("LKAB"),
Iron Ore Company of Canada ("IOC"), Samarco, Lebedinsky GOK,
Mikhailovsky GOK and Severny GOK. Samarco's operations are
currently idled following a tailings dam accident in November 2015.
Prior to the accident, Samarco was the second largest supplier to
the global pellet market, exporting approximately 30 million tonnes
of pellets per annum, or around 20% of total pellet exports.
The pellet market is currently in supply deficit, which could
encourage idled capacity or new supply to enter the market. In
addition, Samarco has indicated that it intends to return to the
market in the second half of 2017. The increase in supply of
pellets could reduce the pellet premium. Furthermore, the current
level of pellet premiums could encourage competing products and
processes to be developed.
Mitigation
-- Iron ore pellets have high capital costs barriers to entry.
-- Iron ore pellet projects require several years to implement.
-- Pellet feed is typically more expensive to produce than iron
ore fines and requires a higher capital intensity. New entrants are
likely to be at higher cost than the current participants in the
market.
1.3 SEABORNE FREIGHT RATES
Possible Impact
As iron ore is a bulk commodity, seaborne freight rates are an
important component of the cost to deliver product to a customer.
An increase in freight rates will reduce the net price received
from a customer (all else equal) while a reduction in freight rates
will increase the net price received from a customer.
Seaborne freight rates, such as C3, are published by the Baltic
Exchange and represents the cost for ocean transportation of iron
ore from the Brazilian port of Tubarao (where the largest seaborne
suppliers of pellets are based) to Qingdao, China (the largest
steel producer in the world).
As Ferrexpo sells to international customers the price it
receives includes reference to C3 or other global benchmarks.
Mitigation
-- Ferrexpo has its own in-house freight and distribution
specialists who procure freight competitively on behalf of the
Group.
-- Ferrexpo's geographic proximity to its European customers is
a competitive advantage compared to other iron ore producers.
-- Ferrexpo can access the seaborne market competitively via its own port infrastructure.
-- Ferrexpo invests in its own infrastructure to ensure that its
total cost of transportation remains competitive.
2. RISKS RELATING TO UKRAINE
2.1 POLITICAL
Possible Impact
Ongoing conflict in Eastern Ukraine, the annexation of Crimea
and political instability have negatively impacted the Ukrainian
economy.
Any continuing or escalating conflict in Eastern Ukraine could
have further adverse effects. This could include a material impact
on the availability of critical production inputs such as
electricity, gas or other products including diesel fuel, as well
as availability of rail and port services.
Economic deterioration impacts the government's ability to fund
usual social services and could lead to social upheaval and
political tension within local communities. It can also impact the
government's ability to meet its payment obligations to exporters,
such as VAT refunds; or it could impact Ferrexpo's ability to use
its cash held in Ukraine; or Ferrexpo's ability to obtain financing
from international capital markets.
Mitigation (also see Ukrainian VAT and Tax risk and Reliance on
State Monopolies risk)
-- The Group manages liquidity to ensure smooth operations
should the economic weakness of the country disrupt the financial
system.
-- Ferrexpo makes meaningful contributions to the local
communities and towns surrounding its operations.
-- Ferrexpo invests heavily in energy efficiency, including
alternative fuels to augment gas consumption, and maintains close
contact with electricity suppliers.
-- Ferrexpo has established several sources of suppliers for key
products as well as several supply routes.
-- Ferrexpo's operations are remote from the conflict zone.
2.2 LEGAL SYSTEM AND COMPLIANCE AND CORRUPTION
Possible Impact
Since Ukraine's change in government in 2014, the government has
undertaken to implement a number of reforms to strengthen the rule
of law in the country, supported by the IMF. The Ukrainian legal
system has been developing to support this transformation; however,
it is subject to greater risks and uncertainties than more mature
legal systems. 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
information see Note 19 of the financial statements.
Transparency International ranks Ukraine as 131st out of 176
countries in terms of the level of perceived corruption. There is a
risk that counterparties are involved in activities that are not in
compliance with relevant international standards. Also see
Counterparty risk on page 24.
Mitigation
-- Ferrexpo prioritises a strong internal control framework and
operates to the highest international standards of compliance and
ethics.
-- Ferrexpo continues to pursue relevant matters through the court system.
2.3 ukrainian banking sector
Possible Impact
The Ukrainian banking sector is regarded as weak. In December
2016 PrivatBank, the country's largest bank with 37% of the
country's retail deposits and one fifth of the banking assets, was
nationalised.
Mitigation
-- Ferrexpo manages its liquidity to ensure it can continue to
operate in the event of disruptions to the local banking
sector.
-- Ferrexpo spreads its funds amongst international and, if available, at least two local banks.
2.4 UKRAINIAN CURRENCY AND LOCAL INFLATION
Possible Impact
Fluctuations in the Hryvnia / US Dollar exchange rate impacts
Ferrexpo's profitability and the book value of its assets.
In 2016 the Hryvnia devalued from UAH24.0 per US Dollar as of 31
December 2015 to UAH27.2 per US Dollar as of 31 December 2016. The
average rate during the year was UAH25.6 per US Dollar (2015
average rate: UAH21.9 per US Dollar). Balances at the yearend are
converted at the prevailing rate.
As a result of the devaluation of the Hryvnia against the US
Dollar since 2014 (as of 1 January 2014 the rate was UAH7.9 per US
Dollar) local inflation has been around 90% over the past three
years.
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.
Mitigation
-- 100% of Ferrexpo's sales are in US Dollars.
-- Ferrexpo invests to reduce its costs of production as well as increase its output and quality.
-- Ferrexpo has a long established Business Improvement
Programme aimed at reducing costs in constant currency by 2% per
year.
-- While Ferrexpo's revenue is received in US Dollars, actual
costs expressed in US Dollars have historically been linked to
international commodity prices rather than local inflation
rates.
-- Ferrexpo can revalue its assets to reflect current
replacement prices in the event of a substantial devaluation of the
Hryvnia against the US Dollar or in the event of
hyperinflation.
2.5 UKRAINIAN TAXATION AND VAT
Possible Impact
Ferrexpo is a large taxpayer in Ukraine. It also operates
internationally and is subject to transfer pricing regulations both
locally and internationally. The Group has experienced times where
the taxation it has paid in Ukraine has been in excess of the
amounts due, leading to increases in working capital and exposure
to devaluation of the local currency.
Ferrexpo incurs VAT on purchases of goods and services, which as
an exporter, it cannot offset on amounts charged on local sales. As
a result, Ferrexpo is exposed to the risk that the Ukrainian
government either delays or does not repay the VAT incurred. This
can be up to 20% of the costs of local operations.
For further information see Political and Legal risk and Note 19
to the financial statements.
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.
Mitigation
-- The Group operates its taxation affairs in an open and
transparent manner and maintains a close dialogue with the
government and operates to best international standards including
OECD guidelines, including the recent Base Erosion and Profit
Shifting ("BEPS") guidelines.
-- Ferrexpo can reduce its working capital requirements via
trade finance or similar to mitigate temporary delays and holds
sufficient operational liquidity to provide a buffer.
2.6 COUNTERPARTY RISK
Possible Impact
Financial instability of Ferrexpo's counterparties, including
its customers, suppliers, the government and local banks, could
absorb high amounts of working capital, impact production levels
and lead to material financial loss.
Ferrexpo has counterparty exposure through ongoing trading
relationships as well as with the Ukrainian government in terms of
taxes payable and receivable (see Ukrainian taxation and VAT) and
in terms of required licences and other permits.
Ukraine has a weak credit profile as defined by international
credit rating agencies. Also see Legal system and compliance and
corruption risk on page 22.
Mitigation
-- Ferrexpo deals with well-established steel producers with sound credit profiles.
-- Ferrexpo's counterparties are subject to regular and thorough
review. The results of these reviews are used to determine
appropriate levels of exposure, and available alternatives, in
order to reduce the potential risk of financial loss.
-- 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.
-- 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.
3. Risks Relating to the group's operations
3.1 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
customer relationships, its financial performance and balance sheet
strength.
Mitigation
-- Ferrexpo has significant volumes of iron ore in stock to
smooth mining variations and holds pellet stocks to mitigate
disruption in the processing facilities.
-- Safety, environmental and operational performance is
regularly and rigorously reviewed throughout the organisation,
including by the Chief Operating Officer, the Executive Committee
and the Board.
-- Ferrexpo has modernised its mining and production facilities,
improving safety, environmental, operational and financial
performance.
-- All accidents are fully investigated and, where appropriate,
improvements are made to minimise the risk of re-occurrence.
-- Appropriate safety training is regularly provided to employees.
-- Employee remuneration is linked to safety performance.
-- Active management of the operational risk register is
undertaken to ensure predictable volumes and quality of output.
3.2 ENERGY COSTS
Possible Impact
Energy represented 47% of Ferrexpo's C1 cost in 2016. An
increase in oil prices and other energy related costs will increase
the Group's operating costs. 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 C3 freight rates).
In 2016, the European Brent spot price increased 49% to US$54
per barrel.
Mitigation
-- Energy costs are either directly or indirectly linked to international markets.
-- Ferrexpo is low on the pellet cost curve. Competitors
producing pellets will also experience similar cost increases.
-- Ferrexpo's Business Improvement Programme focuses on energy
reduction, including the replacement of gas with alternative fuels
and the optimisation of its mining fleet.
3.3 RELIANCE ON STATE MONOPOLIES (also see Political and Legal
risks on page 22 and Energy Costs on page 25)
Possible Impact
The Group purchases electricity and transport services from
state-owned enterprises and the supply of gas is heavily regulated.
Changes in the related tariffs can be politically motivated and
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.
Mitigation
-- Effective lobbying at local and national level to ensure tariffs are appropriate for industry.
-- Ferrexpo manages and owns its own rail wagons to reduce reliance on state-owned rail cars.
-- Recent reforms to the Ukrainian gas sector have increased
competition and improved pricing transparency. As such, Ferrexpo is
diversifying its natural gas supplier base.
-- To date, the Group has not experienced any material supply
disruption of key inputs since its IPO in 2007.
-- Ferrexpo looks to reduce its reliance, where possible, on state monopolies.
3.4 LOGISTICS
Possible Impact
Ferrexpo's logistics capability is dependent on services
provided by third parties and state-owned organisations within
Ukraine.
The Group operates a barging company on the Danube/Rhine River
corridor. River barging can be impacted by low water levels and
ice, which at times can limit its ability to operate.
Logistical bottlenecks on rail or at the port may affect
Ferrexpo's ability to distribute its products on time, impacting
customer relationships.
Mitigation
-- The Group maintains and invests in its logistics capabilities
to ensure available capacity to better service its customers, lower
costs and reduce reliance on third-party providers. Ferrexpo
currently owns 2,252 rail cars, which reduce reliance on state rail
cars for transportation of pellets to border points, 150 barges for
transportation of pellets into Central Europe and a 49.4% interest
in the port of TIS Ruda on the Black Sea which guarantees the Group
independent access to the seaborne markets, avoiding reliance on
the state port.
4. RISKS RELATING TO THE GROUP'S STRATEGY
4.1 DEBT MATURITY PROFILE
Possible Impact
From 2013 until 2016 the debt capital markets and bank debt
markets have been closed, firstly due to geopolitical factors in
Ukraine and in the last year due to low iron ore prices.
As debt falls due Ferrexpo may need to make repayments at a time
when refinancing is not possible and will therefore have to
temporarily change its business plan.
Mitigation
-- Ferrexpo targets an amortisation profile to match its cash
flows with cash held in excess of immediate requirements.
-- Ferrexpo targets strong credit metrics. As of 31 December
2016, net debt to EBITDA was 1.57x compared to 2.78x as of 31
December 2015.
-- Ferrexpo maintains short-term trade finance lines.
4.2 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. Any new debt facilities could also result in
higher interest rates.
The average cost of debt for the period ended 31 December 2016
was 6.7% (average 2015: 5.5%). The increased average rate reflected
amortisation of the Group's pre-export banking facilities, which
have a lower cost compared to the Group's outstanding US$346
million Eurobond.
Mitigation
-- Ferrexpo maintains a high level of interest cover. As of 31
December 2016, this amounted to 6.9x. The Group has a mix of debt
facilities at fixed and floating interest rates. As of 31 December
2016, the debt facilities subject to fixed interest rates
represented approximately 54% of the Group's outstanding debt.
4.3 SUSTAINING AND EXPANSION CAPITAL INVESTMENT
Possible Impact
The Company's facilities require continual sustaining capital
expenditure to maintain productive efficiency. 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 invested over US$2 billion into its operations
since its IPO in 2007. This has included modernisation of existing
equipment.
-- The Group has established strict procedures to control,
monitor and manage capital expenditure which is regularly reviewed
by the Investment and Executive Committee and the Board.
4.4 MINING LICENCES AND GOVERNMENT APPROVALS FOR EXPANSION
Possible Impact
Ferrexpo holds mining licences and the other permits required to
carry out mining operations. If mining licences were to be revoked
or not renewed, the Group's ability to continue to produce pellets
and meet customer demand would be at risk.
The mining licences for the Gorishne-Plavninskoye and
Lavrikovskoye deposit, exploited by FPM, expires in July 2017.
Ferrexpo expects that this licence will be renewed as a matter of
due course.
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.
-- Ferrexpo 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.
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
position and 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, prepared in accordance with IFRS
as adopted in the European Union, 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
Steve Lucas
Chairman
Christopher Mawe
Chief Financial Officer
21 March 2017
Consolidated Income Statement
Before Year Before Year
special Special ended special Special ended
US$000 Notes items items 31.12.16 items items 31.12.15
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Revenue 4 986,325 - 986,325 961,003 - 961,003
Cost of sales 3/5 (400,333) - (400,333) (446,756) - (446,756)
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Gross profit 585,992 - 585,992 514,247 - 514,247
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Selling and distribution expenses 6 (209,529) - (209,529) (226,222) - (226,222)
General and administrative expenses 7 (38,645) - (38,645) (37,103) - (37,103)
Other income 2,914 - 2,914 6,852 - 6,852
Other expenses 8 (34,107) - (34,107) (32,726) - (32,726)
Operating foreign exchange gains 9 13,832 - 13,832 26,025 - 26,025
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Operating profit from continuing
operations before adjusted items 320,457 - 320,457 251,073 - 251,073
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Allowance for restricted cash
and deposits 17 - (8,525) (8,525) - (174,579) (174,579)
Write-offs and impairment losses 10 - (2,501) (2,501) - (5,555) (5,555)
Gain on disposal of available-for-sale
investment - - - - 41,385 41,385
Share of profit from associates 3,726 - 3,726 4,620 - 4,620
Losses on disposal of property,
plant and equipment (4,446) - (4,446) (4,541) - (4,541)
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Profit/(loss) before tax and
finance from continuing operations 319,737 (11,026) 308,711 251,152 (138,749) 112,403
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Finance income 11 175 - 175 2,494 - 2,494
Finance expense 11 (67,177) - (67,177) (71,797) - (71,797)
Non-operating foreign exchange
losses 9 (10,311) - (10,311) (17,750) - (17,750)
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Profit/(loss) before tax 242,424 (11,026) 231,398 164,099 (138,749) 25,350
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Income tax (expense)/credit 12 (43,733) 1,535 (42,198) (22,312) 28,420 6,108
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Profit/(loss) for the year from
continuing operations 198,691 (9,491) 189,200 141,787 (110,329) 31,458
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Profit/(loss) attributable to:
Equity shareholders of Ferrexpo
plc 196,770 (9,416) 187,354 140,030 (106,993) 33,037
Non-controlling interests 1,921 (75) 1,846 1,757 (3,336) (1,579)
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Profit/(loss) for the year from
continuing operations 198,691 (9,491) 189,200 141,787 (110,329) 31,458
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Earnings/(loss) per share:
Basic (US cents) 13 33.60 (1.60) 32.00 23.92 (18.27) 5.65
Diluted (US cents) 13 33.51 (1.60) 31.91 23.86 (18.23) 5.63
--------------------------------------- ----- --------- -------- --------- ---------- ---------- ----------
Consolidated Statement of Comprehensive Income
Year ended Year ended
US$000 31.12.16 31.12.15
------------------------------------------------------------------ --------------- ----------
Profit for the year 189,200 31,458
Items that may subsequently be reclassified to profit
or loss:
Exchange differences on translating foreign operations (126,365) (472,492)
Current income tax effect 26,966 28,811
Deferred income tax effect (10,359) 12,167
Net gains on available-for-sale investments - 41,767
------------------------------------------------------------------- --------------- ----------
Net other comprehensive loss before reclassification (109,758)
of items to profit and loss 10505,835,742) (389,747)
------------------------------------------------------------------- --------------- ----------
Reclassification to profit or loss relating to available-for-sale
investments sold or impaired - (41,767)
------------------------------------------------------------------- --------------- ----------
Net other comprehensive loss to be reclassified to
profit or loss in subsequent periods (109,758) (431,514)
------------------------------------------------------------------- --------------- ----------
Items that will not be reclassified subsequently
to profit or loss:
Remeasurement gains on defined benefit pension liability 1,075 3,878
Income tax effect (246) (722)
------------------------------------------------------------------- --------------- ----------
Net other comprehensive income not being reclassified
to profit or loss in subsequent periods 829 3,156
------------------------------------------------------------------- --------------- ----------
Other comprehensive loss for the year, net of tax (108,929) (428,358)
------------------------------------------------------------------- --------------- ----------
Total comprehensive income/(loss) for the year, net
of tax 80,271 (396,900)
------------------------------------------------------------------- --------------- ----------
Total comprehensive income/(loss) attributable to:
Equity shareholders of Ferrexpo plc 79,650 (387,958)
Non-controlling interests 621 (8,942)
------------------------------------------------------------------- --------------- ----------
80,271 (396,900)
------------------------------------------------------------------ --------------- ----------
Consolidated Statement of Financial Position
As at As at
US$000 Notes 31.12.16 31.12.15
------------------------------------------------------- ----- ----------- ------------
Assets
Property, plant and equipment 574,839 654,392
Goodwill and other intangible assets 35,220 40,024
Investments in associates 2,165 5,801
Inventories 14 130,357 98,802
Other non-current assets 2,984 4,661
Income taxes recoverable and prepaid 12 5,630 54,482
Deferred tax assets 52,818 71,096
------------------------------------------------------- ----- ----------- ------------
Total non-current assets 804,013 929,258
------------------------------------------------------- ----- ----------- ------------
Inventories 14 78,935 96,021
Trade and other receivables 81,745 83,379
Prepayments and other current assets 21,387 18,970
Income taxes recoverable and prepaid 12 10,757 2,829
Other taxes recoverable and prepaid 15 21,389 50,482
Cash and cash equivalents 16 144,751 35,330
Restricted cash and deposits 17 - 9,308
------------------------------------------------------- ----- ----------- ------------
Total current assets 358,964 296,319
------------------------------------------------------- ----- ----------- ------------
Total assets 1,162,977 1,225,577
------------------------------------------------------- ----- ----------- ------------
Equity and liabilities
Issued capital 121,628 121,628
Share premium 185,112 185,112
Other reserves (1,984,758) (1,876,624)
Retained earnings 2,002,153 1,814,598
------------------------------------------------------- ----- ----------- ------------
Equity attributable to equity shareholders of Ferrexpo
plc 324,135 244,714
------------------------------------------------------- ----- ----------- ------------
Non-controlling interests (847) (783)
------------------------------------------------------- ----- ----------- ------------
Total equity 323,288 243,931
------------------------------------------------------- ----- ----------- ------------
Interest-bearing loans and borrowings 3/18 505,641 700,351
Defined benefit pension liability 15,489 17,034
Provision for site restoration 1,071 975
Deferred tax liabilities 586 382
------------------------------------------------------- ----- ----------- ------------
Total non-current liabilities 522,787 718,742
------------------------------------------------------- ----- ----------- ------------
Interest-bearing loans and borrowings 3/18 228,061 203,299
Trade and other payables 28,807 27,566
Accrued liabilities and deferred income 42,584 16,188
Income taxes payable 12 11,780 8,161
Other taxes payable 5,670 7,690
------------------------------------------------------- ----- ----------- ------------
Total current liabilities 316,902 262,904
------------------------------------------------------- ----- ----------- ------------
Total liabilities 839,689 981,646
------------------------------------------------------- ----- ----------- ------------
Total equity and liabilities 1,162,977 1,225,577
------------------------------------------------------- ----- ----------- ------------
The financial statements were approved by the Board of Directors
on 21 March 2017.
Kostyantin Zhevago Christopher Mawe
Chief Executive Officer Chief Financial Officer
Consolidated Statement of Cash Flows
Year Year
ended ended
US$000 Notes 31.12.16 31.12.15
--------------------------------------------------------- ----- --------- ---------
Profit before tax 231,398 25,350
Adjustments for:
Depreciation of property, plant and equipment and
amortisation of intangible assets 50,671 56,596
Interest expense 11 64,975 68,917
Interest income 11 (175) (2,494)
Share of profit from associates (3,726) (4,620)
Movement in allowance for doubtful receivables 252 114
Allowance for restricted cash and deposits 17 8,525 174,579
Loss on disposal of property, plant and equipment 4,446 4,541
Gain on disposal of available-for-sale investment - (41,385)
Write-offs and impairment losses 10 2,501 5,555
Site restoration provision (308) (634)
Employee benefits 3,192 3,543
Share-based payments 389 515
Operating foreign exchange gains 9 (13,832) (26,025)
Non-operating foreign exchange losses 9 10,311 17,750
--------------------------------------------------------- ----- --------- ---------
Operating cash flow before working capital changes 358,619 282,302
--------------------------------------------------------- ----- --------- ---------
Changes in working capital:
(Increase)/decrease in trade and other receivables (3,578) 2,341
Increase in inventories (41,540) (63,965)
Increase/(decrease) in trade and other accounts payable 30,066 (14,787)
Decrease/(increase) in other taxes recoverable and
payable (including VAT) 15 24,345 (113)
--------------------------------------------------------- ----- --------- ---------
Cash generated from operating activities 367,912 205,778
--------------------------------------------------------- ----- --------- ---------
Interest paid (58,793) (65,080)
Income tax refunds/(paid) 12 24,438 (11,054)
Post-employment benefits paid (1,466) (1,778)
--------------------------------------------------------- ----- --------- ---------
Net cash flows from operating activities 332,091 127,866
--------------------------------------------------------- ----- --------- ---------
Cash flows from investing activities
Purchase of property, plant and equipment and intangible
assets (48,176) (65,384)
Proceeds from sale of property, plant and equipment
and intangible assets 47 242
Proceeds from sale of available-for-sale investment - 41,767
Reclassification to restricted cash and deposits 17 - (184,523)
Interest received 168 2,056
Dividends from associates 4,203 1,716
--------------------------------------------------------- ----- --------- ---------
Net cash flows used in investing activities (43,758) (204,126)
--------------------------------------------------------- ----- --------- ---------
Cash flows from financing activities
Proceeds from borrowings and finance 18 19,115 -
Repayment of borrowings and finance 18 (195,918) (393,876)
Arrangement fees paid - (15,308)
Dividends paid to equity shareholders of Ferrexpo
plc - (77,548)
--------------------------------------------------------- ----- --------- ---------
Net cash flows from financing activities (176,803) (486,732)
--------------------------------------------------------- ----- --------- ---------
Net increase/(decrease) in cash and cash equivalents 111,530 (562,992)
Cash and cash equivalents at the beginning of the
year 35,330 626,509
Currency translation differences (2,109) (28,187)
--------------------------------------------------------- ----- --------- ---------
Cash and cash equivalents at the end of the year 16 144,751 35,330
--------------------------------------------------------- ----- --------- ---------
Consolidated Statement of Changes in Equity
Attributable to equity shareholders of Ferrexpo
plc
---------------------------------------------------------------------------
Uniting Employee
of Treasury benefit Total
Issued Share interest share trust Translation Retained capital Non-controlling Total
US$000 capital premium reserve reserve reserve reserve earnings and reserves interests equity
-------------- ------- ------- -------- -------- -------- ----------- --------- ------------ --------------- ---------
At 1 January
2015 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 year - - - - - - 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 - - - - - (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
-------------- ------- ------- -------- -------- -------- ----------- --------- ------------ --------------- ---------
Profit for
the year - - - - - - 187,354 187,354 1,846 189,200
Other
comprehensive
(loss)/income - - - - - (108,523) 819 (107,704) (1,225) (108,929)
-------------- ------- ------- -------- -------- -------- ----------- --------- ------------ --------------- ---------
Total
comprehensive
loss for the
year - - - - - (108,523) 188,173 79,650 621 80,271
-------------- ------- ------- -------- -------- -------- ----------- --------- ------------ --------------- ---------
Effect from
increase of
shareholding
in subsidiary - - - - - - (618) (618) (685) (1,303)
Share-based
payments - - - - 389 - - 389 - 389
-------------- ------- ------- -------- -------- -------- ----------- --------- ------------ --------------- ---------
At 31 December
2016 121,628 185,112 31,780 (77,260) (5,108) (1,934,170) 2,002,153 324,135 (847) 323,288
-------------- ------- ------- -------- -------- -------- ----------- --------- ------------ --------------- ---------
Notes to the Consolidated Financial Statements
Note 1: Corporate information
This statement of financial results was approved by the Board on
21 March 2017. The financial information set out in this statement
does not constitute statutory accounts as defined in section 435 of
the Companies Act 2006. The financial information for 2015 is based
on the statutory accounts for the financial year ended 31 December
2015. Those accounts, upon which the auditors issued an unqualified
opinion with emphasis of matter paragraph in relation to going
concern and which did not contain a statement under 498(2) or
498(3) of the Companies Act 2006, have been delivered to the
Registrar of Companies. The financial information for the year
ended 31 December 2016 has been extracted from the statutory
accounts of Ferrexpo plc which will be delivered to the Registrar
of Companies in due course. The auditors' report on the 2016
statutory accounts was (i) unqualified, (ii) did not include
references to any matters to which the auditor drew attention by
way of emphasis without qualifying its reports and (iii) did not
contain statements under section S498(2) or S498(3) of the
Companies Act 2006.
Ferrexpo plc will publish on or around 21 April 2017 its Annual
Report and Accounts for the year ended 31 December 2016 on its
corporate website www.ferrexpo.com.
Organisation and operation
Ferrexpo plc (the "Company") is incorporated and registered in
England, which is considered to be the country of domicile, with
its registered office at 55 St James's Street, London SW1A 1LA, 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
operate 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% (2015: 50.3%) of
Ferrexpo plc's issued share capital.
Note 2: Basis of preparation
Whilst the preliminary announcement has been prepared in
accordance with International Financial Reporting Standards
('IFRS') and International Financial Reporting Interpretation
Committee ("IFRIC") interpretations adopted for use by the European
Union and with those parts of the Companies Act 2006 applicable to
companies reporting under IFRS, this announcement does not itself
contain sufficient information to comply with IFRS. The Board
approved the full financial statements that comply with IFRS on
Tuesday, 21 March 2017. The financial statements have been prepared
under the historical cost convention as modified by the recording
of pension assets and liabilities and the revaluation of certain
financial instruments.
The Group's principal risks likely to affect its future
development, performance and position are set out on pages 20 to
28. The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the Performance
Review on pages 8 to 10.
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 2015
except for the adoption of new amendments and improvements to IFRSs
effective as of 1 January 2016. These new standards and
interpretations had no effect on reported results, financial
position or disclosure in the financial statements:
IAS 1 Presentation of Financial Statements - disclosure
initiative
Amendments to IFRS 11: Joint arrangements: Accounting for
acquisitions of interests
Amendments to IAS 16 and IAS 38: Clarification of acceptable
methods of depreciation and amortisation
Annual Improvements to IFRSs - 2012-2014 Cycle
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 has begun the impact assessment
on the new standard and expects that the classification and
measurement of its financial instruments under the new standard
will remain largely unchanged. The Group does not intend to early
adopt this standard.
IFRS 15 Revenue from contracts with customers
The new standard was issued in May 2014 and outlines a single
comprehensive model of accounting for revenue arising from
contracts with customers and supersedes current revenue recognition
guidance. The new standard also establishes the principles for the
disclosure of relevant information in the financial statements
about the nature, amount, timing and uncertainties of revenue and
cash flows arising from contracts with customers. The new standard
becomes mandatory for financial years beginning on or after 1
January 2018. The Group expects that there will be an impact in
terms of the recognition of transport related revenue. The Group
has begun the impact assessment on this new standard and does not
intend to early adopt this standard.
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 12 months or less. This new standard
applies to annual reporting periods beginning on or after 1 January
2019 subject to EU endorsement. The Group expects that the new
standard will result in the recognition of right-of-use assets and
lease liabilities in respect of some of the Group's contractual
lease arrangements in place that are currently accounted for as
operating lease. The Company does not intend to early adopt this
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. The Group's full definition of EBITDA is
disclosed in the section on Alternative Performance Measures on
page 51.
Year ended Year ended
US$000 Notes 31.12.16 31.12.15
---------------------------------------------------- ----- ---------- ----------
Profit before tax and finance 308,711 112,403
Allowance for restricted cash and deposits 17 8,525 174,579
Write-offs and impairment losses 10 2,501 5,555
Gain on disposal of available-for-sale investment - (41,385)
Share-based payments 389 515
Losses on disposal of property, plant and equipment 4,446 4,541
Depreciation and amortisation 50,671 56,596
---------------------------------------------------- ----- ---------- ----------
EBITDA 375,243 312,804
---------------------------------------------------- ----- ---------- ----------
"C1" cash costs
"C1" cash costs represents the cash costs of production of iron
pellets from own ore divided by production volume of own ore.
Non-C1 cost components include non-cash costs such as depreciation,
inventory movements and costs of purchased ore and concentrate.
Year ended Year ended
US$000 Notes 31.12.16 31.12.15
---------------------------------- ----- ---------- ----------
Cost of sales - pellet production 5 360,495 405,863
Non-C1 cost components (53,884) (46,268)
---------------------------------- ----- ---------- ----------
C1 cash cost 306,611 359,595
---------------------------------- ----- ---------- ----------
Own ore produced (tonnes) 11,071,404 11,258,446
C1 cash cost per tonne (US$) 27.7 31.9
---------------------------------- ----- ---------- ----------
Net financial indebtedness
Net financial indebtedness as defined by the Group comprises
cash and cash equivalents less interest-bearing loans and
borrowings.
As at As at
US$000 Notes 31.12.16 31.12.15
--------------------------- ----- --------- ---------
Cash and cash equivalents 16 144,751 35,330
Current borrowings 18 (228,061) (203,299)
Non-current borrowings 18 (505,641) (700,351)
--------------------------- ----- --------- ---------
Net financial indebtedness (588,951) (868,320)
--------------------------- ----- --------- ---------
The Group made debt repayments of US$195,918 thousand during the
year ended 31 December 2016 (2015: US$393,876 thousand).
The Group's net financial indebtedness was increased in the
second half of the financial year 2015 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 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 2016 consisted of the
following:
Year Year
ended ended
US$000 31.12.16 31.12.15
------------------------------------------------------------ --------- ---------
Revenue from sales of iron ore pellets and concentrate:
------------------------------------------------------------ --------- ---------
Export 921,861 895,520
------------------------------------------------------------ --------- ---------
Total revenue from sale of iron ore pellets and concentrate 921,861 895,520
------------------------------------------------------------ --------- ---------
Revenue from logistics and bunker business 61,207 61,247
Revenue from other sales and services provided 3,257 4,236
------------------------------------------------------------ --------- ---------
Total revenue 986,325 961,003
------------------------------------------------------------ --------- ---------
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 Year
ended ended
US$000 31.12.16 31.12.15
------------------------------ --------- ---------
Central Europe 425,079 431,429
------------------------------ --------- ---------
Austria 215,479 188,284
Slovakia 48,397 96,211
Others 161,203 146,934
------------------------------ --------- ---------
Western Europe 153,932 105,858
------------------------------ --------- ---------
Germany 143,281 102,985
Others 10,651 2,873
------------------------------ --------- ---------
North East Asia 155,443 119,170
------------------------------ --------- ---------
Japan 96,257 86,343
Others 59,186 32,827
------------------------------ --------- ---------
China and South East Asia 129,391 193,566
------------------------------ --------- ---------
China 125,788 193,566
Others 3,603 -
------------------------------ --------- ---------
Turkey, Middle East and India 58,016 45,497
------------------------------ --------- ---------
Turkey 58,016 45,497
------------------------------ --------- ---------
Total exports 921,861 895,520
------------------------------ --------- ---------
The Group markets its products across various regions. The sales
segmentation data was previously disclosed by Traditional Markets,
Natural Markets and Growth Markets and the disclosure of this
segmentation has been changed during the financial year 2016 to
better reflect how the Group now makes its business decisions and
monitors its sales. Information about the composition of the
regions is provided in the Glossary.
During the year ended 31 December 2016 sales made to three
customers accounted for 40.0% of the revenues from export sales of
ore pellets and concentrate (2015: 41.7%).
Sales to customers that individually represented more than 10%
of total sales in either current or prior year are as follows:
Year Year
ended ended
US$000 31.12.16 31.12.15
----------- --------- ---------
Customer A 215,479 188,284
Customer B 48,397 96,211
----------- --------- ---------
Note 5: Cost of sales
Cost of sales for the year ended 31 December 2016 consisted of
the following:
Year Year
ended ended
US$000 31.12.16 31.12.15
------------------------------------------------- --------- ---------
Energy 155,831 186,312
Personnel 21,934 28,773
Materials 63,911 72,653
Repairs and maintenance 35,357 37,388
Depreciation and amortisation 36,151 42,750
Royalties and levies 15,294 19,653
Purchased concentrate and other items for resale 6,384 21,142
Inventory movements 11,311 (20,163)
Logistics and bunker business 39,838 40,893
Other 14,322 17,355
------------------------------------------------- --------- ---------
Total cost of sales 400,333 446,756
------------------------------------------------- --------- ---------
Thereof for pellet production 360,495 405,863
Thereof for logistics and bunker business 39,838 40,893
------------------------------------------------- --------- ---------
Note 6: Selling and distribution expenses
Selling and distribution expenses for the year ended 31 December
2016 consisted of the following:
Year Year
ended ended
US$000 31.12.16 31.12.15
---------------------------------------- --------- ---------
Pellet transportation 165,897 178,902
Personnel 4,104 4,472
Logistics business 15,525 18,793
Advertising 11,176 11,269
Depreciation 9,849 10,352
Other 2,978 2,434
---------------------------------------- --------- ---------
Total selling and distribution expenses 209,529 226,222
---------------------------------------- --------- ---------
Note 7: General and administrative expenses
General and administrative expenses for the year ended 31
December 2016 consisted of the following:
Year Year
ended ended
US$000 31.12.16 31.12.15
------------------------------------------ --------- ---------
Personnel 21,246 22,123
Office, maintenance and security 4,881 4,788
Professional fees 8,596 5,697
Audit and non-audit fees 1,651 1,587
Depreciation and amortisation 1,506 1,540
Other 765 1,368
------------------------------------------ --------- ---------
Total general and administrative expenses 38,677 37,103
------------------------------------------ --------- ---------
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:
Year Year
ended ended
US$000 31.12.16 31.12.15
------------------------------------------------- --------- ---------
Audit services
------------------------------------------------- --------- ---------
Ferrexpo plc Annual Report 1,048 1,106
Subsidiary entities 379 302
------------------------------------------------- --------- ---------
Total audit services 1,427 1,408
------------------------------------------------- --------- ---------
Audit-related assurance services 154 156
------------------------------------------------- --------- ---------
Total audit and audit-related assurance services 1,581 1,564
------------------------------------------------- --------- ---------
Non-audit services
------------------------------------------------- --------- ---------
Tax advisory 60 22
Tax compliance 5 -
Other services 5 1
------------------------------------------------- --------- ---------
Total non-audit services 70 23
------------------------------------------------- --------- ---------
Total auditor remuneration 1,651 1,587
------------------------------------------------- --------- ---------
During the financial year 2016, non-audit services totalling
US$32 thousand provided for debt management activities of the Group
are included in other finance costs and not included in the table
above.
During the comparative period ended 31 December 2015, non-audit
services totalling US$681 thousand have been capitalised as prepaid
arrangement fees and are not included in the table above.
Note 8: Other expenses
Other expenses for the year ended 31 December 2016 consisted of
the following:
Year Year
ended ended
US$000 31.12.16 31.12.15
---------------------------------------------------------------- --------- ---------
Community support donations 27,519 25,820
Movements in allowance for doubtful receivables and prepayments
made 252 114
Other personnel costs 847 1,261
Other 5,489 5,531
---------------------------------------------------------------- --------- ---------
Total other expenses 34,107 32,726
---------------------------------------------------------------- --------- ---------
Information on the Group's community support donations is
provided in the social responsibility paragraph in the Chairman's
Statement on page 7.
Note 9: Foreign exchange gains and losses
Foreign exchange gains and losses for the year ended 31 December
2016 consisted of the following:
Year Year
ended ended
US$000 31.12.16 31.12.15
---------------------------------------------------- --------- ---------
Operating foreign exchange gains/(losses)
---------------------------------------------------- --------- ---------
Revaluation of trade receivables 14,240 25,943
Revaluation of trade payables (388) 118
Other (20) (36)
---------------------------------------------------- --------- ---------
Total operating foreign exchange gains 13,832 26,025
---------------------------------------------------- --------- ---------
Non-operating foreign exchange (losses)/gains
---------------------------------------------------- --------- ---------
Revaluation of interest-bearing loans (11,577) (39,858)
Conversion of cash and cash equivalents (578) 26,368
Other 1,844 (4,260)
---------------------------------------------------- --------- ---------
Total non-operating foreign exchange (losses)/gains (10,311) (17,750)
---------------------------------------------------- --------- ---------
Total foreign exchange gains 3,521 8,275
---------------------------------------------------- --------- ---------
During the financial year 2016, the Ukrainian Hryvnia has
devalued by approximately 13% (2015: 52%) compared to the US Dollar
from 24.001 as at 31 December 2015 to 27.191 as at the end of this
reporting period.
Note 10: Write-offs and impairment losses
Write-offs and impairment losses for the year ended 31 December
2016 consisted of the following:
Year Year
ended ended
US$000 31.12.16 31.12.15
--------------------------------------------- --------- ---------
Write-off of receivables and prepayments 634 4,598
Write-off/(write-back) of inventories 33 (59)
Write-off of property, plant and equipment 1,822 992
Impairment of available-for-sale investments 12 24
---------------------------------------------- --------- ---------
Total write-offs and impairment losses 2,501 5,555
---------------------------------------------- --------- ---------
The write-off of receivables and prepayments during the
comparative period ended 31 December 2015 is predominantly related
to the cancellation of a 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 2016
consisted of the following:
Year Year
ended ended
US$000 31.12.16 31.12.15
---------------------------------------------------------------- --------- ---------
Finance income
---------------------------------------------------------------- --------- ---------
Interest income 175 1,268
Other finance income - 1,226
---------------------------------------------------------------- --------- ---------
Total finance income 175 2,494
---------------------------------------------------------------- --------- ---------
Finance expense
Interest expense on financial liabilities measured at amortised
cost (54,255) (61,505)
Effect from capitalised borrowing costs 5,269 5,440
Interest on defined benefit plans (2,197) (2,880)
Bank charges (11,372) (12,282)
Other finance costs (4,622) (570)
---------------------------------------------------------------- --------- ---------
Total finance expense (67,177) (71,797)
---------------------------------------------------------------- --------- ---------
Net finance expense (67,002) (69,303)
---------------------------------------------------------------- --------- ---------
Fees for liability management activities of the Group for the
amount of US$4,554 thousand (2015: nil) are included in other
finance costs.
Note 12: Taxation
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 8.9% for the financial year 2016 (2015: 12.4%).
The rate for the comparative period ended 31 December 2015 excludes
the tax effect of the non-recurring charge related to the
restricted cash and deposits balances (see Note 17), 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 comparative period ended 31 December 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 2016 is as follows:
Year Year
ended ended
US$000 31.12.16 31.12.15
--------------------------------------------------------------- --------- ---------
Profit before tax 231,398 25,350
Notional tax charge computed at the weighted average statutory
tax rate of 8.9% (2015: 12.4%) 20,594 3,142
Effect of higher local tax rate on special items (1,003) (11,987)
Reassessment of prior year temporary differences 1,148 (657)
Effect from utilisation of non-recognised deferred tax assets - (2,165)
Expenses not deductible for local tax purposes (1) 7,828 7,383
Income exempted for local tax purposes (1,588) (5,168)
Income for local tax purposes (2) 7,767 -
Non-recognition of deferred taxes on current year losses
(3) 4,552 3,634
Tax related to prior years (4) 1,440 (189)
Other (including translation differences) (5) 1,460 (101)
--------------------------------------------------------------- --------- ---------
Total income tax expense/(credit) 42,198 (6,108)
--------------------------------------------------------------- --------- ---------
Reconciliation of tax effect on special items:
Loss before tax on special items (11,026) (138,749)
Notional tax credit computed at the weighted average statutory
tax rate of 8.9% (2015: 12.4%) (981) (17,197)
Effect of higher local tax rate on special items (1,003) (11,987)
Effect from utilisation of non-recognised deferred tax assets - (2,165)
Effect from change in permanent differences 449 688
Non-recognition of deferred tax asset - 2,241
--------------------------------------------------------------- --------- ---------
Tax credit on special items (1,535) (28,420)
--------------------------------------------------------------- --------- ---------
(1) Predominantly related to Ukraine where certain operating
expenses are historically not deductible for tax purposes according
to the enacted local tax legislation.
(2) Reconciling item relates to an adjustment made in Ukraine in
respect of sales of pellets to subsidiaries of the Group abroad in
order to address the changes in the local transfer pricing law.
(3) Non-recognition of deferred taxes on current year losses due
to the uncertainty in respect of the timing of the subsidiaries
becoming profitable for local tax purposes.
(4) Predominantly in relation to an allowance on an income tax
receivable balance of US$2,115 thousand that was recognised during
the comparative period ended 31 December 2015 and fully provided
for following the assessment made by the relevant tax
authorities.
(5) Increase during the financial year 2016 related to an
increase of the tax expense in Ukraine.
The net balance of income tax receivable changed as follows
during the financial year 2016:
Year Year
ended ended
US$000 31.12.16 31.12.15
------------------------------------------ --------- ---------
Opening balance 49,150 67,884
Income statement charge (41,982) (33,991)
Charge through other comprehensive income 26,966 28,811
Tax (refund)/paid (24,438) 11,054
Translation difference (5,089) (24,608)
------------------------------------------ --------- ---------
Closing balance 4,607 49,150
------------------------------------------ --------- ---------
As at As at
US$000 31.12.16 31.12.15
-------------------------------------------- --------- ---------
Income tax receivable balance - current 10,757 2,829
Income tax receivable balance - non-current 5,630 54,482
Income tax payable balance (11,780) (8,161)
-------------------------------------------- --------- ---------
Net income tax receivable 4,607 49,150
-------------------------------------------- --------- ---------
During the financial years 2013, 2014 and 2015, current VAT
receivable balances in Ukraine were mainly recovered in exchange
for prepayments of corporate profit tax. As at 31 December 2016,
these prepayments totalled US$16,246 thousand (2015: US$54,482
thousand) and it is management's view that this balance will be
offset with future profits or will be refunded in cash. The Group
received refunds of prepaid corporate profit tax totalling
US$26,926 thousand in July and December 2016 in respect of Ferrexpo
Poltava Mining ('FPM'). As a result, the remaining balance of FPM
of US$10,616 thousand as at 31 December 2016 is classified as
current whereas US$5,630 thousand related to two other Ukrainian
subsidiaries are classified as non-current due to the uncertainty
in respect of the timing of the recovery.
Note 13: Earnings per share and dividends paid and proposed
Before Year Before Year
special Special ended special Special ended
items items 31.12.16 items items 31.12.15
------------------------------------------ -------- ------- --------- -------- ------- ---------
Earnings/(loss) for the year attributable
to equity shareholders per share
Basic (US cents) 33.60 (1.60) 32.00 23.92 (18.27) 5.65
Diluted (US cents) 33.51 (1.60) 31.91 23.86 (18.23) 5.63
------------------------------------------ -------- ------- --------- -------- ------- ---------
The calculation of the basic and diluted earnings per share is
based on the following data:
Year Year
ended ended
Thousand 31.12.16 31.12.15
---------------------------------------------- --------- ---------
Weighted average number of shares
Basic number of Ordinary Shares outstanding 585,503 585,462
Effect of dilutive potential Ordinary Shares 1,713 1,422
---------------------------------------------- --------- ---------
Diluted number of Ordinary Shares outstanding 587,216 586,884
---------------------------------------------- --------- ---------
Dividends paid and proposed
Year
ended
US$000 31.12.16
------ ---------
Dividends proposed during the year
Final dividend for 2016: 3.3 US cents per Ordinary Share 19,325
Special dividend for 2016: 3.3 US cents per Ordinary Share 19,325
----------------------------------------------------------- ------
Total dividends proposed 38,650
----------------------------------------------------------- ------
No final dividend was proposed for the financial year 2015 and
no dividends were paid during the financial year 2016.
Year
ended
US$000 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
----------------------------------------------------------- ---------
Note 14: Inventories
As at 31 December 2016 inventories comprised:
Year Year
ended ended
US$000 31.12.16 31.12.15
-------------------------------- --------- ---------
Raw materials and consumables 62,450 65,883
Finished ore pellets 12,408) 25,112)
Work in progress 2,522 3,468
Other 1,555) 1,558)
--------------------------------- --------- ---------
Total inventories - current 78,935 96,021
--------------------------------- --------- ---------
Raw materials and consumables 130,357) 98,802
--------------------------------- --------- ---------
Total inventories - non-current 130,357 98,802
--------------------------------- --------- ---------
Total inventories 209,292 194,823
--------------------------------- --------- ---------
Inventory is held at the lower of cost or net recoverable
amount.
Inventories classified as non-current comprise lean and
weathered ore stockpiles that are, based on the Group's current
processing plans, not planned to be processed within the next year.
It is the Group's intention to process this ore at a later point of
time and it is expected that it will take more than one year to
process this stockpile, depending on the Group's future mining
activities, processing capabilities and anticipated market
conditions.
Note 15: Other taxes recoverable and payable
As at 31 December 2016 other taxes recoverable comprised:
As at As at
US$000 31.12.16 31.12.15
------------------------------------------ --------- ---------
VAT receivable 21,303 50,395
Other taxes prepaid 86 87
------------------------------------------ --------- ---------
Total other taxes recoverable and prepaid 21,389 50,482
------------------------------------------ --------- ---------
As at 31 December 2016, US$20,565 thousand of the VAT receivable
before allowance relates to the Group's Ukrainian business
operations (2015: US$49,339 thousand).
As at 31 December 2016, US$427 thousand (2015: US$30,613
thousand) was overdue and US$595 thousand is in the process of
being considered by the Ukrainian court system as at 31 December
2016 (2015: US$1,147 thousand). Management is of the opinion that
the overdue balances and those in the court system will be
recovered during the next 12 months in full.
The total VAT receivable balance shown in the table above is net
of an allowance of US$891 thousand (2015: US$1,059 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 VAT receivable
balance in Ukraine:
Year Year
ended ended
US$000 31.12.16 31.12.15
------------------------ --------- ---------
Opening balance, gross 49,339 72,837
Net VAT incurred 84,555 91,149
VAT received in cash (109,756) (89,034)
Translation differences (3,573) (25,613)
------------------------- --------- ---------
Closing balance, gross 20,565 49,339
------------------------- --------- ---------
Allowance (891) (1,059)
------------------------- --------- ---------
Closing balance, net 19,674 48,280
------------------------- --------- ---------
Further information on VAT is provided in the Update on Risks
section on page 23.
As at 31 December 2016 other taxes payable comprised:
As at As at
US$000 31.12.16 31.12.15
-------------------------- --------- ---------
Environmental tax 571 583
Royalties 2,309 4,189
VAT payable 173 157
Other taxes 2,617 2,761
-------------------------- --------- ---------
Total other taxes payable 5,670 7,690
-------------------------- --------- ---------
See Note 19 for information in respect of a withholding tax
claim in Ukraine.
Note 16: Cash and cash equivalents
As at 31 December 2016 cash and cash equivalents comprised:
As at As at
US$000 31.12.16 31.12.15
-------------------------------- --------- ---------
Cash at bank and on hand 144,751 35,330
Short-term deposit - -
-------------------------------- --------- ---------
Total cash and cash equivalents 144,751 35,330
-------------------------------- --------- ---------
The available cash and cash equivalents balance was reduced
during the second half of the financial year 2015 by the insolvency
of the Group's transactional bank in Ukraine (see Note 17 below).
The debt repayments during the financial year ended 31 December
2016 totalled US$195,918 thousand (2015: US$393,876 thousand)
affecting the balance of cash and cash equivalents. Further
information on the Group's gross debt is provided in Note 18.
The balance of cash and cash equivalents held in Ukraine amounts
to US$40,787 thousand as at 31 December 2016 (2015: US$13,896
thousand).
Note 17: Restricted cash and deposits
As at 31 December 2016 restricted funds held at Bank F&C are
shown in the table below:
As at As at
US$000 Notes 31.12.16 31.12.15
------------------------------------------------------- ----- --------- ---------
Cash balance with Bank F&C subject to liquidation
process 148,650 168,575
Cash balance subject to ongoing court proceedings 19 8,216 9,308
Allowance on cash and deposits currently not available (156,866) (168,575)
------------------------------------------------------- ----- --------- ---------
Total restricted cash and deposits - 9,308
------------------------------------------------------- ----- --------- ---------
An allowance of the balance not available to the Group was
recorded as at the end of the comparative period ended of 31
December 2015, excluding an amount of US$9,308 thousand claimed by
the Group in the court. As a result of the court proceedings during
the financial year 2016, the Group decided to increase the
allowance for the amount being still heard in the court, resulting
in a charge of US$8,525 thousand (at the average exchange rate for
December 2016) recognised in the income statement as at 31 December
2016 (2015: US$174,579 thousand). See Note 19 for further
information.
Note 18: Interest-bearing loans and borrowings
As at
US$000 31.12.15
-------------------------------------------------------- ------- ---------
Current
Syndicated bank loans - secured 175,000 166,250
Other bank loans - secured 18,309 21,504
Other bank loans - unsecured 1,495 1,431
Obligations under finance leases 3,684 3,444
Trade finance facilities 19,025 -
--------------------------------------------------------- ------- ---------
Interest accrued 10,548 10,670
--------------------------------------------------------- ------- ---------
Total current interest-bearing loans and borrowings 228,061 203,299
--------------------------------------------------------- ------- ---------
Non-current
Eurobond issued 337,685 333,536
Syndicated bank loans - secured 131,250 306,250
Other bank loans - secured 25,434 43,867
Other bank loans - unsecured 5,246 6,939
Obligations under finance leases 6,026 9,759
--------------------------------------------------------- ------- ---------
Total non-current interest-bearing loans and borrowings 505,641 700,351
--------------------------------------------------------- ------- ---------
Total interest-bearing loans and borrowings 733,702 903,650
--------------------------------------------------------- ------- ---------
As at 31 December 2016, the Group has a revolving syndicated
US$350 million pre-export finance facility, which is fully drawn.
The amortisation of the US$350 million facility commenced in
November 2016 with eight quarterly instalments of US$43,750
thousand to the final maturity date of 8 August 2018.
In July 2016, the Group made the final payment of its syndicated
US$420 million revolving pre-export finance facility. As at the end
of the comparative period ended 31 December 2015, US$123 million
was drawn by the Group.
As at 31 December 2016 the major bank debt facilities were
guaranteed and secured as follows:
-- Ferrexpo AG assigned the rights to revenue from certain sales contracts;
-- PJSC Ferrexpo Poltava Mining assigned all of its rights of
certain export contracts for the sale of pellets to Ferrexpo AG;
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 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.
As at 31 December 2016, the Group has open trade finance
facilities in the amount of US$19,025 thousand (31 December 2015:
nil), which are secured against receivables related to these
specific trades.
Note 19: Commitments, contingencies and legal disputes
Commitments
As at As at
US$000 31.12.16 31.12.15
----------------------------------------------------------------- --------- ---------
Capital commitments on purchase of property, plant and equipment 24,665 32,591
----------------------------------------------------------------- --------- ---------
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 recorded a full allowance for the cash balance held in
Bank F&C ('BFC') in September 2015 following it was declared
insolvent and put under temporary administration (see also Note
17). It is expected that the liquidation of the bank which
commenced in December 2016, will take several years and the level
of potential recoverability of the remaining balance of restricted
cash and deposits is still uncertain as at 31 December 2016. As at
31 December 2016, the balance of restricted cash and deposits which
is denominated in Ukrainian Hryvnia with a full allowance amounts
to US$156,866 thousand (2015: US$168,575 thousand).
The Group's principal subsidiary, PJSC Ferrexpo Poltava Mining
('FPM'), received a credit of US$9,984 thousand to its account with
BFC following the introduction of the temporary administration on
18 September 2015. FPM filed a claim against BFC under the
management of the Administrator, as appointed by the Deposit
Guarantee Fund ('DGF'), on 30 October 2015 in the Kyiv City
Commercial Court for the release of this amount in accordance with
applicable legislation. Following the hearing held on 4 December
2015, the Kyiv City Commercial Court ruled in favour of FPM. This
court ruling was subsequently appealed. During the hearing on 25
May 2016, the initial decision in favour of FPM was upheld by the
Kyiv Appellate Commercial Court and on 10 June 2016, the decision
was further appealed by BFC under the management of the Liquidator.
On 5 September 2016, the Highest Commercial Court of Ukraine
cancelled both previous judgements of the lower court instances and
returned the case to the Kyiv City Commercial Court. FPM
subsequently appealed the decision of the Highest Commercial Court
of Ukraine to the Supreme Court of Ukraine. On the 17 October 2016,
the highest court instance in Ukraine, the Supreme Court of
Ukraine, rejected FPM's application to review the decision of the
Highest Commercial Court of Ukraine.
On 31 January 2017, FPM brought the new application to the
Supreme Court of Ukraine against the decision of the Highest
Commercial Court of Ukraine. On 6 February 2017 the Supreme Court
of Ukraine refused to commence the review proceedings in respect of
this decision. As a consequence, the case was heard again by the
Kyiv City Commercial Court on 14 March 2017 and this court instance
dismissed FPM's claim in full. Taking into account the latest court
decision, the allowance recorded in respect of the restricted cash
and deposits was increased by US$ 8,525 thousand (at the average
rate for December 2016), although FPM is going to appeal against
this court decision.
Following commencement of the liquidation of BFC and in
accordance with the applicable legislation, FPM, Ferrexpo Yeristovo
Mining ('FYM') and Ferrexpo Belanovo Mining ('FBM'), collectively
referred to as 'Ukrainian subsidiaries' submitted on 21 January
2016 their claims for UAH4,262 million. This represents the total
amount of cash held with the bank on the date of introduction of
temporary administration after translating in accordance with
applicable law all foreign currency amounts into local currency
equivalents. On 22 April 2016, the liquidator of BFC issued
certificates recognising UAH540 million of these claims. These
recognised claims had been included in the 9th rank on the basis
that subsidiaries were considered as related parties. The Ukrainian
subsidiaries are currently engaged in court proceedings challenging
both the under recognition of claims and the ranking of the
appropriate claims in the local courts.
On 26 October 2016, FPM brought the lawsuit before the Kyiv
Commercial Court against the Liquidator of BFC and the DGF
challenging under-recognition and ranking of the claims in the
liquidation of BFC. On 26 December 2016, the court stayed the
proceedings in the FPM litigation and ordered expert examination of
the banking records and other documents in the case file by an
accounting expert. This order on stay of the proceedings has been
appealed by PJSC Ukrainian International Airlines, which seeks to
join the proceedings as an interested party. On 1 February 2017,
the Kyiv Appellate Commercial Court has dismissed the appeal of
PJSC Ukrainian International Airlines.
On 13 October 2016, FYM brought the lawsuit before the Kyiv
Commercial Court against the Liquidator and the DGF challenging
under-recognition and ranking of the claims in the liquidation of
BFC. On 17 October 2016, the Kyiv Commercial Court terminated the
proceeding. On 20 December 2016, the Kyiv Appellate Commercial
Court returned the case for consideration to the local court. The
next hearing before the Kyiv Commercial Court has been scheduled
for 15 March 2017.
On 26 October 2016, FBM brought the lawsuit before the Kyiv
Commercial Court against the Liquidator and the DGF challenging
under-recognition and ranking of the claims in the liquidation of
BFC. On 27 December 2016, the Kyiv Commercial Court rejected the
claims of FBM in full. FBM filed an appeal on 26 January 2017. The
hearing before the Kyiv Appellate Commercial Court has been
scheduled for 1 March 2017.
An allowance has been recorded in the comparative period ended
31 December 2015 in respect of cash and deposits held at BFC at the
time of temporary administration. It is not expected that the
successful determination of these cases results in either a full or
partial release of the allowance for restricted cash and deposits
at this point of time. See also Note 17 for further
information.
Salvage of grounded vessel
The Group was involved in arbitration proceedings in respect of
the costs incurred for the salvage of a grounded vessel off the
coast of Singapore carrying the Group's iron ore pellets to China.
Although the Group's customer was at risk in respect of the
insurance cover for the pellets shipped, the Group received a claim
from the salvage operator as the Group still had the title to the
goods during the vessel's period of salvage. The final award from
the Arbitrator was received in August 2016. The decision was in
favour of the opposing party, however no payment was due from the
Group as the liability was settled by the Group's insurance company
under the existing insurance cover.
Share dispute
The Group was involved in a share dispute which commenced in
2005 and has been disclosed in its various public documents since
IPO in 2007. On 20 October 2014, the Kyiv City Commercial Court
dismissed the claim of the opposing party 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. No further court proceedings have been initiated by
the opposing party.
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 the transfer pricing law,
which continues to evolve to increase 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.
Ukrainian VAT
Recoverable VAT amounting to US$595 thousand outstanding at 31
December 2016 (2015: US$4,549 thousand) is currently in the process
of being considered by the Ukrainian court system. As the VAT is
fully recoverable under the relevant Ukrainian legislation, the
Group expects to receive positive court decisions for these cases
and that the amount is recovered in full. Consequently, no
provision has been made for the VAT in dispute and associated fines
and penalties.
Ukrainian withholding tax claims
Following a tax audit at Ferrexpo Poltava Mining ('FPM') claims
were made by the Ukrainian tax authorities in relation to allegedly
unpaid withholding tax totalling US$6,296 thousand (UAH170 million)
and associated fines and penalties of US$1,555 thousand (UAH42
million) in respect of interest paid to a subsidiary of the Group
in the United Kingdom in 2013 and 2014.
The management of the Group is of the opinion that the arguments
of the tax office in respect of the current claim or any future
withholding tax claims that may arise in respect of more recent
periods are not well founded and applicable relevant tax treaties
between the United Kingdom and Ukraine are applicable which would
mitigate any claim.
After having taken legal advice, the management of the Group
expects to successfully defend any claims made by the tax
authorities in the Ukrainian courts. Consequently, no provision has
been made for the withholding tax and associated fines and
penalties.
Note 20: Related party disclosure
During the periods presented, the Group entered into arm's
length transactions with entities under the common control of the
majority owner of the Group, Kostyantin Zhevago, with associated
companies and with other related parties. Management considers that
the Group has appropriate procedures in place to identify, control,
properly disclose and obtain independent confirmation, when
relevant, for transactions with the related parties.
Entities under common control are those under the control of
Kostyantin Zhevago. Associated companies refer to TIS Ruda LLC, in
which the Group holds an interest of 49.4%. 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
FPM.
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 31.12.16 Year ended 31.12.15
------------------------------ ------------------------------
Entities Entities
under Other under Other
common Associated related common Associated related
US$000 control companies parties control companies parties
-------------------------------------- -------- ---------- -------- -------- ---------- --------
Sales of pellets (a) 1,975 - - 2,871 - -
Other sales (b) 234 - 143 334 - 496
-------------------------------------- -------- ---------- -------- -------- ---------- --------
Total related party transactions
within revenue 2,209 - 143 3,205 - 496
-------------------------------------- -------- ---------- -------- -------- ---------- --------
Materials (c) 6,954 - 8 6,909 - 12
Purchased concentrate and other items
for resale (d) - - - 277 - -
Spare parts and consumables (e) 1,251 - - 1,298 - 2
Gas (f) 4,297 - - 45,869 - -
-------------------------------------- -------- ---------- -------- -------- ---------- --------
Total related party transactions
within cost of sales 12,502 - 8 54,353 - 14
-------------------------------------- -------- ---------- -------- -------- ---------- --------
Selling and distribution expenses
(g) 10,766 19,803 1,507 10,896 22,248 5,023
General and administration expenses
(h) 673 - 92 849 - 382
Allowance for restricted cash and
deposits (i) 8,524 - - 174,579 - -
-------------------------------------- -------- ---------- -------- -------- ---------- --------
Total related party transactions
within expenses 32,465 19,803 1,607 240,677 22,248 5,419
-------------------------------------- -------- ---------- -------- -------- ---------- --------
Finance income (j) - - - 2,039 - -
Finance expenses (j) (38) - - (58) - -
-------------------------------------- -------- ---------- -------- -------- ---------- --------
Net related party finance income (38) - - 1,981 - -
-------------------------------------- -------- ---------- -------- -------- ---------- --------
A description of the most material transactions which are in
aggregate over US$200 thousand in the current or comparative period
is given below.
Entities under common control
The Group entered into various related party transactions with
entities under common control. 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$1,975 thousand
(2015: US$2,871 thousand) to VA Intertrading AG.
b Sales of power, steam and water and other materials for US$37
thousand (2015: US$78 thousand) and income from premises leased to
Kislorod PCC of US$135 thousand (2015: US$147 thousand).
c Purchases of compressed air and oxygen and metal scrap from
Kislorod PCC for US$3,587 thousand (2015: US$3,918 thousand);
c Purchases of cast iron balls from AutoKraZ Holding Co. for
US$1,269 thousand (2015: US$1,063 thousand); and
c Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas
for US$2,063 thousand (2015: US$1,787 thousand).
d Purchases of concentrate and other items for resale from
Vostok Ruda Ltd. amounting to US$277 thousand during the
comparative period. No such purchases during the period ended 31
December 2016.
e Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship
Repair Plant ("KSRSSZ") in the amount of US$410 thousand (2015:
US$338 thousand);
e Purchases of spare parts from Valsa GTV of US$486 thousand (2015: US$273 thousand); and
e Purchases of ferromanganese from Raw and Refined Commodities
AG for US$102 thousand (2015: US$484 thousand).
f Procurement of gas for US$4,297 thousand (2015: US$45,869
thousand) from OJSC Ukrzakordongeologia.
g Purchases of advertisement, marketing and general public
relations services from FC Vorskla of US$10,766 thousand (2015:
US$10,855 thousand).
h Insurance premiums of US$385 thousand (2015: US$429 thousand)
paid to ASK Omega for workmen's insurance and other insurances;
and
h Fees of US$273 thousand paid to Bank F&C for bank services
during the comparative period. No such fees paid during the period
ended 31 December 2016.
i The Group recorded during the financial year 2016 an
additional allowance for its cash and deposits held at Bank F&C
resulting in a charge of US$8,525 thousand (2015: US$174,579
thousand) as a result of the latest developments of the ongoing
court case. See Note 17 for further information.
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.
g Purchases of logistics services in the amount of US$19,803
thousand (2015: US$22,248 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. All transactions were carried out on an arm's length basis
in the normal course of business.
b Sales of material and services to Slavutich Ruda Ltd. for
US$131 thousand (2015: US$481 thousand).
g Purchases of logistics management services from Slavutich Ruda
Ltd. relating to customs clearance services and the coordination of
rail transit totalling US$1,502 thousand (2015: US$5,023
thousand).
h Consulting fees paid to Nage Capital Management AG of US$92
thousand (2015: US$382 thousand) controlled by a 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. The agreement has been terminated as of 30 September
2016.
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 31.12.16 Year ended 31.12.15
------------------------------ ------------------------------
Entities Entities
under Other under Other
common Associated related common Associated related
US$000 control companies parties control companies parties
------------------------------------ -------- ---------- -------- -------- ---------- --------
Purchases with shareholder approval - - - 842 - -
Purchases in the ordinary course
of business 37 - 1 1,257 - 10
------------------------------------ -------- ---------- -------- -------- ---------- --------
Total purchase of property, plant
and equipment(k) 37 - 1 2,099 - 10
------------------------------------ -------- ---------- -------- -------- ---------- --------
Individual transactions of a capital nature which exceeded
US$200 thousand are described below.
Entities under common control
Current year
k During the financial year 2016, the Group entered in various
transactions of a capital nature with related parties totalling
US$38 thousand. These transactions were in the ordinary course of
business.
Prior year
k During the financial year 2015, the Group entered into various
transactions of a capital nature with related parties totalling to
US$1,267 thousand, which were in the ordinary course of
business:
-- 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
-- the Group procured design documentation services from OJSC DIOS totalling US$288 thousand.
In April 2015 the Group received 27 rail cars totalling US$1,431
thousand (US$842 thousand at the prevailing exchange rate at
delivery) in addition to 25 rail cars received in 2014. A total of
300 rail cars were ordered in February 2014 under the authority of
a shareholder approval obtained on 24 May 2012. As a consequence of
the conflict in the Eastern part of Ukraine, the producer of the
rail cars was not in the position to produce and deliver all rail
cars ordered and prepaid. The remaining balance of the prepayment
was fully written-off as of 31 December 2015, after having provided
for it already as of 31 December 2014.
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 31.12.16 As at 31.12.15
------------------------------ ------------------------------
Entities Entities
under Other under Other
common Associated related common Associated related
US$000 control companies parties control companies parties
------------------------------------- -------- ---------- -------- -------- ---------- --------
Investments available-for-sale - - - 9 - -
Prepayments for property, plant and
equipment - - - 24 - -
------------------------------------- -------- ---------- -------- -------- ---------- --------
Total non-current assets - - - 33 - -
------------------------------------- -------- ---------- -------- -------- ---------- --------
Trade and other receivables (l) 257 4,576 48 688 2,273 8
Prepayments and other current assets
(m) 282 - 201 680 - -
Total current assets 539 4,576 249 1,368 2,273 8
------------------------------------- -------- ---------- -------- -------- ---------- --------
Trade and other payables (n) 456 1,331 267 902 2,625 91
------------------------------------- -------- ---------- -------- -------- ---------- --------
Current liabilities 456 1,331 267 902 2,625 91
------------------------------------- -------- ---------- -------- -------- ---------- --------
A description of the balances over US$200 thousand in the
current or comparative period is given below.
Entities under common control
l As of 31 December 2016, trade and other receivables included
outstanding amounts due from Kislorod PCC of US$20 thousand (2015:
US$404 thousand) for the sale of power, steam and water.
m The balances as at the end of the comparative period ended 31
December 2015 include prepayments of US$577 thousand made to Vostok
Ruda Ltd. for purchases of concentrate. An allowance for the full
amount prepaid was recorded during 2016 as a result of the
bankruptcy filed by the related party.
n Trade and other payables include US$133 thousand for
compressed air and oxygen purchased from Kislorod PCC (2015: US$475
thousand).
Associated companies
l As at 31 December 2016, trade and other receivables included
US$4,576 thousand (2015: US$2,273 thousand) related to dividends
declared by TIS Ruda LLC.
n As at 31 December 2016, trade and other payables included
US$1,331 thousand (2015: US$2,625 thousand) related to purchases of
logistics services from TIS Ruda LLC.
Other related parties
m Prepayments and other current assets totalling US$201 thousand
(2015: nil) relate to prepayments made to Slavutich Ruda Ltd. for
distribution services.
n Trade and other payables of US$267 thousand (2015: US$38
thousand) were in respect of distribution services provided by
Slavutich Ruda Ltd.
Transactional banking arrangements
Prior to 17 September 2015, the Group had transactional banking
arrangements with Bank F&C in Ukraine which was under common
control of Kostyantin Zhevago. See Note 17 and Note 19 for further
information.
The NBU announced on 17 September 2015 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 licence of Bank F&C was revoked by the NBU on 17 December
2015 and the liquidation was initiated by the Deposit Guarantee
Fund. See Note 16, Note 17 and Note 19 for further information in
respect of Bank F&C.
Note 21: Events after the reporting period
No material adjusting or non-adjusting events have occurred
subsequent to the year-end other than the proposed dividend
disclosed in Note 13.
ALTERNATIVE PERFORMANCE MEASURES
When assessing and discussing the Group's reported financial
performance, financial position and cash flows, management may make
reference to Alternative Performance Measures (APMs) that are not
defined or specified under International Financial Reporting
Standards (IFRS).
The APMs used by the Group fall into two categories:
Financial APMs: These financial measures are usually derived
from the financial statements, prepared in accordance with
IFRS.
Non-financial APMs: These measures incorporate certain
non-financial information which management believes is useful when
assessing the performance of the Group.
APMs are not uniformly defined by all companies, including those
in the Group's industry. Accordingly, the APMs used by the Group
may not be comparable with similarly titled measures and
disclosures made by other companies. APMs should be considered in
addition to, and not as a substitute for or as superior to,
measures of financial performance, financial position or cash flows
reported in accordance with IFRS.
Non-financial:
Iron ore price
The PLATTS 62% Fe CFR China price for iron ore fines is an
important industry indicator of the overall level of demand for
iron ore.
Production of premium pellets
The Group reports production of its premium pellets which
includes Ferrexpo Premium Pellets ("FPP"), containing 65% Fe, and
Ferrexpo premium pellets plus (FPP+), containing 65% Fe with
enhanced basicity and low temperature disintegration properties.
Ferrexpo's strategy is to sell high quality pellets to its customer
base. Thus the level of production of premium pellets is an
important indicator of whether the Group is adhering to its
strategy.
Sales volumes
Indicate the level of demand for the Group's products.
LTIFR
Lost time injuries frequency rate (LTIFR) per million man hours
worked across the Company's mining and processing operations in
Ukraine and its barging subsidiary on the Danube River. The Group
presents LTIFR because it believes that it is an important
indicator of how safe the work environment is.
Financial:
C1 cash cost of production
Represents the cash costs of production of iron pellets from own
ore divided by production volume of own ore. Non-C1 cost components
include non-cash costs such as depreciation, inventory movements
and costs of purchased ore and concentrate. The Group presents the
C1 cash cost of production because it believes it is a useful
measure of its cost competitiveness compared to its peer group.
EBITDA
The Group calculates EBITDA as profit from continuing operations
before tax and finance plus depreciation and amortisation and
non-recurring exceptional items included in other income and other
expenses, share-based payment expenses and the net of gains and
losses from disposal of investments and property, plant and
equipment. The Group presents EBITDA because it believes it is a
useful measure for evaluating its ability to generate cash and its
operating performance.
Net debt
Net financial indebtedness as defined by the Group comprises
cash and cash equivalents less interest bearing loans and
borrowings. It provides an indication of the degree of indebtedness
of the Group.
Net debt to EBITDA
Net financial indebtedness divided by EBITDA (both as described
above). The ratio is a measurement of the Group's leverage,
calculated as a company's interest-bearing liabilities minus cash
or cash equivalents, divided by its EBITDA.
Capital Expenditure
Capital expenditure is defined as sustaining and development
cash expenditure on property, plant and (capex) equipment as shown
in the Group's statement of cash flows. It indicates the level of
investment into the Group's asset base to maintain and develop its
businesses.
[1] www.ukrstat.gov.ua
[2] Ferrexpo may from time to time seek to actively manage its
debt portfolio. This process may include retiring or purchasing
outstanding debt through cash purchases by means of open market
purchases, privately negotiated transactions or otherwise. Such
repurchases, if any, will depend on prevailing market conditions,
Ferrexpo's liquidity requirements, contractual restrictions and
other factors. In addition, Ferrexpo may contemplate new issuances
of debt securities.
[3] Ferrexpo Premium Pellets plus ("FPP+") contain 65% Fe with
enhanced basicity and low temperature disintegration properties
compared to FPP pellets.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR LFFFVVAILFID
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