TIDMFXPO
RNS Number : 3699I
Ferrexpo PLC
21 March 2018
21 March 2018
Ferrexpo plc
("Ferrexpo", the "Group" or the "Company")
2017 Full Year Results: significant increase in profitability,
strengthened balance sheet and total full year dividends of 16.5 US
cents.
Ferrexpo plc today announces its financial results for the year
ended 31 December 2017.
Steve Lucas, Non-executive Chairman, said:
"An excellent set of results demonstrating strong demand for
Ferrexpo's high quality iron ore pellets from the world's leading
steel mills.
"The Group's quality upgrade programme, completed in 2015,
allowed Ferrexpo to fully capture the increase in market premiums
for higher quality iron ore, with its 65% Fe pellet product.
"In 2018, Ferrexpo expects further rationalisation of steel
capacity in China which should support global steel margins, and in
turn encourage a continued focus on iron making productivity. These
dynamics, together with a continued focus by Chinese authorities on
the environment and a reduction of air emissions, should provide a
favourable setting for iron ore pellets.
"Reflecting our confidence in the business profile and outlook,
the Board has proposed a final and special dividend of 9.9 US cents
bringing the total dividend for the year to 16.5 US cents."
Extract of 2017 Financial Performance:
US$ million (unless otherwise Year Year Change
stated) ended ended
31.12.17 31.12.16
--------------------------------- ---------- ---------- -------
Total pellet production (kt) 10,444 11,201 -7%
--------------------------------- ---------- ---------- -------
Sales volumes (kt) 10,467 11,697 -11%
--------------------------------- ---------- ---------- -------
Average CFR 62% iron ore fines
price (US$/t) 71.3 58.3 22%
--------------------------------- ---------- ---------- -------
Revenue 1,197 986 21%
--------------------------------- ---------- ---------- -------
C1 cash cost of production (per
tonne) 32.3 27.7 17%
--------------------------------- ---------- ---------- -------
Underlying EBITDA(A) 551 375 47%
--------------------------------- ---------- ---------- -------
Underlying EBITDA margin(A) 46% 38% 8 ppts
--------------------------------- ---------- ---------- -------
Profit for the year 394 189 108%
--------------------------------- ---------- ---------- -------
Diluted EPS 66.85 31.91 109%
--------------------------------- ---------- ---------- -------
Dividend per share (US cents) 16.5 6.6 150%
--------------------------------- ---------- ---------- -------
Net cash flow from operating
activities 353 332 6%
--------------------------------- ---------- ---------- -------
Capital investment(A) 103 48 115%
--------------------------------- ---------- ---------- -------
Net debt 403 589 -32%
--------------------------------- ---------- ---------- -------
Total liquidity(A) 312 145 114%
--------------------------------- ---------- ---------- -------
Net debt to Underlying EBITDA
(A) 0.73x 1.57x -54%
--------------------------------- ---------- ---------- -------
Health and Safety
-- We deeply regret to report one work related fatality in 2017 (2016: two)
-- Group Lost Time Injury Frequency Rate 1.17x in line with 2016
Market Environment
-- Strong market environment for high grade iron ore products including pellets
-- Increase in pellet premiums reflected market conditions
Financial
-- Revenue up 21% to US$1.2BN (2016: US$986M) reflecting higher
iron ore prices and pellet premiums
-- Underlying EBITDA (A) up 47% to US$551M (2016: US$375M) on
higher revenues offset by higher costs and lower production
-- Profit before tax up 95% US$450M (2016: US$231M)
-- Net cash flows from operating activities US$353M (2016:
US$332M) reflected higher EBITDA less working capital
normalization
-- Net debt reduced 32% to US$403M as of 31 December 2017 (31 December 2016: US$589M)
-- Net debt to EBITDA(A) 0.73x as of 31 December 2017 (as of 31 December 2016: 1.57x)
-- Group liquidity (A) US$312M as of 31 December 2017 (31 December 2016: US$145M)
-- Final ordinary dividend of 3.3 US cents per share proposed
(2016: 3.3 US cents) and special dividend of 6.6 US cents per share
(2016: 3.3 US cents)
-- Total interim and final dividend for 2017 of 16.5 US cents
(total interim and final 2016: 6.6 US cents)
Operational
-- Production of 10.4MT (2016: 11.2MT) reflected pellet line
refurbishment and a general increase in maintenance levels
-- 65% Fe pellets represented 95% of total production (2016: 94%)
-- C1 cash cost of production(A) of US$32.3 per tonne (2016:
US$27.7 per tonne) reflected higher commodity prices, increased
mining and maintenance activity and lower production volumes
-- Iron ore stockpile increased by 11.4 million tonnes during the year to 49 million tonnes
Outlook
-- Ferrexpo expects to benefit from higher pellet premiums in
2018, reflecting agreements with customers and strong demand for
high quality pellets
-- 2018 production volumes to reflect a 65 day pellet line
shutdown in 2Q 2018. 1H 2018 production is expected to be in line
with 1H 2017. Production in 2H 2018 is expected to be ahead of 2H
2017.
-- Costs remain subject to commodity prices, the Hryvnia exchange rate and local inflation
Alternative Performance Measures:
Words with the symbol (A) are defined in the Alternative
Performance Measures section on page 49.
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. In 2017, the Group produced 10.4 million tonnes of
pellets ranking it as the 3(rd) largest exporter of pellets to the
global steel industry with a market share of approximately 8.5%.
Ferrexpo has a diversified customer base supplying steel mills in
Austria, Germany, Japan, South Korea, Taiwan, China, Slovakia, the
Czech Republic, Turkey and Vietnam. Ferrexpo has a premium listing
on the main market of the London Stock Exchange under the ticker
FXPO. For further information, please visit www.ferrexpo.com
Analyst meeting:
There is an analyst and investor meeting at 09.00 GMT today at
the offices of Deutsche Bank at Winchester House, 75 London Wall,
London EC2N 2DB. A live video webcast and slide presentation of
this event will be available on www.ferrexpo.com. It is recommended
that participants register by 08.45. The presentation will be
hosted by Steve Lucas (Chairman), Kostyantin Zhevago (CEO) and
Chris Mawe (CFO).
Webcast link:
https://edge.media-server.com/m6/go/livestream_demo_mmc6
For further information contact:
Ferrexpo:
Ingrid McMahon +44 207 389 8304
Maitland:
James Isola +44 207 379 5151
CHAIRMAN'S STATEMENT
Introduction
I am pleased to report another excellent set of results
demonstrating strong demand for Ferrexpo's high quality iron ore
pellets from the world's leading steel manufacturers.
In 2017 the Group almost doubled its pre-tax profit to US$450
million (2016: US$231 million) while Underlying EBITDA(A) increased
by 47% to US$551 million (2016: US$375 million).
Net debt was reduced by 32% to US$403 million, its lowest level
since 2011, with the net debt to EBITDA(A) ratio falling
comfortably below 1 times to 0.73 times compared to 1.57 times as
of 31 December 2016.
Ferrexpo achieved a record pellet premium for its product in
2017. Its average received price outperformed the average Platts
62% Fe iron ore fines price by 40%.
Driving the improvement in pricing was an increasing divergence
during the year for prices paid for different qualities of iron
ore, with high quality iron ore producers, including pellet
producers, receiving significant premiums to the benchmark iron ore
price, while low quality producers realised substantial discounts.
Ferrexpo, as a pellet producer, was very well placed to benefit
from this market development given its strategy of producing and
selling a high quality iron ore product to the best steel mills in
the world.
Although Ferrexpo's cost of pellet production per tonne did
increase during the year, it is still a low cost producer relative
to its peers, and remains in the bottom quartile of the pellet cost
curve.
Dividends
In view of this increase in profitability, the Board was pleased
to resume its previous practice of paying an interim ordinary and a
special dividend during the year, and today we have announced a
final ordinary dividend of 3.3 US cents per share as well as a
special dividend of 6.6 US cents per share. If the final ordinary
dividend is approved by shareholders, the total dividend relating
to 2017 will be 16.5 US cents per share (2016: 6.6 US cents per
share).
Health and Safety
We deeply regret a fatality at Ferrexpo Poltava Mining ('FPM')
in 2017 (2016: two). Our goal remains firmly focused on achieving
zero fatalities or injuries. On behalf of the Group, I would like
to express our sincere condolences to the family of our valued
colleague.
For further information on health and safety performance, see
page 16.
Industry
The steel industry experienced strong profitability in 2017
primarily due to global demand growth and capacity rationalisation
in the Chinese steel sector. As such, steel mills looked to
increase their utilisation rates while in China mills also sought
to decrease their air emissions by reducing sintering and using
higher quality inputs. These factors resulted in increased demand
for high-grade ore, including pellet. Meanwhile, additional supply
of high grade iron ore, including pellet, was limited, resulting in
pellet premiums trading at nine-year highs.
For further information on the market environment see Market
Review on pages 12 - 14.
Strategy
Since its IPO in 2007, Ferrexpo has established itself as a high
quality producer and exporter of iron ore pellets to the best steel
mills in the world. It has done this by investing more than US$2.15
billion into its operations to access additional ore, upgrade its
processing facilities to improve the quality of its pellet, and
establish reliable and cost effective transportation routes to
European and seaborne markets. As a result, it has more than
doubled production of its high quality 65% Fe pellets, and today it
is the third largest exporter of blast furnace pellets by
volume.
At the same time, Ferrexpo is one of the lowest cost pellet
producers in the world. Going forward, the Group will look to
maintain its low cost position within the industry, further improve
the quality of its output and increase its production volume.
In 2017, production volumes were primarily impacted by the
refurbishment of one of the Group's pelletising lines as well as a
general increase in maintenance levels. The Group's refurbishment
programme of its pellet lines will continue into 2018 and 2019.
Ferrexpo, however, has compelling brownfield projects to
incrementally increase its production volumes subject to available
cash flows.
The Group's capital allocation strategy is to maintain an
appropriate balance between a strong balance sheet, attractive
shareholder returns (in the form of dividends) and investment in
growth opportunities. This strategy has been designed to reduce the
risks inherent in operating in an emerging market while selling our
product in a volatile commodities market.
Over the past two years the Group has focused on strengthening
its balance sheet and during this time has reduced net debt by
US$465 million. Given this strong reduction and the improvement in
Group profitability, total dividends of 16.5 US cents have been
declared for 2017. Going forward, the Group will continue to focus
on debt reduction.
Following the reduction in capital investment in 2015, due to
the low iron ore price environment, investment was gradually
increased in 2017. Ferrexpo is implementing a project to increase
output of pellet feed by approximately 1.5 million tonnes. Once
completed in 2020, it will allow the Group to produce sufficient
concentrate to feed all four of its pelletising lines and increase
pellet production to 12 million tonnes per annum. Ferrexpo also
commenced detailed engineering studies regarding the expansion of
its pelletising capacity. Capital will be invested subject to cash
flows and market conditions.
Looking to the future, I am confident that Ferrexpo will make
further progress by improving the quality of its product and
increasing production volumes within the constraints of its capital
allocation strategy.
Board Changes
During 2017, Sir Malcolm Field and Oliver Baring retired as
planned. The Board is most grateful to both of them for the
valuable contributions they have made. Simon Lockett, who has wide
experience of natural resource operations in emerging markets,
joined the Board in June and took over as Senior Independent
Director in September.
The Board's refreshment programme is now complete.
Social Responsibility
For the year ended 2017, it is expected that Ferrexpo's pellet
exports will be approximately 1.9% of Ukraine's total export
revenue. The Board believes it is fundamental to ensure that
Ferrexpo continues to make a positive contribution to the society
in which it operates, aiding the long-term development of Ukraine
and creating a stable operating environment for the Group.
Ferrexpo provides financial support for a broad array of social
programmes across the country and in 2017 invested approximately
2.4% of total Group revenue in these programmes, in line with 2016.
These programmes underpin Ferrexpo's licence to operate and ensure
that the community is supported when required.
Ukraine
The National Bank of Ukraine expects 2017 GDP growth of
approximately 2%, in line with 2016.
Over the year there were various encouraging developments. The
government implemented several reforms to reduce the regulatory
burden on businesses operating within the country. The World Bank's
Doing Business report for the period from 30 June 2016 to 30 June
2017 ranked Ukraine four places higher at 76th out of 190 countries
in terms of overall ease of doing business. In August 2017, Moody's
rating agency upgraded Ukraine's sovereign rating from Caa3 to Caa2
with a positive outlook. The driver for the upgrade was based on
the cumulative impact of structural reforms that, if sustained, are
expected to improve the government's financial position. The rating
upgrade was constrained by the government's heavy debt maturity
profile over the next several years that is expected to require
additional foreign currency lending.
In terms of IMF funding, Ukraine received a US$1 billion tranche
in April 2017, as part of the US$17.5 billion programme agreed in
March 2015. To date, US$7.7 billion has been paid out. The IMF has
stressed that further progress is required in the fight against
corruption, including the establishment of an independent
anti-corruption court.
Against this background of GDP growth, improvements to the
regulatory environment and a credit rating upgrade, the Board of
Ferrexpo believes Ukraine is gradually moving in the right
direction although challenges remain.
Outlook
In 2018, Ferrexpo expects further rationalisation of steel
capacity in China which should support global steel margins, and in
turn encourage a continued focus on iron making productivity. These
dynamics, together with a continued focus by Chinese authorities on
the environment and a reduction of air emissions, provide a
favourable environment for higher quality iron ore, including
pellets.
Ferrexpo expects to benefit from higher pellet premiums compared
to 2017 reflecting agreements already reached with customers and
the prevailing strength in demand for high quality pellets.
From an operational point of view, costs remain subject to
commodity prices, the Hryvnia exchange rate and inflation levels in
Ukraine. Production volumes will reflect a 65 day pellet line
shutdown in the second quarter of 2018. As such first half 2018
production is expected to be in line with the first half of 2017.
Production in the second half of 2018 is expected to be ahead of
the second half of 2017.
Steve Lucas
Chairman
FINANCIAL REVIEW
Summary
Strong demand for high quality iron ore in 2017 enabled Ferrexpo
to achieve a record pellet premium for its product. The Group's
Quality Upgrade Programme, completed in 2015, allowed it to fully
capture the increase in market premiums for its 65% Fe pellet
product, which represented a record 95% of total pellet output
during the year.
While pellet premiums reached a record for the Group, costs per
tonne increased from a ten-year low in 2016. The increase reflected
higher costs for commodity priced inputs as well as the impact of a
7% decline in production volumes due to maintenance activities.
Underlying EBITDA(A) increased by 47% to US$551 million (2016:
US$375 million) reflecting higher revenue partly offset by cost
inflation. Profit for the year increased by US$205 million to
US$394 million (2016: US$189 million). This was driven by the
US$176 million increase in Underlying EBITDA(A) as well as a lower
net finance expense and lower write offs and special items.
Ferrexpo continued to focus on further debt reduction in 2017.
During the year, the Group repaid US$239 million of debt and net
debt declined by US$186 million to US$403 million as of 31 December
2017 (31 December 2016: US$589 million).
Net debt has reduced by US$465 million since it peaked at US$868
million as of 31 December 2015, while net debt to Underlying
EBITDA(A) is at a six-year low and sits comfortably below 1x at
0.73x (2016: 1.57x).
Given its improved profitability and cash generation, the Group
is pleased to announce an increase in dividends, and if the final
ordinary dividend is approved by shareholders, dividends will total
16.5 US cents per share for the full year (2016: 6.6 US cents).
Revenue
Group revenue increased 21% to US$1.2 billion compared to US$986
million in 2016.
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
from Brazil to China. Pellet premiums are typically negotiated
annually, half-yearly or quarterly.
Ferrexpo's achieved price in 2017 increased by US$27 per tonne
compared to 2016. This takes into account price movements in the
benchmark Platts 62% Fe iron ore fines price as well as movements
in pellet premiums and C3 freight.
In 2017, the 62% Fe iron ore fines spot price increased 22% with
an average price of US$71 per tonne compared to US$58 per tonne in
2016.
Due to strong market demand for high grade pellets the Group
achieved a record average pellet premium. Overall, the Group's net
pellet premium increased 86% compared to 2016 levels.
The cost of international freight increased in 2017 due to
strong demand and rising oil prices. The average C3 freight rate
increased US$6 per tonne to US$15 per tonne. As such, turnover from
international freight services increased to US$73 million compared
to US$66 million in 2016.
Sales volumes for the year were 10.5 million tonnes compared to
11.7 million tonnes in 2016. Sales volumes in 2016 benefitted from
a one-off destocking of approximately 400,000 tonnes of pellets
which did not repeat in 2017. Sales volumes in 2017 were also
impacted by lower production volumes. Pellet stocks as of 31
December 2017 were 390,000 tonnes compared to 369,000 tonnes at the
end of 2016.
Costs
Cost of Goods Sold
Ferrexpo's total cost of goods sold was US$411 million in 2017
compared to US$400 million in 2016. The 3% increase primarily
reflected higher commodity price inputs and an increase in
maintenance activities and costs partly reduced by lower production
levels.
C1 Cash Cost of Production(A)
The Group's C1 cash cost of production was US$32.3 per tonne
compared to a ten-year low of US$27.7 per tonne in 2016. The US$4.6
per tonne increase reflected higher commodity prices, increased
maintenance activity, increased mining activity and lower
production volumes.
Costs of approximately US$53 million (or US$5 per tonne of
pellet output) were incurred in the mining of lean (lower grade)
ore which is currently being stockpiled and has, therefore, not
been reported within the C1 cash cost of production, but is
reflected in working capital. It is planned that this lean ore will
be utilised once the Group has installed additional processing
capacity.
For further information see Capital Investment on page 19.
The C1 Cash Cost of Production is regarded as an Alternative
Performance Measure ('APM'). For further information see page
49.
Selling and Distribution Costs
Selling and distribution costs were US$220 million compared to
US$210 million in 2016. The increase primarily reflected higher
seaborne freight rates (see Revenue) as such, international freight
increased by US$7 million to US$73 million.
Rail costs to transport pellets to border points for export
increased marginally during the year, reflecting a 15% increase in
domestic railway tariffs. This increase was partially offset by a
slight depreciation of the Ukrainian Hryvnia against the US
Dollar.
Currency
Ferrexpo prepares its accounts in US Dollars, whereas the
functional currency of the Ukrainian operations is the Hryvnia.
During 2017, the Hryvnia devalued 3% from UAH27.19 per US Dollar
as of 1 January 2017 to UAH28.07 per US Dollar as of 31 December
2017.
Ukrainian Hryvnia vs. US Dollar
1 January 31 December Average Average
2017 2017 2017 2016
-------- --------- ----------- ------- -------
UAH per
US$ 27.19 28.07 26.60 25.55
-------- --------- ----------- ------- -------
Source: National Bank of Ukraine.
Local balances at 31 December 2017 are converted into the
Group's reporting currency at the prevailing exchange rate. The
devaluation of the Hryvnia during the financial year 2017 resulted
in a US$41 million reduction in net assets, as reflected in the
translation reserve.
Operating Foreign Exchange Gains/Losses
Given the functional currency of the Ukrainian subsidiaries is
the Hryvnia, a devaluation of the Hryvnia against the US Dollar
results in foreign exchange gains on the subsidiaries' US Dollar
denominated receivable balances (from the sale of pellets). The
lower operating foreign exchange gains in 2017 of US$6.7 million
(2016: US$13.8 million) reflected a relatively stable Hryvnia
against the US Dollar during the year.
Non-operating Foreign Exchange Gains/Losses
Non-operating foreign exchange gains/ losses are mainly due to
the conversion of loans in currencies different to the functional
currency of certain subsidiaries of the Group, and are the net
effect from a lower devaluation of the Hryvnia to the US Dollar in
2017 compared to 2016 and a significantly stronger appreciation of
the Euro to the US Dollar. The Euro appreciated from 0.956 per US
Dollar to 0.838 per US Dollar in 2017.
Profit Before Tax and Finance
Profit before tax and finance increased by US$187 million to
US$496 million compared to US$309 million in 2016, principally
reflecting a US$177 million increase in operating profit to US$490
million (2016: US$314 million) due to higher sales prices partly
offset by lower sales volumes and cost inflation.
Interest and Debt
Gross debt reduced by 32% in 2017 and as of 31 December 2017 was
US$501 million (31 December 2016: US$734 million). This reflected
repayment of US$194 million of the Group's outstanding Pre-Export
Finance ("PXF") facility, US$26 million Export Credit Agency debt
and a US$19 million repayment of trade finance facilities.
In November 2017, the Group secured a new PXF facility of US$195
million. The interest rate on this facility is 450 basis points +
3-month US$ LIBOR.
Due to the fall in gross debt, finance expense was US$55 million
during the period (2016: US$67 million). The average cost of debt
for the period ended 31 December 2017 was 8.0% (average 2016:
6.7%). The increased average rate reflected amortisation of the
Group's PXF facilities which have a lower cost compared to the
Group's outstanding US$346 million Eurobond, partly offset by lower
average borrowings.
With the first redemption of the Group's Eurobond in April 2018
for US$173 million (the second and final redemption is in 2019 for
US$173 million), Ferrexpo expects its interest expense to reduce in
2018 and 2019 subject to increases in LIBOR. As of 31 December
2017, approximately 26% of its debt was floating and 74% fixed.
For further details see Liquidity and Debt Maturity Profile
below.
Tax
In 2017, the Group's tax charge was US$55 million, resulting in
an effective tax rate of 12.3% compared to 18.2% in 2016, or US$42
million.
The effective tax rate in 2017 reflected a partial
de-recognition of the deferred tax asset on the provision for
restricted cash balances as well as recognition of a deferred tax
asset at Ferrexpo Yeristovo Mining ('FYM') related to losses
incurred in prior periods. This was partially consumed in 2017 and
is expected to be fully offset against future taxable profits.
For further information see Note 9 of the financial
statements.
Profit for the Year from Continuing Operations
Profit for the year increased by US$205 million to US$394
million (2016: US$189 million). This was primarily driven by a
strong year-on-year increase in Underlying EBITDA of US$176
million, as well as a US$12 million reduction in net finance
expense, a US$19 million year-on-year increase in non-operating
forex gains, and a US$11 million reduction in write-offs and
allowances (recorded as special items) offset by a US$13 million
increase in corporate profit taxes.
For further information on special items see Note 7 respectively
of the financial statements.
Cash Flows
Net cash flows from operating activities were US$353 million in
2017 compared to US$332 million in 2016. This reflected a working
capital outflow of US$110 million during the year compared to an
inflow of US$9 million in 2016.
In 2017, working capital included an outflow of US$53 million
(2016: 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.
In 2016, working capital benefitted from a US$29 million
pre-payment from two customers. This pre-payment was reversed in
2017, and in addition, balances due from customers increased by
US$3 million during the year due to higher market prices and timing
of sales which were weighted towards December.
Inventories increased by US$26 million in 2017 partly due to
higher commodity cost inflation as well as higher spare parts and
raw materials due to an increase in maintenance activities and a
restocking of items to normal levels following a destocking in 2015
and 2016.
During the year, Ferrexpo received all VAT outstanding on a
regular monthly basis. In 2016, Ferrexpo received a refund of US$27
million of pre-paid corporate profit tax relating to prior years
which was reflected in a decrease in VAT recoverable and other
taxes recoverable and payable in the cash flow statement.
Capital Investment(A)
Capital expenditure in 2017 was US$103 million compared to US$48
million in 2016. Of this, US$79 million was sustaining capex (2016:
US$48 million) with US$20 million related to development stripping
at FYM. Investment into growth projects was US$24 million (2016:
nil).
In 2017, the Group re-commenced Phase 1 of its concentrate
expansion programme which was postponed in 2015. The project will
increase production of pellet feed by approximately 1.5 million
tonnes per annum and is expected to cost an additional US$65
million to complete by 2020. The total cost of the project is
US$120 million, of which US$48 million was incurred prior to
deferment and US$7 million was incurred in 2017.
During 2017, Ferrexpo invested US$4.4 million in the development
and exploration of the Belanovo, Galeschyno and the Northern
Deposits (2016: US$0.5 million).
Ferrexpo also commenced engineering studies to expand its
pelletising capacity above its current nameplate capacity of 12
million tonnes per annum.
For further information see Capital Investment in the Chairman's
Statement on page 5 and Capital Investment in the Operations Review
on page 19.
Dividends
A final ordinary dividend of 3.3 US cents per share is being
proposed (2016: 3.3 US cents), as well as a final special dividend
for the year of 6.6 US cents (2016: 3.3 US cents). If the final
ordinary dividend is approved by shareholders, the total dividend
related to 2017 will be 16.5 US cents per share (2016: 6.6 US cents
per share).
The special dividend announced today will be paid on 16 April
2018 to shareholders on the register at the close of business on 3
April 2018. Subject to approval at the Group's AGM, payment of the
final ordinary dividend will be made on 27 June 2018 to
shareholders on the register at the close of business on 1 June
2018. The dividend will be paid in UK Pounds Sterling with an
election to receive US Dollars.
Liquidity(A) and Debt Maturity Profile
As of 31 December 2017, Ferrexpo's total available liquidity was
US$312 million (2016: US$145 million) consisting of US$98 million
cash and US$214 million in committed facilities (including a new
US$195 million PXF and available facilities of US$19 million on an
existing PXF). In addition, the Group has up to US$80 million of
unused trade finance facilities.
Net debt declined by US$186 million to US$403 million as of 31
December 2017 (31 December 2016: US$589 million). Net debt to
Underlying EBITDA(A) for the last 12 months was 0.73x compared to
1.57x as of 31 December 2016.
Total debt outstanding, as of 31 December 2017, was US$501
million (31 December 2016: US$734 million). This comprised of
US$113 million drawn under a 2013 PXF facility with three quarterly
instalments of US$38 million remaining (completing in 3Q 2018); a
US$346 million Eurobond maturing in equal parts in April 2018 and
April 2019, and US$39 million of Export Credit Agency ("ECA")
funding maturing over the next four years.
In 2018, the Group has US$309 million of debt amortisations
consisting of a US$173 million Eurobond redemption, US$113 million
PXF repayment and US$23 million of ECA amortisations.
The PXF facility of US$195 million will amortise over eight
quarters with final repayment on 31 December 2020. During 2017,
Ferrexpo considerably strengthened its balance sheet and improved
its liquidity. This was reflected by credit rating upgrades on
Ferrexpo's long-term corporate and debt rating from B- to B with a
positive outlook from Fitch and stable outlook for S&P.
S&P, Fitch and Moody's all rate Ferrexpo's debt one notch above
the Ukraine sovereign rating.
Following the successful closure of a new PXF in 2017, Ferrexpo
may look to further extend its debt maturity profile in 2018 using
the PXF market or other debt capital markets.
MARKET REVIEW
Overview of the Iron Ore Market in 2017
Key developments in the steel and iron ore industry in 2017
included: (1) a significant increase in the anti-dumping duties
imposed on steel products by many countries around the world; (2)
ongoing Chinese government rationalisation of the steel industry as
well as implementation of environmental controls to reduce
emissions from the local production of pig iron and sintering; and
(3) a widening price differential between low grade and high grade
raw materials.
While anti-dumping duties gave traditional steel-producing
countries good reason to lift their own steel production, in China
around 50 million tonnes of steel capacity was closed during the
year. At the same time, World Steel Association figures show that
China increased its overall crude steel production to 832 million
tonnes in 2017 (up from 787 million tonnes in 2016), which included
a 30% reduction in steel exports, indicating healthy domestic
demand.
The elimination of less efficient capacity in the Chinese steel
industry increased the profitability of incumbent mills. Higher
profitability led mills to maximize their steelmaking capacity,
demanding higher-quality inputs which also help to limit
emissions.
Overall, global crude steel production expanded in 2017 by
approximately 5.3% due to strong industrial demand and improving
steel profitability (at a high since the global financial crisis in
2007). In terms of the markets most important to global iron ore,
besides China, European steel output (including CIS countries)
increased 3.8% to 313 million tonnes while North East Asia
increased steel production by 1.7% to 175 million tonnes (Source:
WSA).
Higher steel production combined with high rates of productivity
meant demand for iron ore pellet was strong throughout the year.
While a limited supply of seaborne pellet resulted in pellet
premiums trading at nine-year highs.
The average Platts 62% Fe iron ore fines price rose 22% in 2017
to US$71 per tonne (2016: average US$58 per tonne). While the
average Platts 65% index increased 35% to US$88 per tonne (2016:
average US$65 per tonne), implying strong demand for high grade
products through the year. Conversely, the Platts 58% Fe price
index decreased 4% in 2017 to an average of US$43 per tonne for the
year (2016 average: US$45 per tonne) as low grade products were
heavily discounted through most of the year.
The Iron Ore Pellet Market
According to CRU, in 2017 iron ore pellets accounted for
approximately 22% (443 million tonnes) of total iron ore
consumption, while lump accounted for 16% (321 million tonnes) and
fines 62% (1.2 billion tonnes).
The proportion of actively traded pellets on global markets,
however, comprises only around 8% of total exported iron ore, or
the equivalent of 124 million tonnes in 2017 (compared to over 1.1
billion tonnes of traded iron ore fine).The majority of pellets are
captive to certain steel mills or regions, while iron ore fines and
lump are mined remotely and predominantly traded on the open
(seaborne) market.
The largest consumers of pellets are in China, Russia, India,
USA and Iran (accounting for 65% of total pellet consumption in
2017). The largest importers of pellet are China, Japan, Germany,
Saudi Arabia and Turkey, with Europe importing approximately 47
million tonnes, followed by North East Asia which imported
approximately 21 million tonnes in 2017.
Despite representing approximately 28% of global pellet usage,
the 124 million tonne pellet export market, sets the price for
pellets through negotiations between a limited supply of
independent pellet producers and steel mills.
The supply of actively traded pellets increased by a net 5
million tonnes in 2017 (2016: 119 million tonnes) from producers in
India, Russia and Brazil, while pellet premiums were trading at a
nine-year high. This would suggest that most pelletising plants
elsewhere were already operating near capacity and could only
increase production marginally despite attractive pellet
premiums.
According to CRU, since 2010 exports of lump and fines have
increased by 62% and 44% respectively while the supply of pellets
has decreased by nearly 20%. 2010 marked the peak of pellet
availability on the export market with 151 million tonnes, 27
million tonnes higher than 2017 levels, of which Samarco accounted
for 25 million tonnes.
Breakeven cost curve for pellet exporters
The graph below shows the breakeven pellet cost curve for
delivery to China. Market concentration in the pellet export market
is high, with the two largest suppliers of pellets by volume
(coloured red and pink in) holding a market share of approximately
45%. In terms of their breakeven cost, both these exporters sit in
the first, second, third and fourth quartile of the cost curve
while the higher cost pellet producers require a breakeven 62% Fe
CFR fines price of around US$70 per tonne. Ferrexpo is well
positioned in the bottom half of the cost curve.
CRU Breakeven cost curve for pellet producers to China
http://www.rns-pdf.londonstockexchange.com/rns/3699I_-2018-3-21.pdf
The largest supplier has announced that it will bring back
capacity in 2018 with the restart of operations which have been
idled since 4Q 2012, and sit in the fourth quartile of the cost
curve. CRU expects that this could add an additional 8 million
tonnes to the seaborne market once in full operation (approximately
5 million tonnes in 2018).
The capacity restart of further seaborne supply remains
uncertain in terms of timing and the volume to be produced.
Barriers to entry into the pellet market are high with
significant capital investment required. When developing a
greenfield pellet operation it is usually necessary to invest in
mining, beneficiation, pelletising and logistics capability. The
table: Recent Capacity Additions to the Pellet Market, shows the
cost of the most recent capacity additions to the seaborne pellet
market.
Recent Capacity Additions to the Pellet Market
New pellet Duration Tonnes Cost/tonne Description
capacity of pellet
capacity
----------------- --------------- ----------------------------- ------------- ---------------------
Samarco 2011-2014 8.3Mt R$6.459bn (US$3.251bn US$391/ tonne Construction of
equivalent) 9.5mt concentrator
Construction of
slurry pipeline
with 20Mt capacity
Construction of
8.3Mt pelletiser
9mt increase in
port capacity
----------------- --------------- ----------------------------- ------------- ---------------------
Vale Tubarão 2011-2015 7.5Mt US$1.3bn US$176/tonne Construction of
VIII pellet plant
----------------- --------------- ----------------------------- ------------- ---------------------
Metalloinvest 2012-2015 5Mt RUB16bn (US$460m equivalent) US$92/tonne Construction of
pellet plant
----------------- --------------- ----------------------------- ------------- ---------------------
NMLK 2011-2016 6Mt RUB41bn (US$1.4bn equivalent) US$233/tonne Construction of
pellet plant US$680m
or US$113/tonne
Expanded mining
and beneficiation
capacity
----------------- --------------- ----------------------------- ------------- ---------------------
Source: Company announcements
As a pellet exporter, which has established operations and is
well positioned geographically to supply major import markets,
Ferrexpo benefits from operating in a niche sub-sector of the iron
ore market with high barriers to entry, at a low cost relative to
the competition.
Pellet Utilisation Rates and Forecast Pellet Demand Growth
Pellet utilisation rates in a blast furnace vary regionally
across the world. The table: Consumption of Iron Ore per tonne of
Hot Metal, shows the consumption of pellet, lump and fines per
tonne of hot metal in Europe, North East Asia and China. Europe
remains a large and globally important market for pellets whilst
the proportion of sintering in China is high at close to 80% and
North East Asia utilises a higher proportion of lump.
Consumption of Iron Ore per tonne of Hot Metal
Kg of Fe/tonne of hot metal Europe % of NE Asia % of China % of
mix mix mix
---------------------------- ------ ---- ------- ---- ----- ----
Pellets 522 33% 171 11% 180 11%
Lump 119 7% 371 23% 213 13%
Fines 949 60% 1,069 66% 1,271 76%
---------------------------- ------ ---- ------- ---- ----- ----
Total 1,590 1,611 1,664
---------------------------- ------ ---- ------- ---- ----- ----
Source: CRU statistical review January 2018
Sintering is generally the most polluting part of steel making
and has been targeted as part of the Chinese government's
anti-pollution controls. In Europe and North East Asia, steel
plants have limited sintering capacity while lump contains a higher
level of impurities compared to pellets and, given it is naturally
occurring, has an inconsistent form, making it a less reliable
input compared to pellet. These factors limit the overall
proportion of lump that can be used in a blast furnace and support
the consumption of pellets going forward.
As with fines and lump, the largest consumer of pellet is China,
consuming 144 million tonnes in 2017 compared to 135 million tonnes
in 2016. In 2017, China produced approximately 125 million tonnes
of pellet internally (2016: 120 million tonnes) and imported 19
million tonnes (2016: 15 million tonnes). China's own production of
pellets peaked in 2010 at 140 million tonnes. CRU estimates that
since 2016 China has closed approximately 60 million tonnes of
pelletising capacity which was considered to be obsolete. Ferrexpo
believes there is a large range of mining operations in China with
a wide spectrum of cost structures; however, the marginal cost to
produce concentrate in China is estimated to be approximately US$70
per tonne compared to the average 62% Fe fines price in 2017 of
US$71 per tonne. As China is a large consumer of pellet, the high
local cost of marginal pellet supply should support demand for
imports of pellet.
The consumption of iron ore in 2017 was approximately 2 billion
tonnes, a 1% increase in the proportion of pellet in the blast
furnace burden mix would lead to an additional 20 million tonnes of
pellet demand.
OPERATIONAL REVIEW
Marketing
Total sales volumes in 2017 were 10.5 million tonnes (2016: 11.7
million tonnes) with the Group's premium 65% Fe pellet representing
a record 95% of total pellet output during the year (2016:
94%).
Completion of the Group's Quality Upgrade Programme in 2015 has
allowed Ferrexpo to improve its price realisations. Ferrexpo's
pellet revenue per tonne of pellets sold has allowed it to narrow
the price gap between itself and the benchmark pellet price.
Due to lower production levels in 2017, Ferrexpo focused on
servicing its existing long-term customer portfolio. The table:
Sales Volume by Market Region, shows that the customer mix remained
stable compared to 2016. The countries the Group sells the most to
are Austria, Germany and Japan.
Sales Volume by Market Region
2017 2016
------------------------------------ ------ ------
Central Europe 49% 48%
North East Asia 16% 17%
Western Europe 15% 16%
China and South East Asia 12% 13%
Turkey, Middle East, India 8% 6%
------------------------------------ ------ ------
Total sales volume (million tonnes) 10,467 11,697
------------------------------------ ------ ------
The Group's pricing formula for its long-term contracts are all
based on a spot index iron ore fines price, usually the Platts 62%
Fe iron ore fines price, for various reference periods, and takes
into account the cost of international freight, typically the C3
index, as well as a pellet premium which is typically
negotiated.
The table: Sales Volume by Average Reference Period for Iron Ore
Fines, shows the split of sales volume agreed according to the
average reference period used for the iron ore fines price
calculation. Most of the Group's contracts are based on the average
iron ore fines price for the month of sale or for the quarter of
sale.
Sales Volume by Average Reference Period for Iron Ore Fines
Calculation
2017 2016
------------------------------------ ------ ------
Current month 61% 66%
One month forward 8% 12%
Current quarter 20% 11%
Lagging 3-month quarter 9% 10%
Spot fixed on day 2% 1%
------------------------------------ ------ ------
Total sales volume (million tonnes) 10,467 11,697
------------------------------------ ------ ------
In terms of the reference period used for pellet premiums
calculations in the sales price formula, it is common practice in
the industry for long term pellet supply contracts to fix a pellet
premium on annual basis. There are some exceptions, for example
spot sales, however, in 2017 and historically, the majority of
Ferrexpo's pricing has been based on annual pellet premiums.
PRODUCTION
Health and Safety
Most regrettably there was a fatality at FPM during the year
when a truck driver was fatally injured whilst performing
maintenance. The circumstances have been thoroughly investigated
with findings shared across the Group and further safety procedures
put in place. In 2016, there were two work-related fatalities at
the Group's operations.
There were a total of 23 lost time injuries ("LTIs") across the
Group in 2017 (2016: 22), equating to an LTI frequency rate
("LTIFR") of 1.17, in line with 2016. 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 for
2017 and 2016.
FYM was LTI free for 19 months from February 2016 to August 2017
while the Group's barging subsidiary, DDSG, was LTI free for nine
months from October 2016 to June 2017, a record for DDSG.
Unfortunately, the barging operations experienced five minor
accidents in the second half of 2017, with the principal cause
being slips, trips and falls. DDSG is working to eliminate such
incidents.
Lost Time Injury Frequency Rate
LTIFR 2017 2016
---------------- ---- ----
- FPM 1.03 1.14
- FYM 0.74 0.38
- FBM 0.00 0.00
Mining entities 0.98 1.01
---------------- ---- ----
Barging 4.32 3.70
---------------- ---- ----
Group 1.17 1.17
---------------- ---- ----
Most of the accidents reported have been traced back to
non-compliance with internal safety procedures. The Group
leadership is focused on improving understanding of safety
protocols and adherence to standards, combined with training to
ensure better awareness of the consequences of risk-taking in the
operational environment.
Pellet Production
Pellet production in 2017 was 10.4 million tonnes, compared to
11.2 million tonnes in 2016. The Group's 65% Fe pellet represented
a record 95% of total pellet output during the year (2016: 94%);
however, overall production levels were impacted by constraints in
the processing and pelletising plants.
In 2017, production was impacted by an increase in required
maintenance (planned and unplanned). In the first half of the year,
output reflected a 55-day refurbishment of pellet line number 4.
This is part of a programme to refurbish all four of the Group's
pellet lines, as is required approximately every 15 to 20 years.
FPM completed the refurbishment of line number 3 in 2014. Due to
the low iron ore price environment in 2015 and 2016 further
refurbishments were deferred until 2017. The third line will be
refurbished over approximately 65 days in 2Q 2018 and refurbishment
of the remaining line is planned for the first half of 2019.
The Group has a project underway to expand its concentrate
capacity to increase its output of pellets to nameplate capacity of
12 million tonnes per annum. For further details see Capital
Investment on page 19.
The table below summarises production in 2017 and 2016.
Production statistics
(000't unless otherwise stated) 2017 2016 Change
-------------------------------------------- ------ ------ --------
Iron ore processed 27,230 29,335 -7.2%
Average Fe content 33.69% 33.74% -0.05ppt
Concentrate produced ("WMS") 12,807 14,006 -8.6%
Average Fe content 63.12% 62.78% 0.34ppt
Pellets produced from own ore 10,394 11,071 -6.1%
FBP 559 666 -16.1%
Average Fe content 62.58% 62.44% 0.14ppt
FPP 6,789 7,070 -4.0%
Average Fe content 64.85% 64.88% -0.03ppt
FPP+ 3,046 3,336 -8.7%
Average Fe content 64.85% 64.88% -0.03ppt
Pellets produced from purchased concentrate 50 129 -61.2%
-------------------------------------------- ------ ------ --------
Total pellet production 10,444 11,201 -6.8%
-------------------------------------------- ------ ------ --------
Total Group stripping volume (million
m(3) ) 33,826 22,623 49.5%
-------------------------------------------- ------ ------ --------
Note: Ferrexpo Basic Pellets ("FBP"), Ferrexpo Premium Pellets
("FPP") and Ferrexpo Premium Pellets plus ("FPP+"). In 2017,
Ferrexpo produced 37,000 tonnes of pellet feed for sale with an
average Fe content of 67.2% (2016: 123,000 tonnes, average Fe
67.5%).
In July 2017, FPM's mining licence was renewed for a further 20
years until 2037. FYM's mining licence was renewed in 2012 and will
expire in 2032.
Production Costs
The Group's C1 cash cost of production was US$32.3 per tonne
compared to a ten-year low of US$27.7 per tonne in 2016.
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 relatively 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.
Of the US$4.6 per tonne increase in the C1 cash cost in 2017
compared to 2016, approximately 36% (or US$1.65 per tonne)
reflected higher commodity prices, while increased maintenance
activity represented 20% (or US$0.9 per tonne) of the increase and
approximately 16% (or US$0.73 per tonne) was due to lower
production volumes. Increased stripping activity at FYM, in
preparation for future expansion, represented c.18% (or US$0.83 per
tonne) of the cost increase.
Ukrainian producer price inflation was approximately 16.5%(1) on
average compared to 2016. Local cost inflation, specifically
related to higher electricity tariffs and wages, increased the C1
cost by US$1.3 per tonne. The Hryvnia was relatively stable against
the US Dollar, depreciating by 3%, and it did not impact costs of
production materially.
Approximately half of the Group's cost of sales is incurred in
Hryvnia, with electricity costs the largest component. However, the
electricity cost also has exposure to the US Dollar as
approximately 35% of electricity generation in Ukraine comes from
thermal coal which is priced in US Dollars. In terms of logistics
costs incurred within Ukraine, approximately 90% are in Hryvnia.
Overall, roughly 55% of the Group's total cost base is denominated
in Hryvnia.
The table below shows the Group's C1 cash cost(A) by raw
material input.
(1) Source:
www.ukrstat.gov.ua
Breakdown of C1 cash cost per tonne 2017 2016
------------------------------------- ---- ----
Electricity 28% 31%
------------------------------------- ---- ----
Fuel 9% 7%
------------------------------------- ---- ----
Gas 10% 12%
------------------------------------- ---- ----
Materials 14% 16%
------------------------------------- ---- ----
Spare parts 7% 6%
------------------------------------- ---- ----
Maintenance 8% 6%
------------------------------------- ---- ----
Personnel 8% 6%
------------------------------------- ---- ----
Grinding bodies 9% 8%
------------------------------------- ---- ----
Royalties 5% 5%
------------------------------------- ---- ----
Explosives 2% 3%
------------------------------------- ---- ----
CO(2) Emissions
The table below shows the Group's CO(2) intensity ratio was 242
kilograms per tonne of pellet produced in 2017 compared to 235
kilograms per tonne of pellet produced in 2016.
Emissions in tonnes 2017 2016 Change
------------------------------------------ --------- --------- ------
Total CO(2) emissions 2,614,449 2,703,272 -3.3%
------------------------------------------ --------- --------- ------
Scope 1 (direct emissions generated by
Ferrexpo from natural gas, diesel, coal,
oil, explosives etc) 554,763 550,591 0.76%
------------------------------------------ --------- --------- ------
Scope 2 (indirect emissions purchased
by Ferrexpo from electricity and steam) 1,974,997 2,079,329 -5.0%
------------------------------------------ --------- --------- ------
Pellets produced 10,444 11,201 -6.8%
------------------------------------------ --------- --------- ------
Intensity ratio (kilogram per tonne of
pellet produced) (Scope 1 & 2 only) 242.22 234.79 3.2%
------------------------------------------ --------- --------- ------
Scope 3 (emissions derived from living
matter such as biofuels) 84,689 73,352 15.5%
------------------------------------------ --------- --------- ------
Note: Calculation for the Group's Scope 2 CO(2) emissions for
2016 has been amended due to a correction to the conversion factor
applied for the calculation of emissions from steam.
Electricity, which the Group purchases from the national grid in
Ukraine, represented approximately 75% of the Group's total
emissions in 2017. CO(2) from this source reduced 5% due to
increased use of lower carbon inputs in Ukraine's electricity
generation (as calculated by EBRD(2) ), such as nuclear and hydro
power, as well as due to a 7% decline in production levels. Gas,
which represented 9% of the Group's total emissions in 2017,
reduced 14% due to lower production volumes as well as an increase
in substitution with sunflower husks. In 2017, sunflower husks
replaced 19% of gas consumption with the Group consuming 116,000
tonnes of husks compared to 100,000 tonnes in 2016. Diesel
consumption represented 8% of the Group's total CO(2) emissions in
2017. Emissions from diesel increased 22% during the year due to
increased mining activities.
Overall, Ferrexpo's intensity ratio increased 3% year-on-year
due to higher mining activity, while production volumes reduced,
reflecting increased maintenance activities in the processing
plant.
(2 European Bank for Reconstruction
and Development)
Mining and Production Efficiencies
The Group has several projects underway which contribute to cost
savings, efficiency improvements and enhanced health and safety
standards. These include efficiency gains in shovel and dragline
dig rates as well as a transition to 100% liquid emulsion blasting
media. The transition to emulsion blasting media has resulted in
increased rock fragmentation. This has improved excavator and
shovel dig rates and reduces equipment wear and tear. It also
yields power savings and reduced maintenance cost in the crushing
plant. Other efficiency projects include the use of automatic pit
drills, drones for automatic surveys of the pit area and the
commencement of the creation of a centralised mining control hub
for FYM and FPM. This follows the consolidation of FPM and FYM's
maintenance centre for mobile equipment. The Group is also focused
on improving its fixed plant maintenance processes and procedures
to ensure they are best in class and deliver improved
reliability.
Ferrexpo will continue to implement small scale projects aimed
at improving productivity and efficiency to reduce operating
costs.
Capital Investment (A)
Capital investment during the year focused primarily on
sustaining capex, including refurbishment of pelletiser line number
4. For further information see Pellet Production on page 16.
In 2017, following deferral of growth projects in 2015, FPM
gradually recommenced Phase 1 of its concentrate expansion
programme to address bottlenecks in the concentrator. Once
completed, by 2020, the Group will be able process an additional 6
million tonnes
of raw ore, producing approximately 1.5 million tonnes of pellet
equivalent concentrate. To date, approximately US$55 million has
been spent on purchase of equipment and long-lead items and it is
expected that it will cost an additional US$65 million to
complete.
Exploration and initial pre-stripping activities at Ferrexpo
Belanovo Mine, the Group's next mining deposit to be developed,
occurred during the year. The project will be accelerated subject
to market conditions and demands for additional high quality ore,
in line with requirements of the Group's growth projects.
Ferrexpo has initiated studies to expand its pelletising
capacity from 12 million tonnes to over 20 million tonnes by
increasing the capacity of each of its four pelletising lines,
together with the required increases to mining and concentrate
capacity to support a higher level of production.
The Group has multiple options to increase its mining,
processing and pelletising capacity. However, any investment will
be subject to cash flows and market conditions.
Principal Risks
The list of the principal risks and uncertainties facing
Ferrexpo's business that are listed 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.
In order to provide a more concise overview of the principal
risks facing Ferrexpo, it has grouped the risks into nine
categories compared to 17 risks reported in 2016. Most of the
principal risks reported in 2016 are still present but have been
grouped under more general headings. Interest rate risk, however,
is no longer considered to be principal and has been removed.
All risks and their mitigations are actively considered monthly
at the Group's Finance and Risk Management Committee meetings based
on detailed analysis.
Ferrexpo operates in the mining industry where there is an
inherent level of risk present due to the nature of its operations.
In addition, the iron ore fines price (which forms a major
component of the Group's received price) is volatile, while the
Group's asset base is located in Ukraine, an emerging market. As
such, Ferrexpo recognizes and accepts the risks present in its
business and looks to mitigate them where possible. In general, the
overall level of risk present is similar to prior years and
movements in individual risks has not varied significantly compared
to 2016.
The Board of Ferrexpo has ultimate responsibility for the
identification of risks and associated mitigation strategies. The
Chief Executive Officer, Chief Financial Officer, Chief Operating
Officer and Chief Marketing Officer manage specific risks on a day
to day basis related to their functions.
1. Realised Price
The pricing formula used for long term contracts in the pellet
industry is, in general, based on the Platts 62% Fe iron ore fines
prices, a negotiated pellet premium (usually agreed annually) and
the cost of international freight (usually referenced to the C3
index) . Ferrexpo's achieved price can vary significantly from
period to period as it is dependent on the global price for 62% Fe
iron ore fines, pellet premiums and freight (all of which Ferrexpo
has little or no control over as a price taker).
1.1. Lower Iron Ore Prices (external risk)
Root Cause and Impact
A decline in the 62% Fe iron ore fines price will reduce Group
revenue, profitability and cash generation. A reduction in cash
generation could impact the Group's ability to fund maintenance and
development capital investment. Lower levels of maintenance
investment could result in lower production volumes, further
reducing cash generation and impacting balance sheet strength.
The iron ore fines price averaged US$71 per tonne in 2017
compared to US$58 per tonne in 2016. Most market analysts expect
the price to fall in 2018 and 2019, averaging US$63 per tonne and
US$59 per tonne respectively(3) . For further information on iron
ore prices and the market environment see pages 12 to 14.
(3.) (As of 14 February 2018 expected
average price comprises forecasts
from 13 investment banks)
Mitigation
Ferrexpo is a low cost producer and is currently in the lowest
quartile of the cost curve. Ferrexpo's operating costs are partly
linked to commodity prices. In times of low prices for the end
product, costs also typically reduced. Furthermore, the Ukrainian
Hryvnia is a commodity-related currency and historically it has
depreciated during periods of low commodity prices.
Ferrexpo regularly reviews options to hedge the price of its
output, however, its current strategy is to not enter into hedging
agreements. Ferrexpo has maintained positive profit through the
iron ore price cycle.
1.2. Pellet Premiums and Pellet Supply (external risk)
Root Cause and Impact
Ferrexpo receives a pellet premium for its product in addition
to the iron ore fines price. Currently, a substantial portion of
its profitability is due to this premium. The average Atlantic
pellet premium from 2011 to 2017 was US$35 per tonne.
Average pellet premiums in 2017 were over 70% higher than 2016
and traded at a nine year high. The outlook for premiums in 2018 is
good with the average premium expected to increase.
Approximately 10 million tonnes of high cost pellet supply is
expected to re-enter the market during 2018 and 2019. Steel mills,
however, are currently enjoying high levels of demand and
profitability, underpinning pellet demand. Post 2018, it is
possible that pellet supply that is currently not in production
will re-enter the market. This could coincide with a reduction in
steel mill profitability, impacting demand for pellets and
resulting in an oversupply of pellets to the market. A decrease in
the pellet premium would reduce the Group's revenue, profitability
and cash generation.
Mitigation
Ferrexpo sells high quality pellets which underpins demand for
its product throughout the commodity cycle. Should the pellet
premium decline, Ferrexpo has one of the lowest pellet conversion
costs in the industry, which should ensure that it is able to
remain a competitive producer.
For further information on pellet premiums and the market
environment see pages 12 to 14.
1.3. Seaborne Freight Rates (external risk)
Root Cause and 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 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 for iron
ore from the Brazilian port of Tubarao (where the largest seaborne
pellet supplier is 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 appropriate global
benchmarks.
Freight rates are largely influenced by the price of oil. In
2017, the average C3 freight rate(4) increased to US$15 per tonne
from US$9 per tonne in 2016.
(4) Seaborne freight rates, such as C3, are published
by the Baltic Exchange and represent the cost for ocean
transportation of iron ore from the Brazilian port
of Tubarão (where the largest seaborne suppliers
of pellets are based) to Qingdao, China (the largest
steel producing country 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.
2. Operating Risks
2.1. Operating Risks and Hazards Incl. Mining, Processing and
Logistics (company specific risk)
Root Cause and Impact
Ferrexpo operates large scale mining operations which can pose
significant challenges and environmental risks. This may result in
production-related shortfalls or shutdowns due to geotechnical
incidents, mining or processing equipment failure as well as
logistics bottlenecks.
The Group's operations require sustaining capital expenditure
and repair and maintenance programmes to ensure availability of
equipment. A reduction in sustaining capital or repairs and
maintenance expenditure can result in equipment failure.
Production stoppages will increase costs and lower output. It
can also reduce the quality of the product and lead to late
delivery to customers. Lower volumes, higher costs, financial
penalties due to poor quality and late delivery of product can
impact the Group's cash generation ability, reducing liquidity
levels, impacting capital investment levels as well as balance
sheet strength. The late delivery of product can also impact the
Group's ability to perform according to customer contracts and
impact its ability to renew contracts in the future.
Mitigation
During the year the Group completed a 55-day refurbishment of
pelletiser line number 4. Pelletiser line number 3 was refurbished
in 2014. The Group plans to refurbish the final two pellet lines in
2018 and 2019 respectively. See page 18 for a description of the
factors impacting the Group's operations in 2017.
In 1Q 2015, the Group completed a Quality Upgrade Programme
which has allowed Ferrexpo to increase the overall quality of its
product. Since 2007, Ferrexpo has invested more than US$2.15
billion, which has included modernisation of existing equipment and
investment in its logistics capabilities.
Where possible, Ferrexpo owns its own logistics infrastructure.
This includes 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 seaborne markets, avoiding reliance on the
state port.
2.2. Health and Safety Risks (company specific risk)
Root Cause and Impact
The mining and processing of iron ore is often associated with a
hazardous working environment as it includes the use of explosives
and the operation and repair of heavy machinery, amongst other
things. Failure to provide a safe work environment for the Group's
workforce and failure to ensure an improved and sustained
performance in safety behaviour can impact the Group's social
license to operate. Fatalities and lost time injuries also result
in production stoppages as well as negatively impact employee
moral.
During 2017, there was one fatality compared to two fatalities
in 2016. A total of 23 lost time injuries occurred across the Group
during the year compared to 22 in 2016. The lost time injury
frequency rate per million man hours worked was 1.17, in line with
2016.
Mitigation
Safety performance is regularly reviewed throughout the
organisation.
All accidents are fully investigated, using Incident, Cause and
Analysis methodology. To eliminate reoccurrence the significant
incident register is reviewed six monthly to update controls and
develop additional actions.
Safety training is regularly provided to employees to instill a
culture of accountability. The goal of these safety workshops is to
emphasise and ensure that all employees understand and appreciate
the importance of strict adherence to safety procedures and that
protection of our employees is paramount.
A "near miss" reporting process has been established to learn
from low consequence events.
Employee remuneration is linked to safety performance.
Ferrexpo has modernised its mining and production facilities,
improving safety and environmental performance.
2.3. Operating Cost Increases (external risk)
Root Cause and Impact
The production of iron ore pellets is a more capital intensive
process than other types of iron ore production as it requires the
enrichment of relatively low grade ore into a high grade product.
As such, in general, pellet producers have higher operating costs
per tonne of output than producers of iron ore fines or lump.
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 relatively 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. In addition, over half of the Group's operating
costs, including in-land logistics costs, are incurred in Ukrainian
hryvnia.
As such, the Group's cost of production is sensitive to local
inflation, exchange rate fluctuations between the hryvnia and the
US Dollar and US dollar commodity cost inflation.
In 2017, the Group's C1 cash cost increased from US$28 per tonne
to US$32 per tonne. See page 8 and 17 for a description of the
factors impacting operating costs.
Mitigation
Ferrexpo sits in the bottom quartile of the pellet cost curve.
Many of its costs which relate to commodity prices will impact its
peers to a similar extent. As such in times of higher commodity
prices the Group should be able to maintain its cost
competitiveness relative to its competitors.
Ferrexpo looks to increase production volumes to ensure fixed
cost dilution and enable the Group to offset (to some extent)
external cost inflation. The Group has a Business Improvement
Programme aimed at increasing efficiencies and reducing costs by 1%
to 2% per annum.
The Ukrainian Hryvnia is a commodity-related currency and
historically has depreciated during periods of low commodity
prices.
3. Ukraine Country Risk (external risk)
Root Cause and Impact
Ukraine has been an independent country since 1991. During this
time the country has witnessed two revolutions in 2004 and in 2014.
It has also been subjected to the annexation of Crimea, and there
is an ongoing conflict in Eastern Ukraine. The general political
instability has negative social and economic consequences and is
capable of damaging Ferrexpo's ability to operate without
disruption in Ukraine.
Economic weakness can reduce the government's ability to fund
social services, leading to tensions within local communities. It
can also impact the government's ability to meet payment
obligations to exporters (such as VAT refunds) and/or lead to
higher taxes (including increased royalty payments). Services
provided by state monopolies such as the supply of electricity, gas
and freight transportation can also be disrupted in this
environment. This can affect Ferrexpo's ability to export product
reliably.
Transparency International ranks Ukraine as 130th out of 176
countries in terms of the level of perceived corruption (with
176(th) being regarded as the most corrupt). There is a risk that
counterparties are involved in activities that are not in
compliance with relevant international standards. Further, a weak
judicial system can be susceptible to outside influences and can
take an extended period of time for courts to reach final
judgment.
The Group holds mining licences and the other permits required
to carry out mining operations. If mining licences were to be
revoked or not renewed, Ferrexpo's ability to continue to produce
pellets would be at risk.
Ukraine is a recipient of IMF funding for which, in return, the
government has undertaken to implement a number of systemic
reforms. In August 2017, Moody's rating agency upgraded Ukraine's
sovereign rating from Caa3 to Caa2 with a positive outlook. The
driver for the upgrade was based on the cumulative impact of
structural reforms that, if sustained, are expected to improve the
government's financial position. The rating upgrade was constrained
by the government's heavy debt maturity profile over the next
several years that is expected to require additional foreign
currency lending.
In 2017, Ferrexpo raised new debt facilities, extended FPM's
mining licence for 20 years and received all outstanding VAT.
Also see "Debt maturity profile - impact".
Mitigation
Ferrexpo prioritises sufficient liquidity levels and strong
credit metrics to ensure smooth operations should geopolitical or
economic weakness disrupt the financial system of the country.
Ferrexpo makes meaningful contributions to national and local
communities.
Ferrexpo invests 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 maintains and invests in its logistics capabilities to
ensure available capacity to better service its customers, lower
costs and reduce reliance on state providers.
Ferrexpo prioritises a strong internal control framework
including high standards of compliance and ethics.
Ferrexpo monitors its commitments under its various mining
licences in order to ensure conditions contained within the
licences are fulfilled or the appropriate waivers are obtained.
4. Tax (external risk)
Root Cause and Impact
Ferrexpo is a large tax payer in Ukraine and also pays tax
internationally. The growing complexity of tax legislation around
the world can result in unforeseen tax payments. Ferrexpo is
subject to transfer pricing regulations both locally and
internationally. The Base Erosion and Profit Shifting ('BEPS')
project initiated by the G20 and OECD is likely to increase
scrutiny of cross border tax transactions and may result in
challenges from different jurisdictions.
Legislation and regulations are not always clearly written and
are subject to varying interpretations and inconsistent enforcement
by local, regional and national Ukrainian tax authorities, and
other governmental bodies. The uncertainty of application and the
evolution of Ukrainian tax laws, including those affecting
cross-border transactions, could result in additional tax payments
having to be made by the Group which would reduce cash flows and
impact liquidity levels.
For further information see note 12 of the Financial
Statements.
Mitigation
Ferrexpo conducts transparent and open dialogue with local,
regional and national tax authorities. Its tax strategy is in line
with best international standards and it is in compliance with all
known requirements. The Group regularly takes advice on tax matters
from Ukrainian and international tax experts.
For further information on tax, see note 9 of the financial
statements.
5. Debt Maturity Profile (external risk)
Root Cause and Impact
Ferrexpo operates in a volatile commodity market while the
majority of its assets are based in Ukraine, which has a weak
country credit profile as defined by international credit rating
agencies. From 2013 until 2016, the debt capital markets for
commodity producers with assets in Ukraine were closed due to
geopolitical factors as well as low commodity prices. As such, the
Group can experience periods where the capital markets are closed
or where the cost of funding increases significantly.
In 2018, Ferrexpo has US$309 million of debt amortisations
falling due, and in 2019 US$283 million of amortisations fall
due.
In November 2017, Ferrexpo raised a new bank facility of US$195
million at 450 basis points + US LIBOR compared to the Group's 2017
average cost of debt of 8%. As of 31 December 2017, the Group had
strong credit metrics with total liquidity of US$312 million
(including the new bank debt facility) and net debt to EBITDA of
0.73x.
If the 62% Fe iron ore fines price or the pellet premium was to
fall significantly in 2018 or 2019 without any offsetting impact
from cost reductions it could affect the Group's cash generation
and its ability to meet debt amortisations.
Mitigation
Ferrexpo has a strong balance sheet with prudent credit metrics
enabling it to attract additional debt facilities should it be
required.
Ferrexpo is a low cost producer and has maintained positive
profit through the iron ore price cycle, including an average
EBITDA margin of 36% from 2007 to 2017.
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 financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare such financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
("IFRS") as adopted by the European Union and Article 4 of the IAS
Regulation, and have also chosen to prepare the Parent Company
financial statements in accordance with Financial Reporting
Standard 101 (Reduced Disclosure Framework). 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 the Parent Company 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 Financial Reporting Standard 101 (Reduced
Disclosure Framework) has 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.
In preparing the Group financial statements, International
Accounting Standard 1 requires that the Directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRSs is insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- make an assessment of the Group's ability to continue as a going concern.
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 are also responsible for safeguarding the assets of
the Group and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Responsibility Statement of the Directors in Respect of the
Annual Report and Accounts
We confirm that to the best of our knowledge:
(a) the financial statements, prepared in accordance with the
relevant financial reporting framework, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company and the undertakings included in the consolidation
taken as a whole; and
(b) the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face; and
(c) 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.
This responsibility statement was approved by the Board of
Directors on 20 March 2018 and is signed on its behalf by:
Steve Lucas
Chairman
Chris Mawe
Chief Financial Officer
20 March 2018
CONSOLIDATED INCOME STATEMENT
Before Before
special Special special Special
US$000 Notes items items Year ended 31.12.17 items items Year ended 31.12.16
---------------------------- ----- --------- ------- ------------------- --------- -------- -------------------
Revenue 4 1,197,494 - 1,197,494 986,325 - 986,325
Operating expenses 3/5/7 (716,947) (407) (717,354) (687,060) (2,501) (689,561)
Other operating income 3,238 - 3,238 2,914 - 2,914
Operating foreign exchange
gains 6 6,661 - 6,661 13,832 - 13,832
---------------------------- ----- --------- ------- ------------------- --------- -------- -------------------
Operating profit 490,446 (407) 490,039 316,011 (2,501) 313,510
---------------------------- ----- --------- ------- ------------------- --------- -------- -------------------
Non-operating special items 7 - - - - (8,525) (8,525)
Share of profit from
associates 5,527 - 5,527 3,726 - 3,726
---------------------------- ----- --------- ------- ------------------- --------- -------- -------------------
Profit/(loss) before tax and
finance 495,973 (407) 495,566 319,737 (11,026) 308,711
---------------------------- ----- --------- ------- ------------------- --------- -------- -------------------
Net finance expense 8 (54,766) - (54,766) (67,002) - (67,002)
Non-operating foreign
exchange gains/(losses) 6 9,033 - 9,033 (10,311) - (10,311)
---------------------------- ----- --------- ------- ------------------- --------- -------- -------------------
Profit/(loss) before tax 450,240 (407) 449,833 242,424 (11,026) 231,398
---------------------------- ----- --------- ------- ------------------- --------- -------- -------------------
Income tax (expense)/credit 9 (58,787) 3,426 (55,361) (43,733) 1,535 (42,198)
---------------------------- ----- --------- ------- ------------------- --------- -------- -------------------
Profit/(loss) for the year 391,453 3,019 394,472 198,691 (9,491) 189,200
---------------------------- ----- --------- ------- ------------------- --------- -------- -------------------
Profit/(loss) attributable
to:
Equity shareholders of
Ferrexpo plc 389,675 3,254 392,929 196,770 (9,416) 187,354
Non-controlling interests 1,778 (235) 1,543 1,921 (75) 1,846
---------------------------- ----- --------- ------- ------------------- --------- -------- -------------------
Profit/(loss) for the year 391,453 3,019 394,472 198,691 (9,491) 189,200
---------------------------- ----- --------- ------- ------------------- --------- -------- -------------------
Earnings/(loss) per share:
Basic (US cents) 10 66.53 0.56 67.09 33.60 (1.60) 32.00
Diluted (US cents) 10 66.30 0.55 66.85 33.51 (1.60) 31.91
The presentation of the income statement has been simplified in
the current period, with the comparative information re-presented
to be on a consistent basis, as set out in Note 2. There has been
no restatement of the underlying financial information.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended Year ended
US$000 Notes 31.12.17 31.12.16
--------------------------------------------------------------------------------------- ----- ---------- ----------
Profit for the year 394,472 189,200
Items that may subsequently be reclassified to profit or loss:
Exchange differences on translating foreign operations (41,415) (126,365)
Income tax effect 9 4,557 16,607
--------------------------------------------------------------------------------------- ----- ---------- ----------
Net other comprehensive loss that may be reclassified to profit or loss in subsequent
periods (36,858) (109,758)
--------------------------------------------------------------------------------------- ----- ---------- ----------
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gains on defined benefit pension liability (9,172) 1,075
Income tax effect 9 1,556 (246)
--------------------------------------------------------------------------------------- ----- ---------- ----------
Net other comprehensive (loss)/income not being reclassified to profit or loss in
subsequent
periods (7,616) 829
--------------------------------------------------------------------------------------- ----- ---------- ----------
Other comprehensive loss for the year, net of tax (44,474) (108,929)
--------------------------------------------------------------------------------------- ----- ---------- ----------
Total comprehensive income for the year, net of tax 349,998 80,271
--------------------------------------------------------------------------------------- ----- ---------- ----------
Total comprehensive income attributable to:
Equity shareholders of Ferrexpo plc 348,686 79,650
Non-controlling interests 1,312 621
--------------------------------------------------------------------------------------- ----- ---------- ----------
349,998 80,271
--------------------------------------------------------------------------------------- ----- ---------- ----------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at As at
US$000 Notes 31.12.17 31.12.16
----------------------------------------------------------- ----- ----------- -----------
Assets
----------------------------------------------------------- ----- ----------- -----------
Property, plant and equipment 623,359 574,839
Goodwill and other intangible assets 36,858 35,220
Investments in associates 5,947 2,165
Inventories 11 175,831 130,357
Other non-current assets 10,501 2,984
Income taxes recoverable and prepaid 9 5,454 5,630
Deferred tax assets 9 40,408 52,818
----------------------------------------------------------- ----- ----------- -----------
Total non-current assets 898,358 804,013
----------------------------------------------------------- ----- ----------- -----------
Inventories 11 96,645 78,935
Trade and other receivables 88,327 90,568
Prepayments and other current assets 17,514 12,564
Income taxes recoverable and prepaid 9 14 10,757
Other taxes recoverable and prepaid 23,192 21,389
Cash and cash equivalents 12 97,742 144,751
----------------------------------------------------------- ----- ----------- -----------
Total current assets 323,434 358,964
----------------------------------------------------------- ----- ----------- -----------
Total assets 1,221,792 1,162,977
----------------------------------------------------------- ----- ----------- -----------
Equity and liabilities
Issued capital 121,628 121,628
Share premium 185,112 185,112
Other reserves (2,020,864) (1,984,758)
Retained earnings 2,310,226 2,002,153
----------------------------------------------------------- ----- ----------- -----------
Equity attributable to equity shareholders of Ferrexpo plc 596,102 324,135
----------------------------------------------------------- ----- ----------- -----------
Non-controlling interests 370 (847)
----------------------------------------------------------- ----- ----------- -----------
Total equity 596,472 323,288
----------------------------------------------------------- ----- ----------- -----------
Interest-bearing loans and borrowings 3/13 186,294 505,641
Defined benefit pension liability 20,514 15,489
Provision for site restoration 2,070 1,071
Deferred tax liabilities 9 381 586
----------------------------------------------------------- ----- ----------- -----------
Total non-current liabilities 209,259 522,787
----------------------------------------------------------- ----- ----------- -----------
Interest-bearing loans and borrowings 3/13 314,770 228,061
Trade and other payables 48,428 28,807
Accrued liabilities and deferred income 18,196 42,584
Income taxes payable 9 23,715 11,780
Other taxes payable 10,952 5,670
----------------------------------------------------------- ----- ----------- -----------
Total current liabilities 416,061 316,902
----------------------------------------------------------- ----- ----------- -----------
Total liabilities 625,320 839,689
----------------------------------------------------------- ----- ----------- -----------
Total equity and liabilities 1,221,792 1,162,977
----------------------------------------------------------- ----- ----------- -----------
The financial statements were approved by the Board of Directors
on 20 March 2018.
KOSTYANTIN ZHEVAGO CHRISTOPHER MAWE
CHIEF EXECUTIVE CHIEF FINANCIAL OFFICER
OFFICER
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended Year ended
US$000 Notes 31.12.17 31.12.16
------------------------------------------------------------------------------------ ----- ---------- ----------
Profit before tax 449,833 231,398
Adjustments for:
Depreciation of property, plant and equipment and amortisation of intangible assets 46,392 50,671
Interest expense 8 53,044 64,975
Interest income 8 (372) (175)
Losses on disposal of property, plant and equipment 7,754 4,446
Cash elements included in losses on disposal of property, plant and equipment (2,953) -
Operating special items 7 407 2,501
Non-operating special items 7 - 8,525
Share of profit from associates (5,527) (3,726)
Movement in allowance for doubtful receivables 576 252
Movement in site restoration provision 1,070 (308)
Employee benefits (1,632) 3,192
Share-based payments 586 389
Operating foreign exchange gains 6 (6,661) (13,832)
Non-operating foreign exchange (gains)/losses 6 (9,033) 10,311
Other adjustments (6,458) -
------------------------------------------------------------------------------------ ----- ---------- ----------
Operating cash flow before working capital changes 527,026 358,619
------------------------------------------------------------------------------------ ----- ---------- ----------
Changes in working capital:
Increase in trade and other receivables (3,024) (3,578)
Increase in inventories (78,892) (41,540)
(Decrease)/increase in trade and other accounts payable (27,317) 30,066
(Increase)/decrease in VAT recoverable and other taxes recoverable and payable (511) 24,345
------------------------------------------------------------------------------------ ----- ---------- ----------
Cash generated from operating activities 417,282 367,912
------------------------------------------------------------------------------------ ----- ---------- ----------
Interest paid (48,576) (58,793)
Income tax (paid)/refunded 9 (13,721) 24,438
Post-employment benefits paid (1,539) (1,466)
------------------------------------------------------------------------------------ ----- ---------- ----------
Net cash flows from operating activities 353,446 332,091
------------------------------------------------------------------------------------ ----- ---------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets (102,953) (48,176)
Proceeds from disposal of property, plant and equipment and intangible assets 138 47
Interest received 358 168
Dividends from associates 4,982 4,203
------------------------------------------------------------------------------------ ----- ---------- ----------
Net cash flows used in investing activities (97,475) (43,758)
------------------------------------------------------------------------------------ ----- ---------- ----------
Cash flows from financing activities
Proceeds from borrowings and finance 13 - 19,115
Repayment of borrowings and finance 13 (238,670) (195,918)
Arrangement fees paid (4,042) -
Dividends paid to equity shareholders of Ferrexpo plc (58,316) -
------------------------------------------------------------------------------------ ----- ---------- ----------
Net cash flows used in financing activities (301,028) (176,803)
------------------------------------------------------------------------------------ ----- ---------- ----------
Net (decrease)/increase in cash and cash equivalents (45,057) 111,530
Cash and cash equivalents at the beginning of the year 144,751 35,330
Currency translation differences (1,952) (2,109)
------------------------------------------------------------------------------------ ----- ---------- ----------
Cash and cash equivalents at the end of the year 12 97,742 144,751
------------------------------------------------------------------------------------ ----- ---------- ----------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders of Ferrexpo plc
--------------------------------------------------------
Total Non-controlling
Issued capital Share premium Other reserves Retained capital and interests Total
US$000 earnings reserves equity
---------------- -------------- --------------- --------------- --------- ----------- --------------- ---------
At 1 January
2016 121,628 185,112 (1,876,624) 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)/income
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 (1,984,758) 2,002,153 324,135 (847) 323,288
---------------- -------------- --------------- --------------- --------- ----------- --------------- ---------
Profit for the
year - - - 392,929 392,929 1,543 394,472
Other
comprehensive
loss - - (36,692) (7,550) (44,242) (230) (44,472)
---------------- -------------- --------------- --------------- --------- ----------- --------------- ---------
Total
comprehensive
(loss)/income
for the year - - (36,692) 385,379 348,687 1,313 350,000
---------------- -------------- --------------- --------------- --------- ----------- --------------- ---------
Effect from
increase of
shareholding in
subsidiary - - - 26 26 (96) (70)
Share-based
payments - - 586 - 586 - 586
Equity dividends
to shareholders
of Ferrexpo plc - - - (77,332) (77,332) - (77,332)
---------------- -------------- --------------- --------------- --------- ----------- --------------- ---------
At 31 December
2017 121,628 185,112 (2,020,864) 2,310,226 596,102 370 596,472
---------------- -------------- --------------- --------------- --------- ----------- --------------- ---------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Corporate information
The financial information set out in this statement does not
constitute statutory accounts as defined in section 435 of the
Companies Act 2006. The audited statutory accounts for the year
ended 31 December 2016 have been delivered to the Registrar of
Companies and those for 2017 will be delivered following the
Company's annual general meeting convened for Friday, 25 May
2018.
The auditors' report on the 2017 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 13 April 2018 its Annual
Report and Accounts for the year ended 31 December 2017 on its
corporate website www.ferrexpo.com.
Organisation and structure
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, have 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-Plavninske and Lavrykivske ("GPL") and Yerystivske
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% (2016: 50.3%) of
Ferrexpo plc's issued share capital.
At 31 December 2017, the Group also holds through PJSC Ferrexpo
Poltava Mining an interest of 49.5% (2016: 49.4%) in TIS Ruda, a
Ukrainian port located on the Black Sea. As this is an associate,
it is accounted using the equity method.
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, 20 March 2018. 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 made changes to the presentation of its consolidated
income statement in the consolidated financial statements. These
changes included: i) the aggregation of "Cost of sales", "Selling
and distribution expenses", "General and administrative expenses",
"Other expenses", "Write -offs and impairment losses", and "Losses
on disposal of property, plant and equipment" into a single line
item "Operating expenses"; and ii) the removal of references to
"adjusted items" and "continued operations". These changes simplify
the presentation, enhance the understandability of the financial
statements and better align with industry practice of other listed
mining companies. As a result, comparative period balances have
been represented to align with these changes. This presentation was
already applied for the interim condensed consolidated financial
statements for the period ended 30 June 2017.
The Group's principal risks likely to affect its future
development, performance and position are set out on pages 20 to
25. The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the Financial
Review on pages 7 to 11.
Going concern
The Group has assessed that, taking into account: i) its
available cash and cash equivalents available at the date of
authorisation of the consolidated financial statements; ii) its
cash flow projections for the period of management's going concern
assessment; and iii) events and conditions beyond the period of
management's going concern assessment, in particular the debt
repayments totalling US$177,022 thousand in April and May 2019, it
has sufficient liquidity to meet its present obligations and cover
working capital needs for the aforementioned period and will remain
in compliance with its financial covenants throughout this period.
Therefore, the Group continues to adopt the going concern basis of
accounting for the preparation of this set of financial
statements.
Changes in accounting policies
The accounting policies and methods of computation adopted in
the preparation of the consolidated financial statements are
consistent with those followed in the preparation of the Group's
annual financial statements for the year ended 31 December 2016
except for the adoption of new amendments and improvements to IFRSs
effective as of 1 January 2017. These new standards and
interpretations had no effect on reported results, financial
position or disclosure in the financial statements:
- Amendment to IAS 7 Statement of cash flow - Disclosure initiative
- Amendment to IAS 12 Income taxes - Recognition of deferred tax assets for unrealised losses
- Annual Improvements to IFRSs 2014-2016 cycle
New standards and interpretations not yet adopted
The Group has elected not to early adopt any revised and amended
standards or interpretations, which are not yet mandatory in the
EU.
The standards and interpretations below could have an impact on
the consolidated financial statements of the Group.
IFRS 9 Financial instruments
The complete standard was issued in July 2014 including the
requirements previously issued and additional amendments and
becomes effective for financial years beginning on or after 1
January 2018. 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 impact of an expected loss impairment model does
not materially impact the Group's consolidated financial statements
on the basis (i) the Group does not have a history of credit
losses; and (ii) there has not been a significant change in the
mix, credit terms, or credit quality of the underlying
counterparties as at 31 December 2017. The changes to
classification and measurement of financial instruments is
unchanged on application of the new standard. The Group does not
apply hedge accounting under IAS 39 and does not intend to apply it
under IFRS 9.
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 the current revenue
recognition standard. The new standard establishes the principles
for the disclosure of useful information in the financial
statements about the nature, amount, timing and uncertainties of
revenue and cash flows arising from contracts with customers. The
Group has assessed the impacts of transitioning to IFRS 15. Under
IFRS 15 the revenue recognition model will change from one based on
the transfer of risk and reward of ownership to the transfer of
control of ownership. The Group's revenue is predominantly derived
from sales of iron pellets, where the point of recognition is
dependent on the contractual sales terms based on the International
Commercial terms (Incoterms). As the time of the transfer of risks
and rewards coincides with the transfer of a control, the timing
and the amount of revenue recognised is unlikely to be materially
affected for the majority of sales. For the Incoterms Cost,
Insurance and Freight ("CIF"), and Cost and Freight ("CFR"), the
seller must contract for and pay the freight necessary to bring the
goods to the named port of destination. Consequently, the freight
service on sales contracts with CIF and CFR Incoterms will meet the
criteria of a separate performance obligation and a portion of the
revenue earned under these contracts, representing the obligation
to perform freight service, is deferred and recognised over time as
this obligation is fulfilled, along with the associated costs. The
Group has assessed the impact of the CIF and CFR sales for the year
ending 31 December 2017. If the new standard were applied as of 31
December 2017, freight-related revenue of US$6,006 thousand would
have been deferred, reducing revenue and the operating result by
the same amount, and US$63,447 thousand would have been disclosed
as freight-related revenue in Note 4, without an effect on the
operating result. The Group will apply IFRS 15 for the annual
reporting periods beginning on 1 January 2018, with the cumulative
effect of initially applying IFRS 15, recognised at the date of
initial application. Apart from the impact stated above, the Group
does not anticipate the application of IFRS 15 to have a material
impact on the financial position and/or financial performance.
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. Instead, it 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. Currently, the Group
leases land and buildings under operating leases. The vast majority
of these operating leases are for land used for the extraction of
ore and are not within the scope of IFRS 16 and will be accounted
for under IFRS 6 Exploration for and evaluation of mineral
resources. The Group expects that the new standard will primarily
result in the recognition of right-of-use assets and liabilities in
respect of the long-term rental contracts for its office premises
in London, Dubai and Tokyo, land not used for the direct extraction
of ore as well as for lease equipment. This new standard applies to
annual reporting periods beginning on or after 1 January 2019
subject to EU endorsement and the Group does not intend to early
adopt this standard. If the new standard were applied as of 31
December 2017, right-of-use assets and corresponding lease
liabilities of US$15,167 thousand, before the effect from
discounting, would have been recognised without an effect on the
operating result.
IFRIC 23 Uncertainty over income tax treatments
The interpretation was issued in June 2017 and clarifies the
accounting treatment for uncertainties in income taxes. The new
interpretation is to be applied to the determination of taxable
results, tax bases, unused tax losses, unused tax credits and tax
rates, when there is uncertainty over income tax treatments under
IAS 12, and becomes effective for financial years beginning on or
after 1 January 2019 subject to EU endorsement. The Group is in the
process of performing the impact assessment and does not intend to
early apply the new interpretation.
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.
Use of critical estimates and judgements
The preparation of consolidated financial statements in
conformity with IFRS requires management to make estimates and
judgements that affect the amounts reported in the consolidated
financial statements and accompanying notes. These estimates and
judgements are based on information available as at the date of
authorising the consolidated financial statements for issue. Actual
results could therefore differ from those estimates and judgements.
The Group identified a number of areas involving the use of
critical estimates and judgements made by management in preparing
the consolidated financial statements and supporting information is
embedded within the following disclosure notes included in this
preliminary announcement:
Critical estimates
- Note 9 Taxation - recoverability of deferred tax assets
- Note 11 Inventories - lean and weathered ore
Critical judgements
- Note 9 Taxation - tax legislation in Ukraine
Note 3: Segment information
The Group is managed as a single segment, 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 Underlying EBITDA, gross profit and
net debt.
Underlying EBITDA and gross profit
The Group presents the Underlying EBITDA as it is a useful
measure for evaluating its ability to generate cash and its
operating performance. The Group's full definition of Underlying
EBITDA is disclosed in the Glossary on page 50.
Year ended Year ended
US$000 Notes 31.12.17 31.12.16
---------------------------------------------------- ----- ---------- ----------
Profit before tax and finance 495,566 308,711
Losses on disposal of property, plant and equipment 7,754 4,446
Share-based payments 586 389
Operating special items 7 407 2,501
Non-operating special items 7 - 8,525
Depreciation and amortisation 46,392 50,671
---------------------------------------------------- ----- ---------- ----------
Underlying EBITDA 550,705 375,243
---------------------------------------------------- ----- ---------- ----------
Year ended Year ended
US$000 Notes 31.12.17 31.12.16
-------------- ----- ---------- ----------
Revenue 4 1,197,494 986,325
Cost of sales 5 (411,490) (400,333)
-------------- ----- ---------- ----------
Gross profit 786,004 585,992
-------------- ----- ---------- ----------
Net debt
Net debt as defined by the Group comprises cash and cash
equivalents less interest-bearing loans and borrowings.
As at As at
US$000 Notes 31.12.17 31.12.16
---------------------------------------------------- ----- --------- ---------
Cash and cash equivalents 12 97,742 144,751
Interest-bearing loans and borrowings - current 13 (314,770) (228,061)
Interest-bearing loans and borrowings - non-current 13 (186,294) (505,641)
---------------------------------------------------- ----- --------- ---------
Net debt (403,322) (588,951)
---------------------------------------------------- ----- --------- ---------
The Group made debt repayments of US$238,602 thousand during the
year ended 31 December 2017 (2016: US$195,918 thousand). Net debt
is an Alternative Performance Measure ("APM"). Further information
on the APMs used by the Group, including the definitions, is
provided on pages 49 to 51.
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 2017 consisted of the
following:
Year ended Year ended
US$000 31.12.17 31.12.16
------------------------------------------------------------ ---------- ----------
Revenue from sales of iron ore pellets and concentrate:
Export 1,126,318 921,861
------------------------------------------------------------ ---------- ----------
Total revenue from sale of iron ore pellets and concentrate 1,126,318 921,861
------------------------------------------------------------ ---------- ----------
Revenue from logistics and bunker business 68,449 61,207
Revenue from other sales and services provided 2,727 3,257
------------------------------------------------------------ ---------- ----------
Total revenue 1,197,494 986,325
------------------------------------------------------------ ---------- ----------
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 the current or
prior year were as follows:
Year ended Year ended
US$000 31.12.17 31.12.16
------------------------------ ---------- ----------
Central Europe 536,836 425,079
------------------------------ ---------- ----------
Austria 328,377 215,479
Others 208,459 209,600
------------------------------ ---------- ----------
Western Europe 170,295 153,932
------------------------------ ---------- ----------
Germany 155,508 143,281
Others 14,787 10,651
------------------------------ ---------- ----------
North East Asia 198,165 155,443
------------------------------ ---------- ----------
Japan 120,053 96,257
Others 78,112 59,186
------------------------------ ---------- ----------
China and South East Asia 142,812 129,391
------------------------------ ---------- ----------
China 123,531 125,788
Others 19,281 3,603
------------------------------ ---------- ----------
Turkey, Middle East and India 78,210 58,016
------------------------------ ---------- ----------
Turkey 78,210 58,016
Total exports 1,126,318 921,861
------------------------------ ---------- ----------
The Group markets its products across various regions. The
disclosure of the segmentation reflects how the Group 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 2017 sales made to three
customers accounted for 45% of the revenues from export sales of
ore pellets and concentrate (2016: 40.0%).
Sales to one customer that individually represented more than
10% of total sales in either the current or prior year amounted to
US$328,377 thousand (2016: US$215,479 thousand).
Note 5: Operating expenses before special items
Operating expenses for the year ended 31 December 2017 consisted
of the following:
Year ended Year ended
US$000 31.12.17 31.12.16
---------------------------------------------- ---------- ----------
Cost of sales 411,490 400,333
Selling and distribution expenses 219,703 209,530
General and administrative expenses 41,954 38,647
Other operating expenses 43,800 38,550
---------------------------------------------- ---------- ----------
Total operating expenses before special items 716,947 687,060
---------------------------------------------- ---------- ----------
Operating expenses include:
Year ended Year ended
US$000 31.12.17 31.12.16
-------------------------------------------------------- ---------- ----------
Inventories recognised as an expense upon sale of goods 367,161 360,503
Employee costs 53,293 47,284
Inventory movements (1,846) 11,311
Depreciation of property, plant and equipment 45,920 50,233
Amortisation of intangible assets 472 438
Royalties and levies 19,610 15,294
Costs of logistics and bunker business 63,127 55,363
Audit and non-audit services 1,342 1,651
Community support donations 28,384 27,519
Losses on disposal of property, plant and equipment 7,754 4,448
-------------------------------------------------------- ---------- ----------
Special items not included in the operating expenses are shown
in Note 7.
Information on the Group's community support donations is
provided in the social responsibility paragraph in the Chairman's
Statement on page 5.
Auditor remuneration paid is 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. The auditor's remuneration balances related to the
comparative period ended 31 December 2016 are for audit and
non-audit services provided by the previous audit firm of the
Group.
Note 6: Foreign exchange gains and losses
Foreign exchange gains and losses for the year ended 31 December
2017 consisted of the following:
Year ended Year ended
US$000 31.12.17 31.12.16
---------------------------------------------------- ---------- ----------
Operating foreign exchange gains/(losses)
Revaluation of trade receivables 7,113 14,240
Revaluation of trade payables (394) (388)
Other (58) (20)
---------------------------------------------------- ---------- ----------
Total operating foreign exchange gains 6,661 13,832
---------------------------------------------------- ---------- ----------
Non-operating foreign exchange gains/(losses)
Revaluation of interest-bearing loans 10,136 (11,577)
Conversion of cash and cash equivalents (1,497) (578)
Other 394 1,844
---------------------------------------------------- ---------- ----------
Total non-operating foreign exchange gains/(losses) 9,033 (10,311)
---------------------------------------------------- ---------- ----------
Total foreign exchange gains 15,694 3,521
---------------------------------------------------- ---------- ----------
The translation differences and foreign exchange gains and
losses are predominantly dependent on the fluctuation of the
exchange rate of the Ukrainian Hryvnia against the US Dollar. The
table below shows the closing and average rate of the most relevant
currencies of the Group compared to the US Dollar.
Average exchange rate Closing exchange rate
----------------------- -----------------------
As at As at Year ended Year ended
US$ 31.12.17 31.12.16 31.12.17 31.12.16
---- ----------- ---------- ----------- ----------
UAH 26.597 25.551 28.067 27.191
EUR 0.887 0.903 0.838 0.956
---- ----------- ---------- ----------- ----------
Exchange differences arising on translation of non-USD
functional currency operations (mainly in Ukrainian Hryvnia) are
included in the translation reserve.
Note 7: Special items
Special items for the year ended 31 December 2017 consisted of
the following:
Year ended Year ended
US$000 Notes 31.12.17 31.12.16
---------------------------------------------- ----- ---------- ----------
Operating special items
Write-offs 407 2,501
---------------------------------------------- ----- ---------- ----------
Total operating special items 407 2,501
---------------------------------------------- ----- ---------- ----------
Non-operating special items
Allowance for restricted cash 14 - 8,525
---------------------------------------------- ----- ---------- ----------
Total non-operating special items - 8,525
---------------------------------------------- ----- ---------- ----------
Total special items before related tax effect 407 11,026
---------------------------------------------- ----- ---------- ----------
Tax effect on special items 9 - (1,535)
---------------------------------------------- ----- ---------- ----------
Total special items after related tax effect 407 9,491
---------------------------------------------- ----- ---------- ----------
Special tax items 9 3,426 -
---------------------------------------------- ----- ---------- ----------
Special tax items totalling US$3,426 thousand were recorded
during the financial year 2017 (2016: nil), which is the net effect
from the following two events:
- recognition of a deferred tax asset from available tax loss
carry forwards and temporary differences totalling US$28,822
thousand for an Ukrainian subsidiary, which become profitable in
2017 and is expected to be profitable in the future periods
following the implementation of a new commercial structure. See
Note 9 for further information; and
- derecognition of a deferred tax asset of US$25,396 thousand,
which was recognised in 2015 in respect of the losses recorded as a
result of the insolvency of the Group's transactional bank in
Ukraine. The deferred tax asset was derecognised based on the
latest developments of ongoing court proceedings in Ukraine. See
Note 9 and Note 14 for further information.
During the financial year 2016, a non-operating special item
arose in relation to the insolvency of the Group's transactional
bank in Ukraine. See Note 14 for further details.
Write-offs for the year ended 31 December 2017 primarily
consisted of obsolete inventories and property plant and equipment
as outlined below:
As at As at
US$000 31.12.17 31.12.16
------------------------------------------- -------- --------
Write-off of inventories 368 33
Write-off of property, plant and equipment 39 1,822
Write-off of receivables and prepayments - 634
Other - 12
------------------------------------------- -------- --------
Total write-offs 407 2,501
------------------------------------------- -------- --------
Note 8: Net finance expense
Finance expense and income for the year ended 31 December 2017
consisted of the following:
Year ended Year ended
US$000 31.12.17 31.12.16
----------------------------------------- ---------- ----------
Finance expense
Interest expense on loans and borrowings (46,547) (54,255)
Less capitalised borrowing costs 3,637 5,269
Interest on defined benefit plans (2,094) (2,203)
Bank charges (9,550) (11,372)
Other finance costs (584) (4,616)
----------------------------------------- ---------- ----------
Total finance expense (55,138) (67,177)
----------------------------------------- ---------- ----------
Finance income
Interest income 364 175
Other finance income 8 -
----------------------------------------- ---------- ----------
Total finance income 372 175
----------------------------------------- ---------- ----------
Net finance expense (54,766) (67,002)
----------------------------------------- ---------- ----------
Fees related to the Group's refinancing activities totalling US
$4,554 thousand were included in other finance costs in the
comparative period ended 31 December 2016. There were no such fees
for the period ended 31 December 2017.
Note 9: Taxation
The critical estimates used and judgements made by management in
terms of the taxation are disclosed below:
Critical estimates
Recoverability of deferred tax assets
Deferred tax assets are recognised on temporary differences and
available tax loss carry forwards when it is more likely than not
that they will be recovered in a future period. A deviation between
expected and effective future taxable profits in the different
local jurisdictions may have an adverse impact on the recognised
deferred tax balances in the consolidated financial statements of
the Group. This is particularly the case for a deferred tax asset
totalling US$28,822 thousand that was recognised for available tax
loss carry forwards for a Ukrainian subsidiary during the financial
year 2017 and with a carrying value of US$13,847 thousand as at 31
December 2017. According to the currently enacted tax legislation,
these available losses do not expire. Assumptions about the
generation of expected future taxable profits depend on
management's estimates of future cash flows, which depend on
estimates of future production and sales volumes, commodity prices
and operating costs.
Further, the Group derecognised a deferred tax asset of
US$25,396 thousand (Note 7) on the basis that the liquidator of the
Group's former transactional bank in Ukraine has not recognised all
of the Group's claims of cash and deposit balances, for which a
loss was recorded by the Group in 2015. The Group is currently in
legal dispute to have the claims recognised (Note 14). Assessing
the probability of the Group's claims being recognised is highly
subjective and will ultimately depend on the outcome of the court
proceedings in Ukraine.
Critical judgements
Tax legislation in Ukraine
The Group prices its sales between its subsidiaries using
international benchmark prices for comparable products covering
product quality and applicable freight. The Group judges these to
be on terms which comply with applicable legislation. In August
2017, the State Fiscal Service of Ukraine ("SFS") commenced a tax
audit at the Group's major subsidiary in Ukraine with a focus on
cross-border transactions in terms of its pellet sales to another
subsidiary of the Group. According to the current legislation, the
SFS has to complete this audit within 18 months from the
commencement. No provision has been booked as at 31 December
2017.
Following a tax audit at PJSC Ferrexpo Poltava Mining ("FPM")
claims were made by the Ukrainian tax authorities in relation to
allegedly unpaid withholding tax totalling US$6,057 thousand
(UAH170 million) and associated fines and penalties of US$1,496
thousand (UAH42 million) in respect of interest paid to a
subsidiary of the Group in the United Kingdom in 2013 and 2014.
Following the audits for aforementioned years, the Ukrainian tax
authorities also initiated tax audits for the years 2015 and 2016.
The management of the Group expects to continue to successfully
defend any claims made by the tax authorities in the Ukrainian
courts. Consequently, no provision has been made for the claimed
withholding tax and associated fines and penalties as at 31
December 2017.
The income tax expense for the year ended 31 December 2017
consisted of the following:
Year ended Year ended
US$000 31.12.17 31.12.16
-------------------------------------------------- ---------- ----------
Current income tax
Current income tax charge 45,423 40,542
Amounts related to previous years (4,154) 1,440
-------------------------------------------------- ---------- ----------
Total current income tax 41,269 41,982
-------------------------------------------------- ---------- ----------
Deferred income tax
Origination and reversal of temporary differences 14,092 216
Total deferred income tax 14,092 216
-------------------------------------------------- ---------- ----------
Total income tax expense 55,361 42,198
-------------------------------------------------- ---------- ----------
The amounts related to the prior year shown in table on the
previous page are predominantly related to effects from final tax
assessments received in Switzerland during the year ended 31
December 2017 and in the United Kingdom during the comparative year
ended 31 December 2016. As a result of the final tax assessments
received a recorded tax accrual in Switzerland could be released in
financial year 2017 whereas in the financial year 2016 an income
receivable balance recorded in the United Kingdom in a previous
year had to be derecognised.
Tax effects on items charged to the statement of other
comprehensive income consisted of the following for the year ended
31 December 2017:
Year ended Year ended
US$000 31.12.17 31.12.16
----------------------------------------------------------------------------- ---------- ----------
Tax effect of exchange differences arising on translating foreign operations 4,557 16,607
Tax effect of remeasurement gains on defined benefit pension liability 1,556 (246)
----------------------------------------------------------------------------- ---------- ----------
Total income taxes charged to other comprehensive income 6,113 16,361
----------------------------------------------------------------------------- ---------- ----------
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 was 13.5%
for the financial year 2017 (2016: 8.9%). 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 2017 is as
follows:
Year ended Year ended
US$000 31.12.17 31.12.16
---------------------------------------------------------------------------------------------- ---------- ----------
Profit before tax 449,833 231,398
Notional tax charge computed at the weighted average statutory tax rate of 13.5% (2016: 8.9%) 60,819 20,594
Derecognition of deferred tax assets(1) 25,396 -
Reassessment of prior year temporary differences(2) (5,919) 1,148
Effect from capitalisation of tax loss carry forwards(3) (24,026) -
Expenses not deductible for local tax purposes(4) 7,295 7,828
Income exempted for local tax purposes (2,385) (1,588)
Income for local tax purposes(5) 1,039 7,767
Effect from change in permanent differences (1,957) -
Non-recognition of deferred taxes on current year losses(6) - 4,552
Tax effect related to previous years(7) (4,154) 1,440
Effect of higher local tax rate on special items - (1,003)
Other (including translation differences) (747) 1,460
---------------------------------------------------------------------------------------------- ---------- ----------
Total income tax expense 55,361 42,198
---------------------------------------------------------------------------------------------- ---------- ----------
(1) Derecognition of deferred tax assets includes the effect in
the amount of US$25,396 thousand in respect of an allowance
recorded on restricted cash and deposits balances. See Note 7 and
Note 14 for further information.
(2) Reassessment of prior year temporary difference in the year
ended 31 December 2017 predominantly relates previously
unrecognised deferred taxes on temporary differences for a
Ukrainian subsidiary, which became profitable in 2017. This effect
is expected to be non-recurring. The effect from the reassessment
in the comparative year relates to interest expenses from previous
years that became deductible in Ukraine in 2017 as the subsidiaries
are profitable again. Depending on the level of taxable result in
future years, additional interest expenses might become
deductible.
(3) Effect in the year ended 31 December 2017 is related to the
capitalisation of all available tax losses for a Ukrainian
subsidiary that become profitable in 2017. As the entire balance of
available tax loss carry forwards was recognised as deferred tax
asset, the effect is expected to be of a non-recurring nature.
(4) Effect in the year ended 31 December 2017 predominantly
relates to expenses not deductible in Ukraine and Switzerland. The
effect in Switzerland is expected to be non-recurring whereas the
one in Ukraine is expected to be recurring to a certain extent as a
portion of operating expenses is historically not deductible for
tax purposes according to the enacted local tax legislation.
(5) Reconciling item in the year ended 31 December 2017 relates
to an income taxable in Switzerland, which is expected to be of a
recurring nature, whereas the item in the comparative year 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, which is expected to be
non-recurring.
(6) 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, which, depending on the
level of taxable results of the Group's subsidiaries in the
different jurisdictions might be of a recurring nature.
(7) Effects are related to final tax assessments received in
Switzerland in the current and in the United Kingdom in comparative
year. Both effects are expected to be of a non-recurring
nature.
The net balance of income tax receivable/(payable) changed as
follows during the financial year 2017:
Year ended Year ended
US$000 31.12.17 31.12.16
------------------------------------------ ---------- ----------
Opening balance 4,607 49,150
Income statement charge (41,269) (41,982)
Booked through other comprehensive income 4,557 26,966
Tax paid/(refunded) 13,721 (24,438)
Translation differences 138 (5,089)
------------------------------------------ ---------- ----------
Closing balance (18,247) 4,607
------------------------------------------ ---------- ----------
During the financial years 2013, 2014 and 2015, VAT receivable
balances in Ukraine were mainly recovered in exchange for
prepayments of corporate profit tax. US$26,926 thousand of these
prepaid taxes were refunded in cash during the financial year 2016
for prepayments made by FPM. The remaining balance FPM's
prepayments of US$10,616 thousand as at 31 December 2016 was fully
used to offset with a portion of FPM's taxable profits during the
financial year 2017. An income tax receivable balance of US$5,454
thousand (2006: US$5,630 thousand) relates to prepayments made by
two other Ukrainian subsidiaries and is classified as non-current
due to the uncertainty in respect of the timing of the
recovery.
The net income tax payable as at 31 December 2017 consisted of
the following:
As at As at
US$000 31.12.17 31.12.16
-------------------------------------------- -------- --------
Income tax receivable balance - current 14 10,757
Income tax receivable balance - non-current 5,454 5,630
Income tax payable balance (23,715) (11,780)
-------------------------------------------- -------- --------
Net income tax (payable)/receivable (18,247) 4,607
-------------------------------------------- -------- --------
The movement in the deferred income tax balance is as
follows:
Year ended Year ended
US$000 31.12.17 31.12.16
------------------------------------------ ---------- ----------
Opening balance 52,232 70,714
Income statement credit (14,092) (216)
Booked through other comprehensive income 1,556 (10,359)
Translation differences 331 (7,907)
--------------------------------------------- ---------- ----------
Closing balance 40,027 52,232
--------------------------------------------- ---------- ----------
As at 31 December 2017, the Group had available tax loss carry
forwards in the amount of US$97,873 thousand (2016: US$241,070
thousand) for which no deferred tax assets were recognised.
US$70,198 thousand (2016: US$217,560 thousand) are related to
losses incurred in Ukraine and Austria and those losses do not
expire. The remaining balance totalling US$27,675 thousand (2016:
US$23,510 thousand) relates to losses incurred in Hungary of which
US$22,957 thousand (2016: US$20,564 thousand) expire after more
than eight years.
Temporary differences associated with investments in
subsidiaries for which deferred tax liabilities have not been
recognised amount to US $453,097 thousand (2016: US$491,963
thousand). Other temporary differences of US$26,627 thousand have
not been recognised as of 31 December 2017 (2016: US$52,492
thousand), of which the vast majority relates to temporary
differences on property, plant and equipment in Ukraine.
Note 10: Earnings per share and dividends paid and proposed
Distributable reserves
Ferrexpo plc (the "Company") is the Group's holding company,
with no direct operating business, so its ability to make
distributions to its shareholders is dependent on its ability to
access profits held in the subsidiaries. The Group's consolidated
retained earnings shown in the consolidated statement of changes in
equity do not reflect the profits available for distribution in the
Group as of 31 December 2017.
Before Special Year ended Before Special Year ended
special items items 31.12.17 special items items 31.12.16
---------------------------------------------- ------------- ------- ---------- ------------- ------- ----------
Earnings/(loss) for the year attributable to
equity shareholders per share
Basic (US cents) 66.53 0.56 67.09 33.60 (1.60) 32.00
Diluted (US cents) 66.30 0.55 66.85 33.51 (1.60) 31.91
---------------------------------------------- ------------- ------- ---------- ------------- ------- ----------
The calculation of the basic and diluted earnings per share is
based on the following data:
Year ended Year ended
Thousand 31.12.17 31.12.16
---------------------------------------------- ---------- ----------
Weighted average number of shares
Basic number of Ordinary Shares outstanding 585,674 585,503
Effect of dilutive potential Ordinary Shares 2,074 1,713
-------------------------------------------------- ---------- ----------
Diluted number of Ordinary Shares outstanding 587,748 587,216
-------------------------------------------------- ---------- ----------
Dividends proposed and paid
Taking into account relevant thin capitalisation rules and
dividend-related covenants for the Group's major bank debt
facilities, the total available distributable reserves of Ferrexpo
plc is US$197,236 thousand as of 31 December 2017.
Year ended
US$000 31.12.17
----------------------------------------------------------- ----------
Dividends proposed
Final dividend for 2017: 3.3 US cents per Ordinary Share 19,328
Special dividend for 2017: 6.6 US cents per Ordinary Share 38,656
Special dividend for 2017: 3.3 US cents per Ordinary Share 19,328
----------------------------------------------------------- ----------
Total dividends proposed 77,312
----------------------------------------------------------- ----------
The special dividend for 2017 of 3.3 US cents per Ordinary Share
was declared in December 2017 and paid in January 2018.
Year ended
US$000 31.12.17
----------------------------------------------------------- ----------
Dividends paid during the year
Interim dividend for 2017: 3.3 US cents per Ordinary Share 19,266
Final dividend for 2016: 3.3 US cents per Ordinary Share 19,679
Special dividend for 2016: 3.3 US cents per Ordinary Share 19,371
----------------------------------------------------------- ----------
Total dividends paid 58,316
----------------------------------------------------------- ----------
Year ended
US$000 31.12.16
----------------------------------------------------------- ----------
Dividends proposed
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 dividends were paid during the financial year 2016.
Note 11: Inventories
The critical estimates used by management in terms of the
taxation are disclosed below:
Critical estimates
Lean and weathered ore
Iron ore of various grades is being extracted at the Group's two
operating mines GPL and Yerystivske. In order to maximise the
operational efficiency and output of the processing facility at
FPM, management determines the optimal mix and grade of ore to be
delivered to the processing facility from each mine. During the
last financial years, including the financial year 2017, ore of a
lower iron content was stockpiled due to limited processing
capacities.
It is the Group's intention to process the stockpiled ore once
additional processing capacities are available. This additional
capacity is currently being constructed and expected to be
completed during the financial year 2020 and as a consequence the
entire balance is classified as non-current.
As at 31 December 2017, the ore valued at costs totalled
US$175,831 thousand. Critical estimates in determining the net
realisable value of the lean and weathered ore includes i) the
expected timing of the completion of the capacity upgrade programme
at FPM, ii) forecast iron ore pellet prices, and iii) the estimated
cost to process the ore into iron ore pellets. Separate stress
tests have been performed, which assumed the lowest forecast iron
ore price from a set of brokers, a one year delay in the completion
of the additional capacity and 10% increase in processing costs and
under each scenario the cost value remained recoverable.
At 31 December 2017, inventories comprised:
As at As at
US$000 31.12.17 31.12.16
-------------------------------- -------- --------
Raw materials and consumables 34,295 26,847
Spare parts 42,053 35,603
Finished ore pellets 15,482 12,408
Work in progress 2,475 2,522
Other 2,340 1,555
-------------------------------- -------- --------
Total inventories - current 96,645 78,935
-------------------------------- -------- --------
Lean and weathered ore 175,831 130,357
-------------------------------- -------- --------
Total inventories - non-current 175,831 130,357
-------------------------------- -------- --------
Total inventories 272,476 209,292
-------------------------------- -------- --------
Inventories classified as non-current mainly comprise lean and
weathered ore 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 12: Cash and cash equivalents
As at 31 December 2017, cash and cash equivalents comprised:
As at As at
US$000 31.12.17 31.12.16
-------------------------------- -------- --------
Cash at bank and on hand 97,742 144,751
-------------------------------- -------- --------
Total cash and cash equivalents 97,742 144,751
-------------------------------- -------- --------
The debt repayments during the financial year ended 31 December
2017 totalled US$238,602 thousand (2016: US$195,918 thousand)
affecting the balance of cash and cash equivalents. Further
information on the Group's gross debt is provided in Note 13.
The balance of cash and cash equivalents held in Ukraine amounts
to US$10,281 thousand as at 31 December 2017 (2016: US$40,787
thousand).
Note 7 and Note 14 provide details on the Group's balance of
restricted cash and deposits which has been fully provided for as
currently not available to the Group.
Note 13: Interest-bearing loans and borrowings
This note provides information about the contractual terms of
the Group's major finance facilities.
As at As at
US$000 31.12.17 31.12.16
-------------------------------------------------------- -------- --------
Current
Eurobond issued 171,202 -
Syndicated bank loans - secured 112,500 175,000
Other bank loans - secured 16,218 18,309
Other bank loans - unsecured 1,523 1,495
Obligations under finance leases 3,969 3,684
Trade finance facilities - 19,025
Interest accrued 9,358 10,548
--------------------------------------------------------- -------- --------
Total current interest-bearing loans and borrowings 314,770 228,061
--------------------------------------------------------- -------- --------
Non-current
Eurobond issued 171,202 337,685
Syndicated bank loans - secured - 131,250
Other bank loans - secured 9,267 25,434
Other bank loans - unsecured 3,752 5,246
Obligations under finance leases 2,073 6,026
--------------------------------------------------------- -------- --------
Total non-current interest-bearing loans and borrowings 186,294 505,641
--------------------------------------------------------- -------- --------
Total interest-bearing loans and borrowings 501,064 733,702
--------------------------------------------------------- -------- --------
At 31 December 2017, the Group's major external debt facilities
comprised:
- a syndicated revolving US$350,000 thousand pre-export finance
facility, of which US$131,250 thousand was available (2016:
US$306,250 thousand) and US$112,500 thousand are drawn. The
amortisation of this facility commenced in November 2016 with eight
quarterly amortisations and commitment reductions of US$43,750
thousand to the final maturity date of 8 August 2018; and
- an undrawn syndicated revolving US$195,000 thousand pre-export
finance facility signed on 16 November 2017. Following a grace
period, the facility will be amortised in eight quarterly
instalments. The first instalment is due on 31 March 2019 and the
final maturity date is 31 December 2020.
The aforementioned major bank debt facilities were guaranteed
and secured as follows:
- Ferrexpo AG and Ferrexpo Middle East FZE assigned the rights
to revenue from certain sales contracts;
- PJSC Ferrexpo Poltava Mining assigned all of its rights of
certain export contracts for the sale of pellets to Ferrexpo AG and
Ferrexpo Middle East FZE; and
- the Group pledged bank accounts of Ferrexpo AG and Ferrexpo
Middle East FZE into which sales proceeds from assigned sales
contracts are exclusively received.
In addition to the major bank debt facilities listed above, the
Group has outstanding unsecured Notes at par value totalling
US$346,385 thousand as at 31 December 2017 which fall due in two
equal instalments of US$173,193 thousand on 7 April 2018 and 2019,
respectively. The Notes have a 10.375% interest coupon payable
semi-annually.
As at 31 December 2017, the Group had no open trade finance
facilities (2016: US$19,025 thousand). Trade finance facilities are
secured against receivables related to these specific trades.
All facilities are shown net of associated arrangement fees,
except for the revolving syndicated pre -export finance facilities,
for which the fees are presented in prepayments and current assets
and other non-current assets based on the maturity of the
underlying facility and are amortised over the term of the
facility.
The table below shows the movements in the Interest-bearing
loans and borrowings:
Movements during the year ended 31.12.17
Change of arrangement
US$000 As at 31.12.16 Cash movements fees Interest expense Other As at 31.12.17
---------------------- -------------- -------------- --------------------- ---------------- ----- --------------
Eurobond issued 337,685 - 4,720 - 342,405
Syndicated bank loans
- secured 306,250 (193,750) - - - 112,500
Other bank loans -
secured 43,743 (20,512) 2,254 - - 25,485
Other bank loans -
unsecured 6,741 (1,534) 39 - 28 5,274
Obligations under
finance leases 9,710 (3,690) - 22 6,042
Trade finance
facilities 19,025 (19,025) - - -
Interest accrued 10,548 (47,661) - 46,547 (76) 9,358
---------------------- -------------- -------------- --------------------- ---------------- ----- --------------
Total Interest-bearing
loans and
borrowings/movements 733,702 (286,172) 7,013 46,547 (26) 501,064
---------------------- -------------- -------------- --------------------- ---------------- ----- --------------
Note 14: Commitments, contingencies and legal disputes
Legal
In the ordinary course of business, the Group is subject to
legal actions and complaints. Management believes that the ultimate
liability, if any, arising from such actions or complaints will not
have a material adverse effect on the financial condition or the
results of future operations of the Group.
Deposit Guarantee Fund and Liquidator of Bank F&C
The Group's former transactional bank in Ukraine, Bank F&C
("BFC"), is still going through the liquidation process after
having been declared insolvent by the National Bank of Ukraine and
put under temporary administration on 18 September 2015. The Group
has recorded in previous periods a full allowance for its cash and
deposit balances (denominated in Ukrainian Hryvnia) held with BFC
on the date of introduction of temporary administration, totalling
UAH4,262 million (US$151,850 thousand) as at 31 December 2017
(2016: US$156,866 thousand). The Group, through its major
subsidiaries in Ukraine, is engaged in various court proceedings
with the aim to maximise its recovery in the liquidation process of
BFC as disclosed below.
The Group's principal Ukrainian subsidiary, PJSC Ferrexpo
Poltava Mining ("FPM"), is claiming the release of UAH217 million
(US$7,731 thousand as of 31 December 2017), which was blocked after
the introduction of the temporary administration of BFC on 18
September 2015. FPM has filed a cassation appeal in respect of an
earlier adverse judgment received from the court. With judgment of
17 October 2017, the relevant court instance dismissed FPM's appeal
in full. Based on legal advice obtained, there are no legal grounds
for an appeal against this judgement to the Supreme Court of
Ukraine.
Following the commencement of the liquidation process of BFC and
in accordance with the applicable local legislation, FPM, LLC
Ferrexpo Yeristovo Mining ("FYM") and LLC Ferrexpo Belanovo Mining
("FBM"), collectively referred to as "Ukrainian subsidiaries",
submitted on 21 January 2016 their claims for cash and deposit
balances held with BFC on the date of introduction of temporary
administration totalling UAH4,262 million (US$151,850 thousand as
of 31 December 2017).
On 22 April 2016, the liquidator of BFC issued certificates
recognising UAH540 million (US$19,240 thousand as of 31 December
2017) of these claims and recognised these claims in the ninth
rank. The aforementioned Ukrainian subsidiaries are currently
involved in legal proceedings in respect of the under-recognition
of the claims amounting to UAH3,722 million (US$132,610 thousand as
of 31 December 2017) and the ranking of the claims in the
liquidation process. The court proceedings commenced in October
2016 and following various hearings during the financial year 2017,
the relevant court instance dismissed on 25 October 2017 FPM's
claim in full. FPM filed an appeal on 13 November 2017 and a
hearing took place on 21 February 2018. In this hearing, the
liquidator of BFC failed to provide certain original documents
requested by the court. As a result, the court did not rule on the
parties' motions yet, but instead decided to adjourn the hearing.
The next hearing is scheduled for 29 March 2018. The claims of FYM
and FBM on the same matter are still pending with the relevant
courts, but no hearings took place or are scheduled yet.
Note 15: 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 49.5% (2006: 49.4%). This is
the only associated company of the Group. Other related parties are
principally those entities controlled partially by Anatoly Trefilov
who resigned as a member of the supervisory board of PJSC Ferrexpo
Poltava Mining as of 19 April 2017. In accordance with the Listing
Rules, all transactions with the entities controlled by Anatoly
Trefilov within one year of his resignation from the supervisory
board will still be considered as related party transactions and
disclosed as such.
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 31.12.17 Year ended 31.12.16
----------------------------- -----------------------------
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 - -
Other sales (b) 362 - 94 234 - 143
------------------------------------------------------ -------- ---------- ------- -------- ---------- -------
Total related party transactions within revenue 362 - 94 2,209 - 143
------------------------------------------------------ -------- ---------- ------- -------- ---------- -------
Materials (c) 7,504 - 8 6,954 - 8
Spare parts and consumables (d) 1,382 - - 1,251 - -
Gas (e) - - - 4,297 - -
------------------------------------------------------ -------- ---------- ------- -------- ---------- -------
Total related party transactions within cost of sales 8,886 - 8 12,502 - 8
------------------------------------------------------ -------- ---------- ------- -------- ---------- -------
Selling and distribution expenses (f) 10,867 18,366 827 10,766 19,803 1,507
General and administration expenses (g) 594 - 425 673 - 92
Allowance for restricted cash and deposits (h) - - - 8,524 - -
------------------------------------------------------ -------- ---------- ------- -------- ---------- -------
Total related party transactions within expenses 20,347 18,366 1,260 32,465 19,803 1,607
------------------------------------------------------ -------- ---------- ------- -------- ---------- -------
Finance expense 34 - - 38 - -
------------------------------------------------------ -------- ---------- ------- -------- ---------- -------
Total related party finance expense 34 - - 38 - -
------------------------------------------------------ -------- ---------- ------- -------- ---------- -------
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 as of
the end of the comparative period ended 31 December 2016 to VA
Intertrading AG. No such sales as of 31 December 2017.
b Sales of power, steam and water and other materials for US$88
thousand (2016: US$37 thousand) and income from premises leased to
Kislorod PCC of US$135 thousand (2016: US$135 thousand).
c Purchases of compressed air and oxygen and metal scrap from
Kislorod PCC for US$3,911 thousand (2016: US$3,587 thousand);
c Purchases of cast iron balls from AutoKraZ Holding Co. for
US$851 thousand (2016: US$1,269 thousand); and
c Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas
for US$2,673 thousand (2016: US$2,063 thousand).
d Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship
Repair Plant ("KSRSSZ") in the amount of US$96 thousand (2016:
US$410 thousand);
d Purchases of spare parts from OJSC Uzhgorodsky Turbogas in the
amount of US$294 thousand (2016: US$150 thousand);
d Purchases of spare parts from Valsa GTV of US$756 thousand (2016: US$486 thousand); and
d Purchases of spare parts from OJSC Berdichev Machine-Building
Plant Progress of US$211 thousand (2016: US$61 thousand).
e Procurement of gas for US$4,297 thousand from OJSC
Ukrzakordongeologia as of the end of the comparative period ended
31 December 2016. No such transaction as of 31 December 2017.
f Purchases of advertisement, marketing and general public
relations services from FC Vorskla of US$10,867 thousand (2016:
US$10,766 thousand).
g Insurance premiums of US$403 thousand (2016: US$385 thousand)
paid to ASK Omega for workmen's insurance and other insurances.
h 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 as a result of the
latest developments of the ongoing court case. See Note 14 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.
f Purchases of logistics services in the amount of US$18,366
thousand (2016: US$19,803 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.
f Purchases of logistics management services from Slavutich Ruda
Ltd. relating to customs clearance services and the coordination of
rail transit totalling US$827 thousand (2016: US$1,502
thousand).
g Legal services in the amount of US$221 thousand (2016: nil)
provided by Kuoni Attorneys at Law Ltd., which is controlled by a
former member of the Board of Directors of Ferrexpo plc who
resigned in November 2016, but still acts as a member of the Board
of Directors of one of the subsidiaries of the Group; and
g Consulting services totalling US$205 thousand (2016: US$92
thousand) provided by Nage Capital Management AG, which is
controlled by a former member of the Board of Directors of Ferrexpo
plc who resigned in August 2014, but still acts a s member of the
Board of Directors of one of the subsidiaries of the Group.
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 31.12.17 Year ended 31.12.16
----------------------------- -----------------------------
Entities Entities
under Other under Other
common Associated related common Associated related
US$000 control companies parties control companies parties
------------------------------------------------- -------- ---------- ------- -------- ---------- -------
Purchases in the ordinary course of business 68 - - 37 - 1
------------------------------------------------- -------- ---------- ------- -------- ---------- -------
Total purchases of property, plant and equipment 68 - - 37 - 1
------------------------------------------------- -------- ---------- ------- -------- ---------- -------
There were no individual transactions which exceeded US$200
thousand in the current period or comparative periods.
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 31.12.17 As at 31.12.16
----------------------------- -----------------------------
Entities Entities
under Other under Other
common Associated related common Associated related
US$000 control companies parties control companies parties
-------------------------------------------------- -------- ---------- ------- -------- ---------- -------
Prepayments for property, plant and equipment (i) 2,981 - - - - -
-------------------------------------------------- -------- ---------- ------- -------- ---------- -------
Total non-current assets 2,981 - - - - -
-------------------------------------------------- -------- ---------- ------- -------- ---------- -------
Trade and other receivables (j) 118 1,082 37 257 4,576 48
Prepayments and other current assets (k) 1,088 - 171 282 - 201
-------------------------------------------------- -------- ---------- ------- -------- ---------- -------
Total current assets 1,206 1,082 208 539 4,576 249
-------------------------------------------------- -------- ---------- ------- -------- ---------- -------
Trade and other payables (l) 339 1,367 64 456 1,331 267
Accrued liabilities and deferred income - - 51 - - -
-------------------------------------------------- -------- ---------- ------- -------- ---------- -------
Current liabilities 339 1,367 115 456 1,331 267
-------------------------------------------------- -------- ---------- ------- -------- ---------- -------
A description of the balances over US$200 thousand in the
current or comparative period is given below.
Entities under common control
i As of 31 December 2017, prepayments for property, plant and
equipment totalling US$2,722 thousand (2016: nil) were made to OJSC
Berdichev Machine-Building Plant Progress and US$256 thousand
(2016: nil) to AutoKraZ Holding Co.
k Prepayments and other current assets totalling US$858 thousand
as of 31 December 2017 relate to prepayments made to FC Vorskla for
advertisement, marketing and general public relations services
(2016: nil).
Associated companies
j As at 31 December 2017, trade and other receivables included
US$1,082 thousand (2016: US$4,576 thousand) related to dividends
declared by TIS Ruda LLC.
l As at 31 December 2017, trade and other payables included
US$1,367 thousand (2016: US$1,331 thousand) related to purchases of
logistics services from TIS Ruda LLC.
Other related parties
k Prepayments and other current assets totalling US$171 thousand
(2016: US$201 thousand) relate to prepayments made to Slavutich
Ruda Ltd. for distribution services.
l Trade and other payables of US$59 thousand (2016: US$267
thousand) were in respect of distribution services provided by
Slavutich Ruda Ltd.
Note 16: Events after the reporting period
No material adjusting or non-adjusting events have occurred
subsequent to the year end other than the proposed dividend
disclosed in Note 10.
ALTERNATIVE PERFORMANCE MEASURES
When assessing and discussing the Group's reported financial
performance, financial position and cash flows, management may make
reference to Alternative Performance Measures ("APMs") that are not
defined or specified under International Financial Reporting
Standards ("IFRS").
APMs are not uniformly defined by all companies, including those
in the Group's industry. Accordingly, the APMs used by the Group
may not be comparable with similarly titled measures and
disclosures made by other companies. APMs should be considered in
addition to, and not as a substitute for or as superior to,
measures of financial performance, financial position or cash flows
reported in accordance with IFRS.
Ferrexpo makes reference to the following APMs in the 2017
Annual Report.
C1 cash cost of production
Definition: Non-financial measure, which represents the cash
costs of production of iron pellets from own ore divided by
production volume of own production ore. Non-C1 cost components
include non-cash costs such as depreciation, inventory movements
and costs of purchased ore and concentrate. The Group presents the
C1 cash cost of production because it believes it is a useful
operational measure of its cost competitiveness compared to its
peer group.
Year ended
Year ended 31.12.16
US$'000 31.12.17 (audited)
---------------------------------- ---------- ----------
C1 cash costs 335,451 306,611
Non-C1 cost components 31,745 53,884
---------------------------------- ---------- ----------
Cost of sales - pellet production 367,196 360,495
---------------------------------- ---------- ----------
Own ore produced (tonnes) 10,394,440 11,071,404
C1 cash cost per tonne (US$) 32.3 27.7
---------------------------------- ---------- ----------
Underlying EBITDA
Definition: The Group calculates the Underlying EBITDA as profit
before tax and finance plus depreciation and amortisation and net
gains and losses from disposal of investments and property, plant
and equipment and share-based payments and operating and
non-operating special items, including write-offs and impairment
losses and other exceptional items. The Underlying EBITDA is
presented because it is a useful measure for evaluating the Group's
ability to generate cash and its operating performance. See Note 3
for further details.
Closest equivalent IFRS measure: Profit before tax and
finance.
Rationale for adjustment: The Group presents the Underlying
EBITDA as it is a useful measure for evaluating its ability to
generate cash and its operating performance. It excludes the impact
of special items that can mask underlying changes in performance.
Also it aids comparability across peer groups as it is a
measurement that is often used.
Reconciliation to closest IFRS equivalent:
Year ended Year ended
US$000 Notes 31.12.17 31.12.16
---------------------------------------------------- ----- ---------- ----------
Underlying EBITDA 550,705 375,243
---------------------------------------------------- ----- ---------- ----------
Losses on disposal of property, plant and equipment (7,754) (4,446)
Share-based payments (586) (389)
Operating special items 7 (407) (2,501)
Non-operating special items 7 - (8,525)
Depreciation and amortisation (46,392) (50,671)
---------------------------------------------------- ----- ---------- ----------
Profit before tax and finance 495,566 308,711
---------------------------------------------------- ----- ---------- ----------
Underlying Diluted earnings per share before special items
Definition: Earnings per share excluding special items and
calculated using the diluted number of Ordinary Shares
outstanding.
Closest equivalent IFRS measure: Diluted earnings per share.
Rationale for adjustment: Excludes the impact of special items
that can mask underlying changes in performance.
Reconciliation to closest IFRS equivalent:
Before Special Year ended Before Special Year ended
special items items 31.12.17 special items items 31.12.16
---------------------------------------------- ------------- ------- ---------- ------------- ------- ----------
Earnings/(loss) for the year attributable to
equity shareholders per share
Basic (US cents) 66.53 0.56 67.09 33.60 (1.60) 32.00
Diluted (US cents) 66.30 0.55 66.85 33.51 (1.60) 31.91
---------------------------------------------- ------------- ------- ---------- ------------- ------- ----------
Net debt to underlying EBITDA
Definition: Net debt divided by the Underlying EBITDA (for the
last 12 months):
As at As at
31.12.17 31.12.16
---------------------------------- --------- ---------
Net debt (US$000) (403,322) (588,951)
Underlying EBITDA (US$000) 550,705 375,243
----------------------------------- --------- ---------
Net debt to Underlying EBITDA (%) 73 157
----------------------------------- --------- ---------
Rationale for adjustment: The ratio is a measurement of the
Underlying EBITDA Group's leverage, calculated as a company's
interest-bearing liabilities minus cash or cash equivalents,
divided by its Underlying EBITDA.
Reconciliation of Net debt:
As at As at
US$000 Notes 31.12.17 31.12.16
---------------------------------------------------- ----- --------- ---------
Cash and cash equivalents 12 97,742 144,751
Interest-bearing loans and borrowings - current 13 (314,770) (228,061)
Interest-bearing loans and borrowings - non-current 13 (186,294) (505,641)
---------------------------------------------------- ----- --------- ---------
Net debt (403,322) (588,951)
---------------------------------------------------- ----- --------- ---------
For a reconciliation of Underlying EBITDA to profit before tax
and finance see page 49.
Underlying EBITDA margin
Definition: Underlying EBITDA divided by revenue:
As at As at
Notes 31.12.17 31.12.16
---------------------------------- ----- --------- --------
Underlying EBITDA (US$000) 550,705 375,243
Revenues (US$000) 4 1,197,494 986,325
---------------------------------- ----- --------- --------
Net debt to Underlying EBITDA (%) 46 38
---------------------------------- ----- --------- --------
Rationale for adjustment: The Group presents the Underlying
EBITDA margin as it is a useful measure for evaluating its
operating performance as a percentage of total revenue. It excludes
the impact of special items that can mask underlying changes in
performance. Also it aids comparability across peer groups as it is
a measurement that is often used.
Reconciliation to closest IFRS equivalent:
As at As at
US$000 Notes 31.12.17 31.12.16
-------- ----- --------- --------
Revenue 4 1,197,494 986,325
-------- ----- --------- --------
For a reconciliation of Underlying EBITDA to profit before tax
and finance see page 49.
Capital investment
Definition: Capital expenditure for the purchase of property,
plant and equipment and intangible assets.
Closest equivalent IFRS measure: Purchase of property, plant and
equipment and intangible assets (Net cash flows used in investing
activities).
Rationale for adjustment: The Group presents the capital
investment as it is a useful measure for evaluating the degree of
capital invested in its business operations.
Reconciliation to closest IFRS equivalent:
As at As at
US$000 Notes 31.12.17 31.12.16
---------------------------------------------------------------- ------ -------- --------
Purchase of property, plant and equipment and intangible assets
(Net cash flows used in investing activities 102,953 48,176
------------------------------------------------------------------------ -------- --------
Total liquidity
Definition: Sum of cash and cash equivalents and available
facilities.
Closest equivalent IFRS measure: Cash and cash equivalents.
Rationale for adjustment: The Group presents total liquidity as
it is a useful measure for evaluating its ability to meet short
term business requirements.
Reconciliation to closest IFRS equivalent:
As at As at
US$000 Notes 31.12.17 31.12.16
-------------------------- ----- -------- --------
Cash and cash equivalents 12 97,742 144,751
-------------------------- ----- -------- --------
Available facilities 13 213,750 -
-------------------------- ----- -------- --------
Total liquidity 311,492 144,751
-------------------------- ----- -------- --------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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