TIDMFXPO
RNS Number : 5423G
Ferrexpo PLC
18 March 2020
18 March 2020
Ferrexpo plc
("Ferrexpo", the "Group" or the "Company")
2019 Full Year Results
Ferrexpo PLC, a FTSE 250 iron ore pellet producer, today
announces its full year audited financial results for the 12 months
ended 31 December 2019.
Financial Highlights
-- Revenue up 18% to US$1.5 billion due to higher iron ore fines
prices and an increase in sales volumes
-- Underlying EBITDA (A) up 17% to US$586 million (2018: US$503 million)
-- 62% increase in net cash flows from operations to US$473 million (2018: US$292 million)
-- Net debt (A) to underlying EBITDA reduced to 0.48 times
-- Capital investment (A) increased 83% to US$247 million (2018: US$:135 million)
Steve Lucas, Non-Executive Chairman, said:
"Ferrexpo has continued to deliver strong cash flow generation
which is up 62% year on year. This has enabled us to allocate
capital to further reduce debt, to increase investment to drive
medium term growth, and to pay record dividends to
shareholders."
"I am also pleased to report that the Group had no fatalities in
2019 (2018: one fatality) and that the Group's Lost time injury
frequency rate ("LTIFR") declined to 0.58 times - a record low for
the Group.
"The safety and wellbeing of our employees is paramount. That is
why we are taking precautions to mitigate the risk of infection
from the COVID-19 virus. This includes cancellation of business
trips in accordance with respective government advice, also in
locations where the COVID-19 virus has had a more severe impact,
Ferrexpo has stipulated a working from home requirement. We have
been following and will continue to follow the advice from health
authorities in Ukraine, as well as other jurisdictions where our
employees are based.
"During 1Q 2020, COVID-19 began causing disruption to Chinese
supply chains impacting the distribution networks of steel
producers and their customers. This could result in short-term
volatility for the iron ore market as high levels of steel
inventory, built up during this period, are released into the
supply chain once normal operations resume. Early signs are
indicating that the Chinese economy is beginning to recover from
the peak of the COVID-19 virus.
"The spread of the virus into Europe, however, could result in
further economic uncertainty. Prior to the virus, we had expected
steel profitability in Europe to show a mild recovery in key
markets from the second half of the year onwards.
"Amidst this backdrop, Ferrexpo remains well placed to manage
our way through the current uncertainties due to our low cost
position relative to our peers, our well invested asset base, our
premium customer portfolio and our strong balance sheet.
" Nevertheless, given this general market uncertainty, the Board
has deferred its decision on a final ordinary and/or special
dividend to an appropriate time when the market situation and the
effect of the COVID-19 virus has become clearer. At this point, the
Board intends to declare a dividend and will keep the market
updated."
2019 Financial Summary:
Year ended Year ended Change
US$ million (unless otherwise stated) 31.12.19 31.12.18 %
Pellet production from own ore (kt) 10,519 10,506 +0.1%
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Sales volumes (kt) 10,312 10,227 +0.8%
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Avg PLATTS CFR 62% Fe iron ore fines price
(US$/t) 93 69 +35%
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Avg PLATTS CFR 65% Fe iron ore fines price
(US$/t) 104 90 +16%
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Revenue 1,507 1,274 +18%
----------- ----------- -------
Average C1 cash cost(A) (per tonne) 47.8 43.3 +10%
----------- ----------- -------
Underlying EBITDA(A) 586 503 +17%
----------- ----------- -------
Diluted EPS (US cents) 68.4 56.7 +21%
----------- ----------- -------
Net cash flow from operating activities 473 292 +62%
----------- ----------- -------
Capital investment(A) 247 135 +83%
----------- ----------- -------
Net debt(1) 281 339 -17%
----------- ----------- -------
Cash 131 63 +108%
----------- ----------- -------
Net debt to EBITDA(A) 0.48 0.67x -28%
----------- ----------- -------
Notes:
(1) N et debt as of 31 December 2019 included a US$7 million
effect from the first time application of IFRS16 Leases.
Alternative Performance Measures: Words with the symbol (A) are
defined in the Alternative Performance Measures section on pages
55-57 .
Health and Safety
-- No work related fatalities (FY 2018: one)
-- Group lost time injury frequency rate 0.58 per million man
hours (FY 2018:1.18, 1H 2018: 0.97)
Market Environment
-- Average realised FOB price increased 17% compared to 2018
-- Despite periods of regional demand weakness through the year,
the Group was pleased to renew and/or extend several key long-term
contracts as well as secure a new long-term contract with a leading
German steel mill
Operational Highlights
-- 3% increase in production of 65% Fe pellets from own ore compared to 2018
-- Proportion of high quality 65% Fe pellet increased to 96% of total output (2018: 94%)
-- 1% increase in sales volumes compared to 2018
-- C1 cash cost US$47.8 per tonne up US$4.5 per tonne reflecting
domestic inflation of 4% and a 14% appreciation of the local
currency during the year
-- Capital investment increased to US$247 million reflecting
modernisation of processing facilities and near term growth
projects to increase production by 1.5MT to 12MTPA by 2021
Corporate Governance
-- Appointment of Graeme Dacomb, a retired partner from Ernst
& Young, as an independent non-executive director and as Chair
of the Audit Committee
-- Appointment of Fiona MacAulay, who has extensive operational
experience in emerging markets in the upstream oil and gas sector,
as an Independent Non-Executive director and as Chair of the
Remuneration Committee. As of 12 February 2020, Fiona MacAulay
became Chair of the HSEC Committee
-- Conclusion of the Independent Review into the use of funds
donated by Ferrexpo to the Blooming Land Charity
-- Kostyantin Zhevago temporarily stepped down as CEO in October
2019 to focus on resolving certain matters in Ukraine relating to
one of the businesses he owned until 2015
Analyst conference call and webcast
Ferrexpo will host an analyst presentation today via audio
webcast which will start at 09:00 GMT.
To join the webcast, please follow this link
https://edge.media-server.com/mmc/p/fzit7kc8
If you wish to join via audio, please see below for dial in
details and instructions:
DIAL IN NUMBERS
Participant
1. 10 minutes prior to the start of the call, dial the
appropriate Participant Dial-In Number listed in the Conference
Dial-In Number section below.
2. Provide the Operator with the Conference ID Number.
Conference ID 3496277
Participant Standard International Dial-In: +44 (0) 203 009 5710
Participant UK Local Call Dial-In Number: 0844 493 3857
For further information contact:
Ferrexpo:
Ingrid McMahon +44 207 389 8304
Maitland/AMO:
James Isola +44 207 379 5151
Notes to Editors:
Ferrexpo is a Swiss headquartered iron ore company with assets
in Ukraine. It has been mining, processing and selling high quality
iron ore pellets to the global steel industry for 40 years. In
2019, the Group produced 10.5 million tonnes of pellets ranking it
as the 3rd largest exporter of pellets to the global steel industry
with a market share of approximately 8%. Ferrexpo has a diversified
customer base supplying steel mills in Austria, Germany, Japan,
South Korea, Taiwan, China, Slovakia, the Czech Republic, Turkey,
Vietnam and America. Ferrexpo has a premium listing on the main
market of the London Stock Exchange. Since its IPO in 2007, the
Group has paid approximately US$750 million in dividends to
shareholders, invested over US$2.5 billion of capital into its
operations and paid US$829 million in taxes and royalties to the
Ukrainian government. For further information, please visit
www.ferrexpo.com
CHAIRMAN'S STATEMENT
Health and safety
I am very pleased to be able to report that the Group had no
fatalities in 2019 (2018: one fatality). Furthermore, the Group's
lost time injury frequency rate ("LTIFR") declined to 0.58x - a
record for the Group and a strong improvement on 2018 when the
Group LTIFR was 1.18x.
This performance is thanks to a relentless focus in our
operations on the safety of our people, improving the reporting of
near-miss incidents and a determined focus on training.
COVID-19
The Board is closely monitoring the impact of the virus on the
world, our people and our key customers and suppliers. Meanwhile,
the health of our staff is of the highest priority and we have
implemented a number of measures to protect our workforce as far as
practicable.
Year in summary for all stakeholders
At the end of a year which has posed a number of challenges, I
am pleased to be able to report a strong set of financial results
and significant progress on corporate governance matters (see
Corporate Governance below).
Ferrexpo's operations continued to perform strongly in 2019.
Production of high quality 65% Fe pellets from own ore increased 3%
to 10.1 million tonnes (2018: 9.8 million tonnes) while sales
volumes increased to 10.3 million tonnes (2018: 10.2 million
tonnes). Despite lower demand from some steel mills compared to
2018, the Group signed new long-term contracts for supply into
Germany and Taiwan as well as renewing a long-term contract for
supply into Japan. Ferrexpo has a geographically diversified sales
portfolio which allowed the Group to maintain consistent supply to
the market despite some periods of weaker demand from specific
regions during the year.
Reported underlying EBITDA for the year rose 17% to US$586
million compared to US$503 million in 2018. Net cash flow from
operations increased by 62% to US$473 million compared to US$292
million.
Total dividends declared for the 2019 financial year amount to
13.2 US cents per share (2018: 23.1 US cents per share). The Board
is committed to dividends and intends to consider a potential final
ordinary and/or special dividend for the 2019 financial year once
the general market situation and the effect of the COVID-19 virus
has become clearer. Overall, in 2019 the Group paid out dividends
of US$155 million, a 60% increase on 2018 when US$97 million was
paid.
During the year, the Group paid taxes and royalties of US$114
million in Ukraine (2018: US$73 million) while it remained a major
customer of state infrastructure in areas such as electricity, gas
and railway facilities. The Group was the largest exporter of iron
ore pellets in the region and accounted for approximately 2% of
Ukraine's total exported goods in 2019.
In 2019, Ferrexpo's workforce totaled 10,767 people (including
subcontractors). Total employee benefits paid to employees were
US$109 million (2018: US$86 million). Average salaries at FPM in
2019 were 60% above the national average in Ukraine(1) .
(1) Source: www.ukrstat.gov.ua/
In terms of community developments in 2019, US$6 million was
invested directly into local community projects (2018: US$6
million) including refurbishment of an X-ray room in a municipal
hospital, creation of a salt spa therapy room in a municipal
hospital, refurbishment of the local chess club, continued support
for our local rowing club, Gornyak, as well as supporting
preparations for the 2020 Summer Olympic games through the purchase
of equipment, rowing boats and oars. At five local schools classes
were updated with the latest technology such as the physics room,
IT, mathematics and technical drawing classes. In terms of
infrastructure development, a new community square was built with a
children's playground as well as an audio system and a big
screen.
Ferrexpo's scope 1 and 2 carbon intensity ratio was 240 kg of
CO(2) per tonne of pellets produced in 2019 (2018: 237 kg per tonne
of pellets). The increase was primarily as a result of a 1%
increase in electricity consumption due to a 5% increase in tonnes
of ore processed during the year. The use of sunflower husks to
partially heat the Group's pelletisers, as an alternative energy
source, increased 15% in 2019(2) . For the first time, Ferrexpo is
publishing its estimate of its downstream scope 3 emissions.
Downstream scope 3 emissions represent the emissions from
activities that relate to the distribution and use of the Group's
pellets. Ferrexpo's scope 3 emissions in 2019 were estimated to be
10.0 million tonnes (2018: 9.9 million tonnes). Ferrexpo's
calculation of scope 3 emissions utilizes independent research from
CRU. The research shows that steel mills produce 38% less
greenhouse gasses if they use Ferrexpo's magnetite iron ore pellets
instead of the more commonly used iron ore fines.
(2) Sunflower husks are reported separately to CO(2) emissions
given they are a sustainable energy source
Finally, in March 2019 the Group commissioned Knight Piésold
Consulting to conduct an independent review of our tailings storage
facility in terms of design, construction and operational
management (in addition to regular inspections by the Ukrainian
government and internal specialists). The conclusion of the Knight
Piésold report was that our tailings facility is an appropriate
design for the volume of tailings being deposited, it is well
managed and it has an appropriate inspection and monitoring regime.
The report raised a number of key differences between the structure
of Ferrexpo's tailings dam and the Brumadinho dam in Brazil that
failed in January 2019, specifically the topography of the area of
construction of Ferrexpo's dam is on flat land (rather than valley
fill), with embankments at a shallower angle and dam walls
constructed using a mixture of materials including coarse compacted
rock (as opposed to un-compacted material). The report made a
number of recommendations with regard to improving the dam's
operational controls, which the Company is now looking to
adopt.
Corporate governance
A number of corporate governance changes were made during the
year which are described in further detail below. When considering
corporate governance, it is worth taking into account that
Ferrexpo's production base resides exclusively in Ukraine,
currently rated Caa1 by Moody's. This is a non-investment grade
rating and classifies the country as having substantial risks.
Since Ferrexpo's IPO on the London Stock Exchange in 2007, the
Board has managed a variety of risks including regional
geopolitical tensions as well as counterparty risks in areas such
as payments to local third parties, recovery of VAT, the
requirement to prepay corporate profit tax and the management of
legal and other related claims, amongst others.
For further information see the Principal Risks on page 22.
The following sections detail how we have focused on corporate
governance in 2019.
Independent review of Blooming Land charity
As announced in February 2019, the Group established an
Independent Review Committee ("IRC") to investigate the use of
funds donated by Ferrexpo to a Ukrainian charity called Blooming
Land (the "Charity"). The work of the IRC and its advisers included
a forensic review undertaken by BDO LLP, a review of relevant
documentation, interviews with Ferrexpo employees and Directors,
correspondence with the Charity, and other third parties together
with advice from legal counsel in the UK and Ukraine.
The IRC was unable to conclude as to the ultimate use of all of
Ferrexpo's funds by the Charity, a third party.
Donations to the Charity were suspended in May 2018, and in
August 2019 the Group formally terminated the relationship. The
Board's current policy regarding charitable donations is to only
support causes or charities local to the Company's operations.
Should the Company resume any national corporate social
responsibility ("CSR") programme in Ukraine, the Board will ensure
adherence to the highest standards of diligence, oversight,
governance and reporting.
New board appointments
In 2019, I was pleased to make a number of appointments to the
Board which I feel significantly strengthen our team. As part of
the selection process, a wide range of factors were taken into
consideration, including requirements for diversity, mining sector
experience and emerging market knowledge. I now feel that, subject
to one further appointment which is in progress, we have the right
mix of skills on the Ferrexpo Board.
In February, we announced the appointment of Lucio Genovese as a
Non-independent Non-executive Director. Lucio has been involved in
the mining and commodities industry for over 30 years. He has deep
knowledge across the sector, including in iron ore. He has
extensive experience of operating in emerging markets, specifically
in Russia and the CIS states. As a previous Board member (from 2007
to 2014) and, as a Board member of Ferrexpo AG, Lucio has in-depth
knowledge of the Group which is extremely valuable to the
Board.
In June, Graeme Dacomb joined as an Independent Non-executive
Director and as the Chair of the Audit Committee. Graeme was a
partner at Ernst & Young for 26 years where, for his last 12
years, he was a lead partner in the extractive industry,
responsible for coordinating the provision of a full suite of
services to multinational mining and oil and gas clients including
Xstrata, Fresnillo and BP across a broad range of countries
including emerging markets. In addition to audit services, he
provided critical advice to his clients on corporate governance
structures, risk management, acquisitions, disposals and financial
systems and controls. From 2011 to 2018, Graeme was a member of the
Financial Reporting Review Panel.
In August, we announced the appointment of Vitalii Lisovenko as
Senior Independent Director and Fiona MacAulay as an Independent
Non-executive Director and as Chair of the Remuneration
Committee.
Vitalii, who joined the Ferrexpo Board in November 2016, has
made a strong contribution to the Board and has deep knowledge of
financial markets and the Ukrainian business environment.
Fiona has extensive operational experience in emerging markets
in the upstream oil and gas sector, having worked for a number of
large multinationals as well as mid and small-sized companies. This
includes as CEO of Echo Energy Plc. Fiona is Chair of Independent
Oil & Gas Plc where she also chairs the Technical, Health,
Safety and Environment and Remuneration Committees. Fiona is also a
member of the Exploration Advisory Board of Cairn India, the
largest private sector producer of crude oil in India as well as
being on the Board of Coro Energy Plc, where she is a member of the
Remuneration Committee and chairs the Health, Safety, Environment
and Sustainable Committee.
During the year, three directors resigned: Simon Lockett, Mary
Reilly and Bert Nacken. I would like to thank them for their
contributions to the Company.
In October 2019, Kostyantin Zhevago informed the Board of his
decision to step aside, temporarily, from his position of Chief
Executive Officer of the Group to focus on resolving certain
matters in Ukraine relating to one of the businesses he owned until
2015.
The Board, including Kostyantin, believes that this temporary
change of leadership was necessary and in the interests of all
shareholders to enable him to focus on these matters in Ukraine
without impacting the Company's operations. Kostyantin remains on
the Board as a Non-independent Non-executive Director and has the
full support of the Board.
We were very pleased that Chris Mawe agreed to step into the
role of Acting Chief Executive Officer. His extensive knowledge of
the Group's operations will ensure business continuity.
As a result of Chris becoming Acting Chief Executive Officer,
Roman Palyvoda was appointed Acting Chief Financial Officer given
his extensive financial experience within the Group. Roman joined
Ferrexpo in September 2008 in a senior financial role. Previously,
Roman worked at Renault Group for over five years, latterly as the
Financial Controller for Russia, Ukraine and the CIS.
The Group has a strong executive management team with a track
record of delivering the Group's strategic objectives. In addition,
many of the senior management team have been with the Group for at
least ten years, further adding stability during volatile
times.
Last but not least, Ferrexpo acknowledges the need for diversity
in its Board, management and employee structures. A programme to
deliver our diversity objectives is ongoing.
Auditor appointment
In July 2019, Ferrexpo announced that following the completion
of an audit tender led by the Company's Audit Committee, MHA
MacIntyre Hudson, the UK member of Baker Tilly International, was
appointed as the Company's new auditor. Baker Tilly International
operates one of the top ten audit networks in the world and,
importantly, has significant audit capability in Ukraine having
operated there since 1999.
Purpose, Values and Strategy
Our purpose is to produce and market premium quality iron ore
pellets, vital for sustainable steel production essential to modern
life. Our values underpin our purpose and culture.
In summary, these values are to Act Responsibly, Make it Happen,
Integrity in What We Do, Diversity within One Team and Continuous
Innovation. These values were first defined at the Group's
leadership conference in Kyiv in October 2017 and were subsequently
refined and approved by the Executive Management Team and the
Board. Our strategic priorities are: to produce high quality
pellets, be a low cost producer, sell to a world class customer
portfolio, maintain a social licence to operate and to maintain
appropriate capital allocation between a strong balance sheet,
returns to shareholders and investment for growth.
Safety and responsibility is our number one priority and the
Board is strongly focused on ensuring that it is embedded in
everything we do.
Ferrexpo has a unique culture that is very focused on
collaboration especially when the Group is impacted by external
factors, such as the current coronavirus epidemic. I'm proud to say
that our team is hardworking and conscientious and works tirelessly
for the good of the Group. We all very much believe in the value
Ferrexpo adds to all stakeholders and to Ukraine. Our decisions are
for the long term and ensure a sustainable future for all.
Alongside our culture and values we have a Code of Business
Conduct, available on our website at www.ferrexpo.com, which sets
out the specific standards of conduct that we all commit to
meet.
We also expect our suppliers to adhere to our standards of
conduct. All suppliers are expected to comply with our anti-bribery
and anti-corruption policy, and to our Code of Conduct which
commits them to appropriate ethical and human rights standards,
including anti-slavery.
The Board monitors culture in a number of ways so that it is in
alignment with our Purpose, Values and Strategy, including site
visits and interacting with management and employees as part of our
duties. We also review a number of cultural indicators from
employee surveys as well as accident statistics, internal audit
reports and whistleblowing data, which is collected via an
independently managed hotline.
Workforce engagement
Workforce engagement as set out by the 2018 Corporate Governance
Code, is managed via the Board and executive management. The Board
took the view that the most appropriate way to achieve meaningful
and effective engagement with the workforce was through the CSR
Committee, a sub-committee of the Board. As most of these CSR
members are based in Ukraine and engage with the community and
workforce on a daily basis the Board considered this method to be
the most appropriate.
In order to fully understand employee views a survey consisting
of 45 questions was developed to understand opinions on strategy
alignment, Group culture, employee development, reward and
recognition, team work and integration, effectiveness of leadership
and areas on accountability and performance. The survey elicited a
good response with over 50% of total employees participating (or
4,769 employees across our worldwide operations).
The results of the survey were fed back and considered by the
Board in July 2019 as well as to 60 of the Group's top leaders at a
leadership conference in Kyiv in September 2019 and representatives
of the workforces who were tasked with distributing the
information.
In October 2019, a town hall session was held at Horishni Plavni
(the main town surrounding our mines) with over 245 members of the
workforce attending. Senior management in attendance included Jim
North (Group Chief Operating Officer), Viktor Lotous (Head of
Managing Board, FPM), Nikolay Goroshko (General Director of FYM),
Yuriy Khimich (General Director of FBM) and Greg Nortje (Group
Chief Human Resource Officer), as well as Vitalii Lisovenko (Senior
Independent Director). The session was two hours long and members
of the workforce had the opportunity to raise questions and bring
any matters to the attention of the senior management. The results
of the questions have subsequently been analysed and each
functional head in the business has been tasked to identify areas
of improvement and to build on strengths with their colleagues. It
is our intention to monitor these action plans and assess their
effectiveness on an annual basis.
Iron ore pellet market
In 2019, steel demand was muted in some regions, particularly in
the second half of the year, reflecting increased raw material
costs and weaker end-user demand. The Group, however, had the
ability to deploy product to other markets to offset any regional
weakness. Overall, the price the Group received for its pellets
remained attractive compared to historic levels.
Capital allocation
The Group is committed to maintaining low net debt, paying
dividends to shareholders and allocating capital to incremental
investments with high internal rates of return with the aim to
sustainably increase output. We maintain a strong focus on
liquidity especially during the current very uncertain business
climate.
Ferrexpo people
I would like to thank all of Ferrexpo's workforce, the senior
management team and our Board members. Their hard work and
determination to overcome challenges this year have once again
proven our resilience and our ability to stay focused when it is
needed most. This underpins our Purpose and Values as a Group and
secures the long-term future for all.
I would also like to say a special thanks to Nikolay Petrovich
Goroshko who retired as the General Director of Ferrexpo Yeristovo
Mining on 31 January 2020. Nikolay first joined the Company in 1984
and oversaw the Group's listing in 2007 as the Chief Financial
Officer as well as heading the development of Ferrexpo Yeristovo
Mine - the first new open pit mine in the former USSR since
Independence.
Outlook
During 1Q 2020, COVID-19 began causing disruption to Chinese
supply chains impacting the distribution networks of steel
producers and their customers. This could result in short-term
volatility for the iron ore market as high levels of steel
inventory, built up during this period, are released into the
supply chain once normal operations resume. Early signs are
indicating that the Chinese economy is beginning to recover from
the peak of the COVID-19 virus.
The spread of the virus into Europe, however, could result in
further economic uncertainty. Prior to the virus, we had expect
steel profitability in Europe to show a mild recovery in key
markets from the second half of the year onwards.
Incumbent pellet suppliers that have the ability to supply their
domestic market and to export will likely switch back to domestic
customers in 2020 given lower international pellet premiums
compared to 2018. In addition, lower pellet premiums could see some
high-cost supply exiting the market.
Ferrexpo remains well placed to manage our way through the
current uncertainties, due to our low-cost position relative to our
peers, our well-invested asset base, our premium customer portfolio
and our strong balance sheet.
Steve Lucas
Chairman
ACTING CHIEF EXECUTIVE'S REVIEW
In October 2019, I was appointed Acting Chief Executive Officer
by the Board of Ferrexpo. I joined Ferrexpo in 2008 as Chief
Financial Officer and I am pleased to serve as interim CEO to
ensure continuity and stability through what has been a challenging
2019.
By focusing on areas within our control, such as completing
existing capital projects (to increase our pellet output by 14% to
12 million tonnes of pellet per annum by 2021), continuing to
improve our pellet quality and further strengthening our customer
relationships, we have further developed the business based on our
strengths.
Ferrexpo has always had significant organic growth potential.
This potential, however, requires careful consideration in relation
to country and iron ore price volatility whilst maintaining a
strong balance sheet to ensure a sustainable and prosperous future
for all stakeholders. This strategy requires evolution not
revolution and sound financial discipline.
The success of this strategy can be measured by our track record
of consistent operational performance - total production of 65% Fe
pellets has increased by 6.4 million tonnes or by 173% since
2007.
Since 2007, Ferrexpo has generated US$3.8 billion in free cash
flow from operations. Shareholders have received over US$750
million in dividends, whilst taxes of US$829 million have been paid
to the Ukrainian government and we have invested approximately
US$2.5 billion into our mining, processing and logistics
operations, making us one of the largest investors in the country
over that period.
I'm very proud to say that Ferrexpo can compete with the best
peers in the world. I would like to express my sincere gratitude to
the executive management team and workforce for their full support
during this temporary period.
Chris Mawe
Acting CEO
FINANCIAL REVIEW
Summary
Group revenue and profit before tax increased by 18% in 2019
compared with 2018. Strong cash flow generation, up 62% year on
year, funded dividend payments of US$155 million and capital
investment of US$247 million, an increase in investment of 83%,
whilst net debt reduced by 17% to US$281 million.
Revenue
Group revenue increased by 18% to US$1.5 billion in 2019 (2018:
US$1.3 billion), principally due to a 17% increase in Ferrexpo's
realised free on board ("FOB") price and an increase in pellet
sales volumes. Higher realised prices during the period mainly
reflected a significant increase in the iron ore fines price.
In 2019, the 62% Fe iron ore fines price increased 35% from an
average of US$69 per tonne to US$93 per tonne. This increased
revenue by US$246 million. During the year, in line with the
industry, Ferrexpo progressively switched to pellet pricing based
off the 65% Fe fines index rather than the 62% Fe fines index,
reflecting the higher iron content of its pellets.
Following the switch to the 65% Fe fines index, the average
realised pellet premium in 1H 2019 was in line with the average of
2018.
However, a fall in long-term customer pellet premiums in 4Q 2019
and a corresponding increase in spot sales to China, reduced the
average weighted pellet premium for the year by 12% compared with
the average 2018 level. This decreased revenue by US$73 million.
For further information see Market Review on page 14.
Ferrexpo's agreed sales prices are based on a variety of
reference periods, ranging from the average iron ore fines price
for a month to a quarterly lag. In 2019, this difference in timing
had a positive effect on sales increasing revenue by US$19 million
compared to 2018.
Seaborne freight revenue arising from CFR sales increased
revenue by US$25 million compared to 2018. This reflected a higher
proportion of sales to Asia.
Sales volumes for the period increased to 10.3 million tonnes
(2018: 10.2 million tonnes), increasing revenue by US$10 million.
For further information see Operations Review - Marketing on page
17.
Lastly, the Group's barging operations increased revenue by US$5
million in 2019 compared with 2018.
Costs
C1 Cost of production
The Group's average C1 cash cost of production(A) was US$47.8
per tonne in 2019 compared with US$43.3 per tonne in 2018.
The increase in costs was primarily due to domestic cost
inflation and a strong local currency against the US Dollar.
Together these factors added US$2.5 per tonne to the C1 cash cost
compared to 2018, reflecting Ukrainian inflation of 4% while the
Hryvnia appreciated 14% against the US Dollar during the year. Over
half of the Group's operating costs are in local currency and are
impacted by the Hryvnia exchange rate and inflation.
For further information see Currency on page 11.
Repair and maintenance costs increased by US$2.0 per tonne in
2019. This expenditure was primarily focused on fleet truck
repairs.
An improvement in consumption norms offset the majority of
commodity cost increases during the year.
In 2020, the Group expects royalties to increase by
approximately US$1 per tonne due to new royalty tax legislation
expected to be adopted in March 2020, impacting the Group from 2Q
2020.
The Group's C1 cost represents the cash costs of production of
iron pellets from own ore (to the mine gate), divided by production
volume from own ore, and excludes non-cash costs such as
depreciation, pension costs and inventory movements, also the costs
of purchased ore, concentrate and gravel.
The C1 cash cost of production (US$ per tonne) is regarded as an
Alternative Performance Measure ("APM"). For further information
see page 55.
Selling and distribution costs
Total selling and distribution costs were US$294 million (2018:
US$260 million). This included an increase in rail tariffs of 15%
from April 2019. International freight costs arising from CFR sales
increased by US$25 million compared to 2018; this figure is also
included in revenue.
General, administrative and other expenses
General and administrative and other expenses was US$66 million
compared with US$45 million in 2018. This reflected an increase in
local personnel costs due to the appreciation of the local currency
against the US Dollar and higher audit and professional fees as a
result of the independent review into the Blooming Land Charity.
For further information see Principal Risk 1 on page 22 and Note 14
Contingencies to the Consolidated Financial Statements.
Currency
Ferrexpo prepares its accounts in US Dollars. The functional
currency of the Group's operations in Ukraine is the Hryvnia, which
represents approximately half of the Group's operating costs. In
2019, the Hryvnia appreciated 14% from UAH27.688 per US Dollar on 1
January to UAH23.686 per US Dollar as of 31 December 2019. For
further information see C1 Cost of Production on page 10.
Local balances as of 31 December 2019 are converted into the
Group's reporting currency at the prevailing exchange rate. The
appreciation of the Hryvnia resulted in a US$265 million increase
in net assets in 2019 (2018: increase of US$12.1 million), as
reflected in the translation reserve.
Table 1: Ukrainian Hryvnia vs. US Dollar
Spot Opening rate Closing rate Average Average
16.03.20 01.01.19 31.12.19 2019 2018
------------ ---------- ------------- ------------- -------- --------
UAH per US$ 26.596 27.688 23.686 25.846 27.200
------------ ---------- ------------- ------------- -------- --------
Source: National Bank of Ukraine
Operating foreign exchange gains/ losses
Given that the functional currency of the Ukrainian subsidiaries
is the Hryvnia, an appreciation of the Hryvnia against the US
Dollar results in foreign exchange losses on the subsidiaries' US
Dollar denominated receivable balances (from the sale of pellets).
The operating foreign exchange loss in 2019 was US$46.8 million
compared to a loss of US$5.3 million in 2018.
Non-operating foreign exchange gains/ losses
Non-operating foreign exchange losses are mainly due to the
conversion of UAH denominated intercompany payable balances and the
conversion of Euro denominated loans (at the Group's barging
facility) into the functional currency of the respective Group's
subsidiary. The increase of the non-operating foreign exchange
losses to US$18.5 million (2018: US$1.6 million) was driven by a
14% appreciation of the Hryvnia during the year against the US
dollar and the change in the Euro/US Dollar exchange rate. For
further information see Note 6 to the Consolidated Financial
Statements.
Underlying EBITDA(A)
Underlying EBITDA(A) in 2019 increased 17% to US$586 million
compared to US$503 million in 2018.
This reflected a 17% increase in the Group's received pellet
price-contributing US$246 million to Group revenue compared to 2018
together with higher sales volumes contributing US$10 million. This
was partially offset by an increase of US$47 million in the cash
cost of production, higher selling and distribution expenditure of
US$12 million, an increase in other of US$10 million and a non-cash
operating forex loss of US$47 million.
Interest
Interest expense on loans and borrowings declined 23% to US$34
million compared to US$43 million in 2018 due to a lower
outstanding debt balance and final repayment of higher cost
Eurobonds in April 2019. The average cost of debt for the period
ended 31 December 2019 was 7.0% (average 31 December 2018: 8.2%).
The decrease was due to the repayment of US$173 million 10.375%
Eurobonds.
Further details on finance expense are disclosed in Note 7 Net
finance expense to the Consolidated Financial Statements.
Tax
In 2019, the Group's tax expense was US$56 million (2018: US$57
million). The effective tax rate for 2019 was 12.2% (2018: 14.5%).
This reflected the appreciation of the Ukrainian Hryvnia against
the US Dollar, negatively impacting the profitability of the
Group's local subsidiaries, as well as lower global pellet premiums
compared with 2018. The effective tax rate in 2018 reflected strong
pellet premiums in the Chinese spot market.
In 2019, the Group paid income taxes of US$84 million (2018:
US$44 million), of which US$73 million were paid in Ukraine (2018:
US$36 million).
Further details on taxation are disclosed in Note 8 Taxation to
the Consolidated Financial Statements .
Profit for the period
Profit for the period increased 20% to US$403 million compared
with US$335 million in 2018, reflecting a 16% increase in operating
profit and lower net financial expense, offset by a non-operating
foreign exchange loss of US$18.5 million (2018: loss of US$1.6
million).
Cash Flows
Operating cash flow before working capital increased 26% while
the working capital outflow in 2019 was US$30 million compared to
an outflow of US$116 million in 2018. The decrease in working
capital largely reflected a 58% reduction in inventory build of
stockpiled ore due to the redesign of the FPM pit. Low grade ore
that was stockpiled in prior years will be processed once the Group
increases its beneficiation capacity to 12 million tonnes per annum
(expected to be in 2021). Higher pricing in 2019 and a strong sales
month in December 2019 compared to December 2018 increased trade
receivables. As a result of the higher operating cash flow and the
lower net working capital outflow, the net cash flow from operating
activities increased 62% to US$473 million in 2019 (2018: US$292
million).
Capital investment was US$247 million, an increase of 83%
compared to 2018 (US$135 million), while dividends paid increased
60% to US$155 million compared to US$97 million in 2018.
Capital investment(A)
Capital expenditure in 2019 was US$247 million compared to
US$135 million in 2018. Of this, US$102 million was sustaining and
modernisation capex (2018: US$66 million) at FPM. As in 2018,
sustaining capex also included a substantial refurbishment of one
of the Group's four pellet lines during the period.
Investment at FYM of US$46 million (2018: US$32 million)
included capitalised stripping, drill automation and development of
a spare parts warehouse for the Group as part of the integration of
certain key functions between the Group's operations.
Investment in FPM's Concentrate Expansion Programme ("CEP 1")
was US$34 million (2018: US$24 million). The project remains on
track for completion by the end of 2020 and is expected to increase
pellet production by 1.5 million tonnes per annum in 2021. FPM also
spent US$22 million on phase 1 of its press filtration project
during the year.
Ferrexpo invested US$11 million (2018: US$4 million) in the
development and exploration of the Belanovo, Galeschyno and the
Northern Deposits.
The Group acquired 600 rail cars in 2019 for approximately US$26
million (2018: US$3 million). While it invested approximately US$4
million of sustaining capex at its logistics company in Austria in
2019 (2018: US$5 million).
Ferrexpo continues engineering studies to expand its pelletising
capacity above its current nameplate capacity of 12 million tonnes
per annum towards 20 million tonnes per annum.
For further information on Capital investment see page 21.
Dividends
Total dividends declared for the 2019 financial year amount to
13.2 US cents per share (2018: 23.1 US cents per share). The Board
is committed to dividends and intends to consider a potential final
ordinary and/or special dividend for the 2019 financial year once
the general market situation and the effect of the COVID-19 virus
has become clearer. Overall, in 2019 the Group paid out dividends
of US$155 million, a 60% increase compared to 2018 (US$97 million),
and has paid US$40 million so far in 2020.
Debt and debt maturity profile
Ferrexpo has a strong balance sheet with low levels of debt. Net
debt to underlying EBITDA(A) for the last 12 months was 0.48x
compared with 0.67x as of 31 December 2018. Net debt as of 31
December 2019 was US$281 million, down 17% compared to 31 December
2018 (US$339 million). This included a US$68 million increase in
cash to US$131 million (31 December 2018 cash: US$63 million).
Gross debt as of 31 December 2019 was US$412 million compared
with US$402 million as of 31 December 2018. Of this, US$7 million
was as a result of the first-time application of IFRS 16
Leases.
The Group has a US$400 million 2017 PXF facility which will
amortise over 12 quarters (US$33 million per quarter) commencing 1Q
2020. The Group has other facilities of US$5 million which mostly
relate to export credit agency funding which will amortise monthly
over the next 18 months.
Ferrexpo may consider extending its debt maturity profile in
2020 using the PXF market or other debt capital markets.
During the year, Ferrexpo's long-term corporate and debt rating
was upgraded by Fitch to BB- (an upgrade of one notch) with a
stable outlook. The rating is capped at the maximum level above
Ukraine's Sovereign rating.
Related party transactions
The Group enters into arm's length transactions with entities
under the common control of, Kostyantin Zhevago, a controlling
shareholder of the Group. For further information see Note [15]
Related party disclosure to the Consolidated Financial
Statements.
Management of the Group has recently received information that
FC Vorskla (a related party of the Group) provided a loan, which as
of 31 December 2019 was approximately US$17 million, to another
related party, Collaton Limited, which is controlled by Kostyantin
Zhevago.
MARKET REVIEW
Summary of iron ore market in 2019
A significant supply deficit emerged in the first half of 2019
due to the tragic tailings dam accident in Brazil in January and
poor weather conditions in Australia and Brazil during most of the
period. This coincided with strong steel production in China with
Chinese output rising 10% compared to first half 2018.
Prices responded accordingly and the 62% Fe fines price rose
US$45 per tonne to an average first half 2019 price of US$91 per
tonne and traded above US$125 per tonne for the first time since
2014.
In the second half of the year, steel production from Europe and
North Asia declined due to weak industrial production and
significantly lower profitability given higher input costs. As
such, steel mills looked to reduce production through lower
productivity or by idling blast furnaces.
Following weather-related supply weakness in the first half of
2019, iron ore supply recovered from Brazil and Australia in the
second half of the year. As a result, the benchmark 62% Fe fines
price corrected from August reaching a low of US$80 per tonne in
November.
Overall, reduced steel mill capacity utilisation led to
increased demand for lower quality ore and the price premium
between high grade 65% Fe ore and 62% Fe ore narrowed to an average
of US$11 per tonne in 2019 from US$21 per tonne in 2018.
Iron ore pellets in 2019
In the first half of 2019, the supply of pellets to the global
export market reduced by 11 million tonnes, or by 8%, due to the
major supply disruptions in Brazil. This underpinned a near
all-time high for pellet premiums in the first nine months of the
year - the Platts Atlantic pellet premium (which remains based off
the 62% Fe fines price) averaged US$61 per tonne in first half
2019. From the fourth quarter of 2019, the Platts Atlantic pellet
premium fell to an average of US$37 per tonne as steel mills looked
to economise and reduce losses.
Overall in 2019, the total pellet export market declined by 3%
to 135 million tonnes vs. 140 million tonnes in 2018.
Table 2: Global pellet exporters shows the market share of the
top pellet exporters in 2019 compared with 2018. Production from
Brazil declined by 26% due to the tailings dam accident and
resulting constraints on wet processing and tailings storage.
Production from Sweden also declined while there was a strong
increase in production from Russia, India and Iran as local
producers switched sales from domestic markets to international
markets to take advantage of higher pellet premiums.
Table 2: Global pellet exporters (million tonnes)
2019 2018
2019 2018 % Mkt share Mkt share
-------------- ----------------------------- ----- ----- ---- ---------- ----------
Vale - Group Brazil, Oman 32.7 44.1 -26% 24% 32%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
LKAB Sweden 16.3 18.8 -13% 12% 13%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
Ferrexpo Ukraine 10.3 10.2 +1% 8% 7%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
Bahrain Steel Bahrain 9.1 7.6 +20% 7% 5%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
IOC Canada 8.9 8.3 +7% 7% 6%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
Metalloinvest Russia 7.2 4.2 +71% 5% 3%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
US Steel USA 7.0 5.3 +32% 5% 4%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
QCM Canada 6.5 5.6 +16% 5% 4%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
Cliffs USA 4.7 5.0 -6% 3% 4%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
Metinvest Ukraine 5.0 5.4 -7% 4% 4%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
Severstal Russia 3.8 5.5 -31% 3% 4%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
BRPL India 3.0 2.0 +50% 2% 1%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
JSPL India 2.2 1.6 +38% 2% 1%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
Grange Australia 2.3 2.1 +10% 2% 2%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
KIOCL India 2.1 1.5 +40% 2% 1%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
CMP Chile 0.2 3.0 -93% 0% 2%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
Subtotal 121.3 130.2 -7% 90% 93%
--------------------------------------------- ----- ----- ---- ---------- ----------
Other Iran, Venezuela, India, CIS 13.7 9.4 +46% 10% 7%
-------------- ----------------------------- ----- ----- ---- ---------- ----------
Subtotal 135.0 139.6 -3%
--------------- ---------------------------- ----- ----- ---- ---------- ----------
Source: CRU, Market Outlook January 2020, Company
Average ore burden mix to produce hot metal
In 2019, according to CRU, China increased pellet imports by 63%
from 19 million tonnes to 31 million tonnes. As a result, China
became the second largest importer of pellets behind Europe which
imported 34 million tonnes (2018: 39 million tonnes). This
reflected a strong increase in supply of pellets to China during
the year and higher profit margins of steel producers in China
compared to European steel producers. It also reflected
requirements to reduce environmental emissions and an increasing
requirement to use higher quality ore to produce more sophisticated
steel products.
Traditional pellet markets in 2019 (Europe, Japan, South Korea,
Taiwan) witnessed a reduction in pellet consumption compared with
2018, reflecting lower pellet availability in the first half of
2019 and challenges in their steel markets due to higher cost
inputs and weaker end user demand.
Table 3: Average ore burden mix to produce hot metal reflects
the above switch, with Europe increasing consumption of sinter and
reducing pellet consumption which was partially offset by an
increase in pellet consumption in China.
Table 3: Average ore burden mix to produce hot metal
Sinter Sinter Lump Lump Pellets Pellets
(2019) (2018) (2019) (2018) (2019) (2018)
------------ ------- ------- ------- ------- ------- -------
EU 28 64% 58% 10% 8% 26% 34%
------------ ------- ------- ------- ------- ------- -------
China 78% 79% 10% 11% 12% 10%
------------ ------- ------- ------- ------- ------- -------
Japan 66% 66% 22% 21% 12% 13%
------------ ------- ------- ------- ------- ------- -------
South Korea 70% 70% 24% 21% 6% 9%
------------ ------- ------- ------- ------- ------- -------
Source: CRU, Market Outlook January 2020
Pellet premiums and the pelletising cost curve
Graph 1: Export Cost Curve of Converting Concentrate to Pellet,
shows the cost to pelletise beneficiated ore. The pellet premium
determines which pellet producers can sustain production in a lower
pellet premium environment.
In 2019, the average Platts Atlantic pellet premium of US$59 per
tonne supported global production. The Chinese spot pellet premium,
however, was more volatile falling to approximately US$16 per tonne
in September 2019 (see graph 2: Monthly average Chinese spot pellet
premium 2019). The Chinese market tends to act as the market of
last resort for exporters. At these levels, and if demand elsewhere
is weak, a significant proportion of exporters would have been loss
making (as can be seen from graph 1), and historically supply has
exited the market around these levels.
Ferrexpo believes that the structure of the pelletising cost
curve (shown on graph 1) should support pellet premiums in 2020 and
over the medium to long term.
As can be seen from graph 1, Ferrexpo is a low cost pellet
producer which supports its cash generation through the cycle.
Graph 1: Pelletising conversion costs from pellet feed to
pellet, 2019, ex-works, US$/dmt
http://www.rns-pdf.londonstockexchange.com/rns/5423G_1-2020-3-17.pdf
Graph 2: Monthly Average Chinese Spot Pellet Premium in 2019,
US$/tonne
http://www.rns-pdf.londonstockexchange.com/rns/5423G_1-2020-3-17.pdf
2020 pellet outlook
High barriers to entry, especially given relatively low pellet
premiums, are unlikely to incentivise new pellet supply in 2020.
Incumbent producers can balance supply by switching production from
blast furnace to direct reduction pellets or from international
export to domestic consumption. In 2020, pellet seaborne supply
should not increase due to international prices moderating to
historical levels and continued supply issues from Brazil. An
extended period of low pellet premiums could result in some
capacity reduction for producers with high pellet conversion
costs.
At the end of 2019, industry levels of pellet stocks were higher
than the historical average and it may take some time for the
market to absorb these, especially taking into account the impact
of the COVID-19 virus. This could prevent pellet premiums from
rising in the short term.
OPERATIONS REVIEW
Marketing
Total sales volumes in 2019 were 10.3 million tonnes (2018: 10.2
million tonnes) with the Group's premium 65% Fe pellet representing
96% of total pellet output during the year (2018: 94%).
Table 4 below shows the breakdown of sales by key market
regions. Sales to China and South East Asia include sales to
Vietnam and Taiwan.
Table 4: Sales Volume by Market Region
2019 2018
------------------------------------ ------ ------
Central Europe 36% 47%
------------------------------------ ------ ------
North East Asia 16% 17%
------------------------------------ ------ ------
Western Europe 13% 16%
------------------------------------ ------ ------
China and South East Asia 30% 13%
------------------------------------ ------ ------
Turkey, Middle East, India 5% 6%
------------------------------------ ------ ------
North America - 1%
------------------------------------ ------ ------
Total sales volume (million tonnes) 10,312 10,227
------------------------------------ ------ ------
Ferrexpo benefits from a diversified sales portfolio with
leading steel mills throughout the world, while its logistics
routes to customers provide a competitive advantage given Ukraine's
central geographic location. Ferrexpo's average shipping duration
to Asia is 30 days compared to its main pellet-producing
competitors in Brazil (40 days), Canada (55 days) and Scandinavia
(50 days). Ferrexpo is also very competitively placed in terms of
shipment days to Europe and Turkey. This ensures that weakness in
one region, can be compensated by sales into other regions.
Production
Health and Safety
Ferrexpo is pleased to report that there were no fatalities in
2019 (2018: one) and that it recorded its lowest lost time injury
frequency rate ("LTIFR") since listing in 2007.
Table 5: Lost Time Injury Frequency Rate (including employees
and contractors)
2019 2018
---------------- ---- ----
- FPM 0.57 1.25
---------------- ---- ----
- FYM 0.00 0.66
---------------- ---- ----
- FBM 0.00 0.00
---------------- ---- ----
Mining entities 0.57 1.15
---------------- ---- ----
Barging 0.91 1.83
---------------- ---- ----
Group 0.58 1.18
---------------- ---- ----
The Group has been focused on developing a preventative approach
to safety based on an understanding of high potential risk areas
across the business, and taking actions to mitigate these risks. In
recent years, Ferrexpo has focused on improving reporting of
near-miss events without injury, referred to as serious incident
reports, to understand the causes of such events. Together with
improved risk assessments, this reporting is helping to reduce the
number of injuries incurred.
Ferrexpo will continue to improve and adapt its safety
practices. Efforts in 2020 are set to focus on contractor training,
to ensure the correct safety policies and procedures are adhered to
at site, as well as ensuring that contractors maintain the Group's
high standards in their personal protective equipment. An analysis
of incidents in 2019 revealed three key areas for future
improvement: managing activities in close proximity to rotating
equipment, transportation of employees and employee walkways.
In the first half of 2019, overall long-term customer
performance was in line with contract agreements and no volumes
were sold into the Chinese spot market. In the second half of the
year, weakness in Europe (as previously discussed on pages 14-15 in
the Market Review) saw volumes increase to China, a majority of
which were sold on the spot market.
Despite periods of regional weakness through the year, the Group
was pleased to renew and/or extend several key long-term contracts
as well as secure a new long-term contract with a leading German
steel mill.
The Group's pricing formula for its long-term contracts is based
on a spot index iron ore fines price. In 2019, this was a 65% Fe
index while in 2018, and in prior years, this was the 62% Fe index,
plus a negotiated pellet premium and an adjustment for the cost of
international freight, typically the C3 index.
Spot market sales to China are also made on the 65% Fe iron ore
fines price plus the prevailing Chinese spot pellet premium. The
Chinese spot pellet premium can vary significantly from negotiated
long-term contract pellet premiums.
Long-term sales contracts are typically of two to five years'
duration although the Group has sales contracts of varying tenors
up to 13 years. In general, a small proportion of uncommitted
volume is maintained for: (1) new customer development; (2)
adjusting for production variations; and (3) opportunistic spot
sales.
For further information on sales see Revenue in the Financial
Review on page 10 and Market Review on page 14.
Reserves and Resources
Ferrexpo has updated its Reserve and Resource statement for its
Gorishne-Plavninske-Lavrykivske ("GPL") and Yerystivske projects.
As a result, total JORC reserves have increased to 1.6 billion
tonnes (from 1.3 billion tonnes) and total resources have decreased
to 5.7 billion tonnes (from 6.5 billion tonnes). There has been a
notable increase in the Fe magnetic content of GPL's reserve and
resource base (see below).
These statements are prepared in accordance with the guidelines
set out in the Australasian Code for Reporting of Exploration
Results, Mineral Resources and Ore Reserves (the JORC Code, 2012
edition). At current production rates, the Group has enough
reserves for the next 55 years of production. The changes compared
to the Group's previous Reserve and Resource statement are as
follows:
JORC Reserves
- 285 million tonnes increase in Proved Reserves
- 72 million tonnes increase in Probable Reserves
- Overall the Group's total JORC classified reserves have
increased by 357 million tonnes to 1.6 billion tonnes
- GPL, the area or reserve mined by FPM, has seen an increase in
its Proved Reserves Fe total content from 27% to 33% and an
increase in its Fe magnetic from 17% to 26%.
Table 6: JORC Reserve Statement as of 1 January 2020
Deposit Proved, Fe total, Fe magnetic, Probable, Fe total, Fe magnetic,
Mt % % Mt % %
--------------------------------- -------- ---------- ------------- ---------- ---------- -------------
Gorishne-Plavninske-Lavrykivske
("GPL") 403 33 26 718 31 23
--------------------------------- -------- ---------- ------------- ---------- ---------- -------------
Yerystivske 227 34 27 281 33 26
--------------------------------- -------- ---------- ------------- ---------- ---------- -------------
JORC reserves 630 33 26 999 32 24
--------------------------------- -------- ---------- ------------- ---------- ---------- -------------
JORC Resources
- 328 million tonnes increase in Measured Resources
- 454 million tonnes decrease in Indicated Resources
- 696 million tonnes decrease in Inferred Resources
- Overall the Group's total JORC classified resources have
decreased by 822 million tonnes to 5.7 billion tonnes
- GPL has seen an increase in its Fe total content from 30% to
33% and an increase in its Fe magnetic from 20% to 25%.
Table 7. JORC Resource Statements as at 1 January 2020
Deposit Measured, Fe total, Fe mag, Indicated, Fe total, Fe mag, Inferred, Fe total, Fe mag,
Mt % % Mt % % Mt % %
--------------------------------- ---------- ---------- -------- ----------- ---------- -------- ---------- ---------- --------
Gorishne-Plavninske-Lavrykivske
("GPL") 567 33 25 1,217 31 23 704 31 23
--------------------------------- ---------- ---------- -------- ----------- ---------- -------- ---------- ---------- --------
Yerystivske 254 34 27 524 33 26 402 33 25
--------------------------------- ---------- ---------- -------- ----------- ---------- -------- ---------- ---------- --------
Bilanivske 336 31 24 1,149 31 23 217 30 21
--------------------------------- ---------- ---------- -------- ----------- ---------- -------- ---------- ---------- --------
Galeschynske - - - 268 55 - 58 55 -
--------------------------------- ---------- ---------- -------- ----------- ---------- -------- ---------- ---------- --------
JORC Resources 1,157 33 25 3,158 33 22 1,381 32 22
--------------------------------- ---------- ---------- -------- ----------- ---------- -------- ---------- ---------- --------
Pellet production
Pellet production from own ore was in line with 2018 at 10.5
million tonnes. Overall, production levels were impacted by
constraints in the processing and pelletising plants. FPM completed
a planned 58-day pellet line refurbishment in 4Q 2019. This marks
the completion of a refurbishment programme to its four pellet
lines.
Once the Group's current capital projects are completed, which
includes de-bottlenecking the concentrator and building a
concentrate stockyard, FPM expects to produce enough pellet feed to
ensure its pelletiser can operate at full capacity of 12 million
tonnes per annum. See Capital Investment on page 21.
Iron ore processed in 2019 increased 5%, this underpinned a 3%
increase in 65% Fe pellet volumes to 10.1 million tonnes or 96% of
total production - a record percentage of production for the
Group.
Due to the refurbishment of the Group's final pellet line in 4Q
2019, the Group ended the year with 186 thousand tonnes of
concentrate.
Mining and production efficiencies
The Group has continued to implement initiatives which
contribute to cost savings, efficiency improvements and enhanced
health and safety standards.
The Group's excavator rates have benefited from the transition
to 100% liquid emulsion in the Company's blasting operations. This
has improved the fragmentation of blasted rock, resulting in
improved excavator efficiencies and reduced waiting time for haul
trucks. In addition, an improved mine design at FPM has led to
improved cycle times for haul trucks.
The first stage of implementation of FYM's automated drill rigs
has been completed, and drills are now operated by tele remote mode
from the Group's centralised mine control room. Use of drones to
survey the pit area has also been implemented at FYM.
Consolidation of FPM's and FYM's mining and mobile maintenance
activities into one organisation has continued and will be
completed in 2020. As such, all maintenance activities for mining
will be carried out by one team to optimise the use of resources
and improve fleet availability.
Lastly, it is encouraging to note that gas consumed per pellet
produced has fallen 34% since the Group's IPO in 2007 from 18,440
m(3) per tonne to 12,118 m(3) per tonne in 2019. This is as a
result of better heat recuperation from recycling exhaust gases and
the increased use of sunflower husks in the Group's
pelletisers.
Ferrexpo will continue to implement small-scale projects aimed
at improving productivity and efficiency to reduce operating
costs.
CO(2) emissions
Table 8: CO(2) Emissions
2019 2018 Change
---------------------------------------------------------- --------- --------- ------
CO(2) emissions (tonnes) 2,624,280 2,605,082 0.7%
---------------------------------------------------------- --------- --------- ------
Scope 1 (direct) (tonnes) 579,415 588,781 -1.6%
---------------------------------------------------------- --------- --------- ------
Scope 2 (indirect) (tonnes) 1,940,551 1,925,670 0.8%
---------------------------------------------------------- --------- --------- ------
Pellets produced (tonnes, 000s) 10,519 10,607 -0.8%
---------------------------------------------------------- --------- --------- ------
Intensity ratio (kilogramme per tonne of pellet produced) 240 237 1.2%
---------------------------------------------------------- --------- --------- ------
Biofuels (reported separately) (tonnes) 104,313 90,631 15.1%
---------------------------------------------------------- --------- --------- ------
Note: 2018 numbers have been restated due to the adoption of GHG
Protocol emissions factors in this report (see above) and this has
resulted in an increase in the 2018 intensity ratio from 235 to 237
per kilogramme per tonne of pellet produced.
CO(2) emissions
Overall emissions of greenhouse gases in 2019 remained in line
with 2018, with the 1% increase in electricity consumption the
principal driver behind the Group's overall emissions intensity
ratio increasing from 237 in 2018 to 240 kilogrammes of CO(2)
emissions per tonne of pellets produced in 2019. The increase in
electricity consumption is due to the 5% increase in tonnes of ore
processed. Electricity accounts for approximately 75% of the
Group's greenhouse gas emissions, due to the large component of
coal fired power stations that contribute to Ukraine's national
grid. Ferrexpo is considering reducing its reliance on electricity
from the national grid with solar power, by installing a 5MW pilot
plant on the southern extent of FPM's waste dumps. If the pilot
project is approved and proves successful, it is envisaged that the
Group will expand the use of solar power which could have
significant savings in terms of operating cost and Ferrexpo's Scope
2 greenhouse gas emissions.
Scope 1 emissions relate to emissions directly produced through
the Group's own activities in Ukraine, such as diesel consumption
in mining vehicles. Scope 2 emissions are those that are generated
by third parties in the supply of electricity and heat (steam) to
the Group's operations.
For the first time, Ferrexpo is publishing an estimate of its
downstream Scope 3 emissions. Downstream Scope 3 emissions
represent the emissions from upstream and downstream activities
that relate to the distribution and use of the Group's pellets.
Ferrexpo's total Scope 3 emissions in 2019 are estimated to be
10.0Mt (2018: 9.9Mt), or the equivalent of 0.95 tonnes of CO(2)
-equivalent per tonne of pellets produced (2018: 0.94 tonnes of
CO(2) equivalent per tonne of pellets produced). Ferrexpo's
calculation of its Scope 3 emissions utilises independent research
by CRU for the allocation of emissions by steel mills in their
conversion of Ferrexpo's pellets to metal(3) . This research shows
that steel mills produce 38% less greenhouse gas if they use
Ferrexpo's magnetite iron ore pellets instead of the more commonly
used iron ore fines, which requires sintering with coking coal
before being charged to the blast furnace. This saving of Scope 3
greenhouse gases at the steel mill far exceeds the additional
greenhouse gases produced in Ferrexpo's processing and pelletising
magnetite ores in Ukraine. As the Group's understanding of its
Scope 3 emissions increases, the intention is to add upstream
activities, such as goods purchased and business travel, to the
Company's Scope 3 estimate.
(3) CRU Research based on incremental adjustments of pellets and
sinter in the burden of a blast furnace of a typical European steel
mill. Emissions factor provided is per tonne of hot metal produced
and does not account for further processing of steel into flat or
long steel products as this depends on the individual customer
In 2019, the Group has adopted the standards published by the
Greenhouse Gas Protocol for the calculation of the Company's Scope
1 emissions. This has resulted in a minor adjustment to the
reported emissions for 2018 (as shown in table 8 above), and as a
result, the 2018 intensity ratio has increased from 235 to 237 per
kilogramme per tonne of pellets produced. Adoption of the Protocol
has also enabled Ferrexpo to publish figures that include emissions
of methane (CH4) and nitrous oxide (N(2) O). Whilst emissions of
these gases are generally much lower than the volumes of carbon
dioxide emitted, the greenhouse effect per tonne emitted is much
higher - 25 times more for methane and almost 300 times more for
nitrous oxide. Inclusion of these gases helps further standardise
Ferrexpo's reporting in line with peers. A major component of
Ferrexpo's emissions are through its use of electricity (Scope 2),
and the emissions factor for this activity is provided by the
European Bank of Reconstruction and Development.
Capital investment
The Group's approved capital projects can be seen in table 9.
Ferrexpo is on track to reach 12 million tonnes of pellets output
per annum by 2021.
Table 9: Approved Capital Projects
Project
Projects
to reach Total Spend Remaining
12MTPA Description Status Expected completion cost FY 2019 spend
---------------- ----------------------- ---------------- -------------------- -------- --------- ----------
New grinding Process 6MTPA Construction 2020 US$41M US$8M US$5.4M
section of crushed ore and assembly
into pellet feed works underway
---------------- ----------------------- ---------------- -------------------- -------- --------- ----------
Concentrate Decoupling of Construction 2021 US$38M US$11M US$13M
stockyard concentrator & and assembly
pellet plant by works underway
providing concentrate
storage capacity
---------------- ----------------------- ---------------- -------------------- -------- --------- ----------
Phase 2 expansion
----------------------------------------- ---------------- -------------------- -------- --------- ----------
Press filtration Replacement of Construction Completed US$115M US$22M US$92M
plant disc filtration and assembly in four phases
to reduce moisture works underway of 6MTPA
in balling plant
Final phase
completed
2024
---------------- ----------------------- ---------------- -------------------- -------- --------- ----------
Logistics
---------------- ----------------------- ---------------- -------------------- -------- --------- ----------
Rail cars Continuation of 600 new rail Completed - US$26M -
programme to replace cars delivered
state rail cars. in FY 2019
Number of rail
cars as of 31
December 2019:
2,850
---------------- ----------------------- ---------------- -------------------- -------- --------- ----------
The cost to complete the new grinding section in the
beneficiation plant has increased by US$6 million due to labour,
equipment and construction material price inflation, exacerbated by
the strong Hryvnia compared with the US Dollar. The project is
approximately 85% complete and FPM expects to begin commissioning
in 3Q 2020.
The concentrate stockyard is approximately 60% complete. Works
still to be completed include a thickening area, additional
filtration and compression capacity and the load-out area. FPM
expects to begin technological commissioning in 2Q 2020 and to
complete the loading complex in 1Q 2021. The total cost of the
project has increased by US$14 million due to the finalisation of a
more detailed design, especially regarding increased filtration
capacity, and cost inflation exacerbated by the strong Hryvnia
compared with the US Dollar.
Ferrexpo is currently considering a series of projects which
will allow expansion of pellet capacity to 20 million tonnes per
annum. This includes further development of the Group's
beneficiating capacity, expansion of the Group's pelletising
capacity and debottlenecking of logistics infrastructure including
rail and port. A preliminary estimate of the required capital
investment per tonne is approximately US$150-US$200 per tonne of
incremental output.
PRINCIPAL RISKS
The principal risks and uncertainties facing Ferrexpo's business
as assessed by the Board are listed below.
Principal risks include, but are not limited to, those that
could result in events or circumstances that might threaten the
Company's business model, future performance, solvency or liquidity
and reputation.
Due to the very nature of risk any list cannot be expected to be
completely exhaustive. New risks may emerge and the severity or
probability associated with known risks may change over time.
The Group has an internal risk register which considers emerging
and principal risks related to the business in terms of monetary
impact, probability, maximum foreseeable loss, trend and mitigating
actions. The risk register is updated monthly and discussed by
executive management at the Group's Finance and Risk Management
Committee, where the completeness of the risk register is also
considered and any new identifiable risks added. The risk register
is also discussed and reviewed by the Audit Committee, at least
quarterly per year.
The Board of Ferrexpo has ultimate responsibility for the
identification of emerging and principal risks and associated
strategies to manage and mitigate such risks, and confirms that
during the year it carried out a robust assessment of the Company's
emerging and principal risks. The Acting Chief Executive Officer,
Acting Chief Financial Officer, Chief Operating Officer and Chief
Marketing Officer manage specific risks on a day-to-day basis
related to their functions.
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 recognises and accepts the risks present in its
business and looks to manage and mitigate them where possible. In
2019, the kinds of risks included on the register were similar to
prior years. There was an emergence of some country risk inherent
during times of government change. The Group's operations were not
materially impacted and Ferrexpo continued to operate successfully.
Risks relating to 2020 are discussed below.
1. Country
1.1. Ukraine country risk (external risk)
Transparency International ranks Ukraine as 126th out of 180
countries in terms of the level of perceived corruption (with 180th
being regarded as the most corrupt). Ukraine's ranking has
deteriorated compared to 2018 where it was ranked 120th. Risks
associated with these levels of ranking included counterparties
that are involved in activities which are not in compliance with
relevant international standards, and a weak judicial system that
can be susceptible to outside influences and can take an extended
period of time for courts to reach final judgement.
Ongoing conflict and or economic and or political events in
Ukraine can constrain Ferrexpo's ability to raise finance. This
could impact the Group's ability to repay debt amortisation and
could result in lower levels of capital investment (including
sustaining capex which could result in lower production levels).
General country instability also has negative social and economic
consequences and could impact Ferrexpo's ability to operate without
disruption in Ukraine. It can also reduce availability of high
skilled labour as emigration levels rise.
Kostyantin Zhevago, a controlling shareholder of Ferrexpo, has a
number of other business interests in Ukraine, unconnected to the
Group. Developments at these other businesses can inadvertently
have a negative impact on Ferrexpo's reputation.
In this regard, a Ukrainian court has placed a restriction
covering 50.3% of the shares in Ferrexpo Poltava Mining ("FPM")
held by Ferrexpo AG Switzerland, the sole shareholder in FPM.
Ferrexpo AG has appealed this court order. The restriction does not
affect ownership of the shares but prohibits their transfer. The
Group believes this restriction is temporary and is in connection
with ongoing matters in Ukraine involving Kostyantin Zhevago and
one of the businesses he owned until 2015. Ferrexpo's operations
remain unaffected and continue as normal. Furthermore, Ferrexpo AG
has no intention, and never has had any intention, to transfer its
shareholding in FPM. The Board of Ferrexpo believes that an appeal
should be successful given the advice received that the order has
no proper or reasonable basis under Ukrainian law.
During the year the controlling shareholder, Kostyantin Zhevago,
stepped down as CEO in order to resolve certain matters in one of
the businesses he previously owned. While this is a separate matter
from Ferrexpo, there is a risk that these matters may affect the
business due to his 50.3% shareholding.
Mitigation
Ferrexpo operates in accordance with relevant laws and utilises
internal and external legal advisers as required to monitor and
adapt to legislative changes or challenges.
It maintains a premium listing on the London Stock Exchange and
it is currently in compliance with the UK Corporate Governance Code
and Market Abuse Regulation.
Ferrexpo has a relationship agreement in place with its
controlling shareholder, Kostyantin Zhevago which stipulates that
the majority of Board Directors must be independent. For all
related party transactions strict procedures, systems and controls
are in place.
Ferrexpo prioritises a strong internal control framework
including high standards of compliance and ethics. It operates a
centralised compliance structure supported and resourced locally at
the Group's operations. Ferrexpo has implemented policies and
procedures throughout the Group including training.
Ferrexpo prioritises sufficient total liquidity(A) levels and
strong credit metrics to ensure smooth operations should
geopolitical or economic weakness disrupt the financial system of
the country.
Ferrexpo looks to maintain a talented workforce through skills
training and by offering competitive wages, taking into account
movements of the Hryvnia against the US Dollar and local inflation
levels.
Ferrexpo has a high profile given its international client base,
its London listing and bank lending from Western financial
institutions. Board Directors and relevant senior management are
tasked with stakeholder engagement and government relations to
communicate the economic contribution that Ferrexpo makes to
Ukraine and to show that it operates to world class standards.
1.2. Counter party risk (external risk)
Root cause and impact
Ferrexpo has counterparty exposure through ongoing trading
relationships as well as with the Ukrainian government, in many
areas including taxation, mining licences to operate as well as
other permits. It also has counterparty exposure through state
monopolies such as the supply of electricity, gas and freight
transportation. Ukraine has a weak credit profile as defined by
international credit rating agencies. Financial instability or lack
of transparency at Ferrexpo's counterparties could lead to
financial loss. This could impact the Group's ability to pay
dividends to shareholders, repay debt amortisation and could result
in lower levels of capital investment, including sustaining capex
which could impact production levels.
In 2019, the Group established an Independent Review Committee
("IRC") to investigate the use of funds donated by Ferrexpo to a
Ukrainian charity called Blooming Land. The work of the IRC and its
advisers included a forensic review undertaken by BDO LLP, a review
of relevant documentation, interviews with Ferrexpo employees and
Directors, correspondence with the Blooming Land Charity and other
third parties and advice from legal counsel in the UK and Ukraine.
The review was unable to conclude that all funds had been spent in
accordance with the initial intention, which leaves the Group open
to regulatory challenges.
Mitigation
Ferrexpo deals with well-established steel producers that have
sound credit profiles.
Ferrexpo's counterparties are subject to regular and thorough
review. The results of these reviews are used to determine
appropriate levels of exposure, and available alternatives, in
order to reduce the potential risk of financial loss.
The Group develops its supplier base in order to avoid excessive
dependence on any supplier, actively encouraging a diversity of
supply where reasonable and practical.
Companies that would like to work with Ferrexpo are required to
undergo an Accreditation Procedure, where their documents, licences
and financial stability are checked. In 2019, Ferrexpo added
automatic screening and monitoring for sanctions and other risks
for counterparties registered in Ukraine. Suppliers that pass
accreditation can participate in tenders. Additional checks and
further monitoring are required at this stage, including checks for
sanctions, adverse media, bribery, use of forced labour, etc.
All supplier contracts must contain the defined set of
compliance clauses (related to anti-bribery, sanctions, tax
compliance, modern slavery, etc). In 2019, these and other
requirements were consolidated into the Business Partners' Code of
Conduct, which is now referenced in all contracts.
The Executive Compliance Committee ("ECC"), an executive
sub-committee of the Board meets regularly (eight times in 2019),
and is charged with ensuring that systems and procedures are in
place to comply with laws, regulations and ethical standards. The
ECC is attended by the Group Compliance Officer and, as necessary,
by the local compliance officers from the operations, who present
regular reports and ensure that the ECC is given prior warning of
regulatory changes and their implications. The ECC enquires into
the ownership of potential suppliers deemed to be "high risk", and
oversees the management of conflicts of interests below Board level
and general compliance activities (including under the UK Bribery
Act 2010, the Modern Slavery Act, the Criminal Finances Act, and
the EU General Data Protection Regulation).
Donations to the Blooming Land Charity were suspended in May
2018, and in August 2019 the Group formally terminated the
relationship.
The Board's current policy regarding charitable donations is not
to donate on a nationwide basis. Should the Company resume any
national CSR programme in Ukraine, the Board will ensure adherence
to the highest standards of diligence, oversight, governance and
reporting.
2. Global steel demand
Root cause and impact
The Group's realised price is principally impacted by demand for
iron ore which is highly correlated to global demand for steel and
steel mill profitability.
A weak demand environment would support demand for low grade
iron ore as steel mills look to reduce their input costs and,
therefore, reduce the premium paid for high quality ores and
pellets. Higher scrap usage could also impact overall demand for
iron ore and hence iron ore pricing.
In 2019, steel production increased in China (+8.3%), India
(+1.8%) and the Middle East (+19.2%) while it decreased in most of
the rest of the world. Europe 28 production was down 4.9%, Japan
down 4.8% and South Korea down 1.4%.
Profit margins at steel mills in Germany fell from around
mid-teens at the start of 2019 to low single digits by the end of
the year. In China, profit margins fell sharply in 3Q 2019 from
around break-even levels at the start of the year, and ended the
year with a small recovery to positive single digits. Margins were
under pressure due to increased raw material costs and weaker
end-user demand. To date in 2020, the outlook for steel mill
margins is subject to the impact of the coronavirus, which cannot
be fully assessed at present. During 1Q 2020, the COVID-19 virus
began causing disruption to Chinese supply chains which in turn is
impacting the distribution networks of steel producers and their
customers. This is likely to result in increased short-term
volatility for the iron ore market. Once supply chains return to
normal operation, there could be a prompt drawdown of steel
inventory, which has built up during this period of disruption,
causing downward pressure on steel prices. Further, a significant
spread of the COVID-19 virus into Europe could also impact steel
demand and subsequently pellet demand from the largest
pellet-consuming region.
Mitigation
Ferrexpo is a low cost producer relative to the majority of its
peers, positioned on the lower half of the pellet cost curve.
Ferrexpo's operating costs are partly correlated with commodity
prices. When the commodities cycle is in a downward phase, and
Ferrexpo typically receives a lower selling price, its cost base in
general also reduces. The Hryvnia is a commodity-related currency
and historically over the long term it has depreciated during
periods of low commodity prices, although movements of the Hryvnia
against the US Dollar can also be influenced by short-term
political factors.
3. Risks related to realised pricing
3.1 Change in pricing methodology
Root cause and impact
Ferrexpo's achieved price can vary significantly from period to
period as it is dependent on the global price for iron ore fines,
pellet premiums and freight.
The Group's pricing formula for its long-term contracts is based
on the leading iron ore fines indices plus a negotiated pellet
premium and an adjustment for the cost of international freight,
typically the C3 index.
In 2019, most pellet exporters to the seaborne market, including
Ferrexpo, agreed with customers to base pellet pricing off the 65%
Fe iron ore fines price. This represented a major change for the
industry and allowed producers of 65% Fe pellets, such as Ferrexpo,
to directly capture the price premium for higher grade ore.
Price negotiations for 2020 remain ongoing.
Mitigation
Ferrexpo endeavours to achieve the prevailing market price at
all times, however, it is a low cost producer and has always been
cash flow positive through the commodities cycle. For more
information on its position on the cost curve see Market Review
page 16. The Group also has the logistics capability to divert
sales to other markets to offset any regional weakness.
3.2. Lower iron ore prices (external risk)
Root cause and impact
A decline in the 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, higher
production costs, reduced cash generation and a weakened balance
sheet. This could impact the Group's ability to pay dividends to
shareholders, repay debt amortisation and invest in future
production growth.
The 62% Fe iron ore fines price averaged US$93 per tonne in 2019
compared to US$69 per tonne in 2018.
The iron ore forward curve for benchmark 62% Fe iron ore fines
is currently in backwardation with delivery in December 2020 at
around US$80 per tonne compared to spot on 16 March of
approximately US$90 per tonne.
Lower iron ore fines prices will reduce the Group's realised
price and profitability.
Change
Mitigation
Ferrexpo is a low cost producer relative to the majority of its
peers, positioned on the lower half of the pellet cost curve.
Ferrexpo's operating costs are partly correlated with commodity
prices. When the commodities cycle is in a downward phase, and
Ferrexpo typically receives a lower selling price, its cost base in
general also reduces. The Hryvnia is a commodity-related currency
and historically over the long term it has depreciated during
periods of low commodity prices, although movements of the Hryvnia
against the US Dollar can also be influenced by short-term
political factors.
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 and cash
generation throughout the iron ore price cycle.
3.3. Pellet premiums and pellet supply (external risk)
Root cause and impact
Historically, pellet premiums have been correlated to steel mill
profitability as they are the most productive source of iron in a
blast furnace and thus trade at a price premium to other types of
iron ores. When steel producer profitability is under pressure the
reduction in usage of higher cost raw materials could lead to lower
demand for iron ore pellets and/or a fall in pellet premiums.
Lower pellet premiums will reduce Ferrexpo's realised price and
could impact the Group's cash generation ability. This could impact
the Group's ability to pay dividends to shareholders, repay debt
amortisation and could result in lower levels of capital investment
(including sustaining capex).
Historically, a substantial portion of Ferrexpo's profitability
has been due to the pellet premium. The average Atlantic pellet
premium from 2011 to 2019 was US$42 per tonne.
Pellet premiums are primarily influenced by steel mill
profitability; however, in the medium to long term premiums may
also be influenced by increasing requirements to reduce air
emissions in the steel production process or an increase in supply
of lump ores.
High barriers to entry make it unlikely that there will be
significant new pellet supply entering the market in 2020.
Incumbent producers, however, can switch supply from blast furnace
to direct reduction pellets or from international export to
domestic consumption. The Group believes that in 2020 pellet
seaborne supply will not increase due to weaker international
prices.
Further low pellet premiums could result in some capacity
reduction for producers with high pellet conversion costs.
A producer in Brazil is likely to return to the market
(following a five-year outage due to a tailings dam failure) at the
end of 2020 which could reduce pellet premiums; however, the
producer has indicated that it will operate at around 30-35% of its
25 million tonne capacity for at least five years, given reduced
tailings storage capacity.
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.
3.4. 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, and reduce profitability, 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. C3 freight represents the cost for ocean transportation
for iron ore from the Brazilian port of Tubarão (where the largest
seaborne pellet supplier is based) to Qingdao, China (the world's
largest steel producer).
Ferrexpo's received price is referenced to transparent freight
indices such as the Baltic Exchange C3 freight price(2) . In 2019,
the C3 index was in line with 2018 at an average of US$18 per
tonne. Freight rates are largely influenced by the price of oil and
demand for seagoing vessels from bulk commodity producers.
As of 1 January 2020, the International Maritime Organization
enforced a new 0.5% global sulphur cap on fuel content in the
shipping industry from the present 3.5% limit. Subject to supply
and demand dynamics, including steel mill profitability, the
introduction of IMO 2020 could increase freight costs, due to the
installation cost of scrubbers or the higher cost of compliant
fuel, for iron ore suppliers across the industry and reduce net
prices and thus impact profitability.
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.
4. Operating risks
4.1. Operating risks and hazards including mining, processing
and logistics (Company-specific risks)
Root cause and impact
Ferrexpo operates large-scale mining operations and industrial
process facilities, which pose significant operating challenges and
environmental risks. The Group is exposed to geotechnical
incidents, including high wall failures and tailings dam breaches,
as well as catastrophic processing equipment failure. This could
lead to large-scale fatalities, production-related shortfalls or
shutdowns as well as logistics bottlenecks.
The Group's operations require significant sustaining capital
expenditure and repair and maintenance programmes to ensure safe
operation and availability of equipment. A reduction in sustaining
capital or repairs and maintenance expenditure can result in
accidents and/or fatalities, lower mining volumes, processing plant
breakdowns and pelletiser line failures.
Production stoppages will reduce output, increase operating
costs, and reduce the quality of the product. Lower volumes, higher
costs and financial penalties due to poor quality and late delivery
can impact the Group's cash generation ability, reducing liquidity
levels and impacting capital investment A levels as well as our
ability to repay debt and pay dividends to shareholders. Poor
pellet quality or late delivery of product can also affect the
Group's ability to perform according to customer contracts and its
ability to maintain and renew contracts in the future.
Leadership development, in-depth technical know-how and a
well-developed succession planning process is required to maintain
detailed operating expertise and is key to underpinning the
performance of the Group's operations and reducing operating
risk
Mitigation
In 2019, the Group completed a programme to refurbish its pellet
lines. Since listing in 2007, Ferrexpo has spent US$959 million on
sustaining and modernisation capital (2019 sustaining capex: US$97
million; 2018 sustaining capex: US$66 million).
Ferrexpo operates one tailings dam covering an area of 1,500
hectares. The dam is constructed on flat topography. The dam is
split into three sections with each section subdivided into smaller
sections of 400 metres by 400 metres. The walls of the dam and of
the sections within the dam are constructed using engineered fill,
including siliceous rock. Due to this construction methodology, a
total failure or breach of the major walls of the tailings
impoundment is unlikely to occur. In the unlikely event of failure
of the compartment walls or structure the impact would be minimal
in terms of tailings release. The dam has been designed by external
consultant Ukrgiproruda, with biannual inspections by the Ukrainian
mining regulator.
Following the tailings dam breach in Brazil in January 2019, the
Group commissioned Knight Piésold Consulting to conduct an
independent review of our tailings storage facility in terms of
design, construction and operational management. The conclusion of
the Knight Piésold report was that our tailings facility is an
appropriate design for the volume of tailings being deposited, is
well managed and has an appropriate inspection and monitoring
regime. The report raised a number of key differences between the
structure of Ferrexpo's tailings dam and the Brumadinho dam that
failed in January 2019, specifically the topography of the area of
construction of Ferrexpo's dam is on flat land (rather than valley
fill), with embankments at a shallower angle and dam walls
constructed using a mixture of materials including coarse compacted
rock (as opposed to uncompacted material). The audit report made a
number of recommendations with regard to improving the dam's
operational management controls, which the Company is now looking
to incorporate.
As a result of the continued development of the mines' open pit
operations, Ferrexpo has recently implemented improved geotechnical
management processes. This includes the use of international
geotechnical consultants to regularly review the geotechnical
management programme as well as monitoring and operational controls
of the pit high walls.
Where possible, Ferrexpo owns its own logistics infrastructure.
As of 31 December 2019, this included 2,850 rail cars, which
reduces reliance on state rail cars for transportation of pellets
to border points, 154 barges to transport pellets into Central
Europe, and a 49.9% 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.
The Group operates a talent management and leadership programme
to ensure management coverage of business-critical roles. This
involves the annual assessment of all managers across the Group of
approximately 300 people. The results are presented to the
Operations Management Committee, the Executive Management Committee
and to the Board.
4.2. 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 large mining machinery, amongst
other things. Failure to provide a safe work environment for the
Group's workforce and failure to ensure the right safety culture
and subsequent safe behaviours can impact the Group's social
licence to operate. Fatalities and lost time injuries negatively
impact the workforce, their families and the communities in which
we operate, and it can result in production stoppages due to
regulatory interventions.
The Group was fatality free in 2019 (2018: one fatality) and the
Group's lost time injury frequency rate ("LTIFR") declined to 0.58x
- a record for the Group and a significant improvement on the 2018
result where the Group LTIFR was 1.18x.
Mitigation
Analysis conducted on the Group's incidents highlight
non-compliant behaviour and work practices being the primary cause
of accidents with a large promotion of these events involving the
Group's contractors.
Actions taken during 2019 have been largely focused around
contractors and FPM employees. Activities include:
- significant incident reporting and investigation methods;
- significant risk training and awareness;
- leadership development programme to ensure right safety
culture is instilled in the work place;
- programme to improve housekeeping of maintenance and
production areas and work place conditions;
- increased frequency of external HSE audits and review of subsequent action plans;
- development of a standardised reporting procedure and
alignment to international best practice through benchmarking;
- implementation of Visible Leadership programme;
- safety training to instill a culture of accountability. The
goal of these workshops is to emphasise and ensure that all
employees understand and appreciate the importance of good
operating discipline and the strict adherence to safety procedures
and that protection of our employees is paramount; and
- an increase in speed checks, implementation of stationary
speed monitoring devices and speed cameras, as well as enhanced
drug and alcohol testing to provide greater sampling of the
workforce.
A portion of all employees' total remuneration, especially the
bonus structure, is linked to team and individual safety
performance
4.3. Operating cost increases (external and company 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 iron ore into a high grade iron
ore product. As such, pellet producers typically have higher
operating costs per tonne of output than producers of iron ore
fines or lump.
Approximately 30% Ferrexpo's C1 cash cost of production (US$ per
tonne) is commodity related, including fuel, gas, explosives, tires
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 typically reduced. In addition, over 60% of the
Group's operating costs, including in-land logistics costs, are
incurred in Ukrainian Hryvnia. The Hryvnia is a commodity-related
currency and historically over the long term it has depreciated
during periods of low commodity prices, although movements of the
Ukrainian Hryvnia against the US Dollar can also be influenced by
short-term political factors.
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 the higher pellet premium environment the Group has taken the
opportunity to increase its repair and maintenance activities to
further improve equipment reliability and performance. The Group is
also increasing its mining activity at FPM to sustain existing
volume of higher grade ore and access new plots with higher grade
ore.
In 2019, the Group's C1 cash cost of production increased to
US$47.8 per tonne from US$43.3 per tonne. See pages [10 and 11] for
a description of the factors impacting operating costs.
In 2020, the Group expects royalties (which are included in the
C1 cash cost of production) to increase by approximately US$1 per
tonne due to new royalty tax legislation expected to be adopted in
March 2020, impacting the Group from 2Q 2020.
Change
Mitigation
Ferrexpo sits in the bottom half 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.
Ferrexpo has established several sources of suppliers for key
products as well as several supply routes.
STATEMENT OF DIRECTORS' RESPONSIBILITES
17 March 2020
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
applicable accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company and the subsidiary undertakings included in the
consolidation taken as a whole
(b) the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Company and the subsidiary 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, is fair, balanced and understandable, and provides the
information necessary for shareholders to assess the Group's
position, performance, business model and strategy.
This responsibility statement was approved by the Board of
Directors on 17 March 2020 and is signed on its behalf by:
Steve Lucas
Chairman
Chris Mawe
Acting Chief Executive Officer
INDEPENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF
FERREXPO PLC ON THE PRELIMINARY ANNOUNCEMENT OF FERREXPO PLC
As the independent auditor of Ferrexpo plc we are required by UK
Listing Rule LR 9.7A.1 (2) to agree to the publication of Ferrexpo
plc's preliminary statement of annual results for the year ended 31
December 2019.
The preliminary statement of annual results for the year ended
31 December 2019 includes the 2019 full year results and the
disclosures required by the Listing rules including:
- Financial Highlights and 2019 Financial Summary;
- Chairman's Statement;
- Management commentary included in the Financial Review, Market
Review, Operations Review and Principal Risks sections;
- Statement of Directors' Responsibilities;
- Consolidated Income Statement;
- Consolidated Statement of Comprehensive Income;
- Consolidated Statement of Financial Position;
- Consolidated Statement of Cash Flows;
- Consolidated Statement of Changes in Equity;
- Notes to the Consolidated Financial Statements; and
- Alternative Performance Measures.
The Directors of Ferrexpo plc are responsible for the
preparation, presentation and publication of the preliminary
statement of annual results in accordance with the UK Listing
Rules.
We are responsible for agreeing to the publication of the
preliminary statement of annual results, having regard to the
Financial Reporting Council's Bulletin "The Auditor's Association
with Preliminary Announcements made in accordance with the
requirements of the UK Listing Rules".
Status of our audit of the financial statements
Our audit of the annual financial statements of Ferrexpo plc for
the year ended 31 December 2019 is complete and we signed our
auditor's report on 17 March 2020. Our auditor's report is not
modified and contains no emphasis of matter paragraph.
Procedures performed to agree to the preliminary announcement of
annual results
In order to agree to the publication of the preliminary
announcement of annual results of Ferrexpo plc we carried out the
following procedures:
- Confirmed that the preliminary statement includes the minimum
information required by the Listing Rules.
- Checked that the figures in the preliminary statement have
been accurately extracted from the audited financial
statements.
- Checked the consistency of presentation of the financial
information in the preliminary statement with the audited financial
statements.
- Read management commentary, the financial information in the
consolidated financial statements and notes thereof and considered
if the management commentary is:
- Fair, balanced and understandable
- Materially consistent with the financial statements and with
the contents of the annual report
- Consistent with the information and our knowledge obtained in
the course of the audit of the financial statements of
Ferrexpo plc for the year ended 31 December 2019.
- Considered if for Alternative Performance Measures ("APM") and associated narrative:
- APMs are clearly defined and have been given meaningful labels
- The use and relevance of APMs is explained
- APMs have been reconciled to the most relevant figures in the financial statements
- Comparatives have been included
- Considering whether the financial information in the
preliminary announcement is misstated, either because it is stated
incorrectly or because it is presented in a misleading manner.
Rakesh Shaunak FCA
Senior Statutory Auditor
For and on behalf of MHA MacIntyre Hudson,
Statutory Auditor
London
17 March 2020
CONSOLIDATED INCOME STATEMENT
Year ended Year ended
US$000 Notes 31.12.19 31.12.18
-------------------------------------- ----- ---------- ----------
Revenue 3/4 1,506,724 1,274,030
Operating expenses 3/5 (968,443) (844,470)
Other operating income 5,614 3,314
Operating foreign exchange losses 6 (46,752) (5,295)
-------------------------------------- ----- ---------- ----------
Operating profit 497,143 427,579
-------------------------------------- ----- ---------- ----------
Share of profit from associates 4,114 5,360
-------------------------------------- ----- ---------- ----------
Profit before tax and finance 501,257 432,939
-------------------------------------- ----- ---------- ----------
Net finance expense 7 (23,191) (39,332)
Non-operating foreign exchange losses 6 (18,491) (1,585)
-------------------------------------- ----- ---------- ----------
Profit before tax 459,575 392,022
-------------------------------------- ----- ---------- ----------
Income tax expense 8 (56,282) (56,801)
-------------------------------------- ----- ---------- ----------
Profit for the year 403,293 335,221
-------------------------------------- ----- ---------- ----------
Profit attributable to:
Equity shareholders of Ferrexpo plc 402,370 333,616
Non-controlling interests 923 1,605
-------------------------------------- ----- ---------- ----------
Profit for the year 403,293 335,221
-------------------------------------- ----- ---------- ----------
Earnings per share:
Basic (US cents) 9 68.6 56.9
Diluted (US cents) 9 68.4 56.7
-------------------------------------- ----- ---------- ----------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended Year ended
US$000 Notes 31.12.19 31.12.18
--------------------------------------------------------------------------------------- ----- ---------- ----------
Profit for the year 403,293 335,221
Items that may subsequently be reclassified to profit or loss:
Exchange differences on translating foreign operations 266,163 12,178
Income tax effect 8 (20,487) (2,007)
--------------------------------------------------------------------------------------- ----- ---------- ----------
Net other comprehensive income that may be reclassified to profit or loss in subsequent
periods 245,676 10,171
--------------------------------------------------------------------------------------- ----- ---------- ----------
Items that will not be reclassified subsequently to profit or loss:
Remeasurement (losses)/gains on defined benefit pension liability (6,898) 875
--------------------------------------------------------------------------------------- ----- ---------- ----------
Net other comprehensive (loss)/income not being reclassified to profit or loss in
subsequent
periods (6,898) 875
--------------------------------------------------------------------------------------- ----- ---------- ----------
Other comprehensive income for the year, net of tax 238,778 11,046
--------------------------------------------------------------------------------------- ----- ---------- ----------
Total comprehensive income for the year, net of tax 642,071 346,267
--------------------------------------------------------------------------------------- ----- ---------- ----------
Total comprehensive income attributable to:
Equity shareholders of Ferrexpo plc 639,722 344,587
Non-controlling interests 2,349 1,680
--------------------------------------------------------------------------------------- ----- ---------- ----------
642,071 346,267
--------------------------------------------------------------------------------------- ----- ---------- ----------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at As at
US$000 Notes 31.12.19 31.12.18
----------------------------------------------------------- ----- ----------- -----------
Assets
Property, plant and equipment 1,044,426 701,376
Right-of-use assets 10 10,976 -
Goodwill and other intangible assets 47,552 39,609
Investments in associates 8,064 7,037
Inventories 11 255,026 217,688
Other non-current assets 24,093 32,104
Deferred tax assets 8 38,608 27,946
----------------------------------------------------------- ----- ----------- -----------
Total non-current assets 1,428,745 1,025,760
----------------------------------------------------------- ----- ----------- -----------
Inventories 11 199,714 144,919
Trade and other receivables 99,864 85,695
Prepayments and other current assets 42,653 27,344
Income taxes recoverable and prepaid 8 184 61
Other taxes recoverable and prepaid 37,377 44,837
Cash and cash equivalents 12 131,020 62,996
Total current assets 510,812 365,852
----------------------------------------------------------- ----- ----------- -----------
Total assets 1,939,557 1,391,612
----------------------------------------------------------- ----- ----------- -----------
Equity and liabilities
Issued capital 121,628 121,628
Share premium 185,112 185,112
Other reserves (1,764,808) (2,010,080)
Retained earnings 2,810,622 2,568,187
----------------------------------------------------------- ----- ----------- -----------
Equity attributable to equity shareholders of Ferrexpo plc 1,352,554 864,847
----------------------------------------------------------- ----- ----------- -----------
Non-controlling interests 78 2,050
----------------------------------------------------------- ----- ----------- -----------
Total equity 1,352,632 866,897
----------------------------------------------------------- ----- ----------- -----------
Interest-bearing loans and borrowings 3/13 274,011 197,258
Defined benefit pension liability 33,628 21,444
Provision for site restoration 3,016 1,940
Deferred tax liabilities 8 140 352
----------------------------------------------------------- ----- ----------- -----------
Total non-current liabilities 310,795 220,994
----------------------------------------------------------- ----- ----------- -----------
Interest-bearing loans and borrowings 3/13 138,367 204,600
Trade and other payables 65,627 34,292
Accrued and contract liabilities 39,257 32,693
Income taxes payable 8 21,248 20,571
Other taxes payable 11,631 11,565
----------------------------------------------------------- ----- ----------- -----------
Total current liabilities 276,130 303,721
----------------------------------------------------------- ----- ----------- -----------
Total liabilities 586,925 524,715
----------------------------------------------------------- ----- ----------- -----------
Total equity and liabilities 1,939,557 1,391,612
----------------------------------------------------------- ----- ----------- -----------
The financial statements were approved by the Board of Directors
on 17 March 2020.
Steve Lucas Christopher Mawe
Chairman Acting Chief Executive Officer
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended Year ended
US$000 Notes 31.12.19 31.12.18
--------------------------------------------------------------------------------------- ----- ---------- ----------
Profit before tax 459,575 392,022
Adjustments for:
Depreciation of property, plant and equipment, right-of-use assets and amortisation of
intangible
assets 82,130 62,094
Finance expense 7 21,267 37,832
Finance income 7 (1,436) (891)
Losses on disposal of property, plant and equipment 417 5,701
Cash elements included in losses on disposal of property, plant and equipment (153) (372)
Write-offs 1,241 1,489
Share of profit from associates (4,114) (5,360)
Movement in allowance for doubtful receivables 736 222
Movement in site restoration provision 437 (162)
Employee benefits 3,534 3,642
Share-based payments 1,022 674
Operating foreign exchange losses 6 46,752 5,295
Non-operating foreign exchange losses 6 18,491 1,586
Other adjustments (7,307) (7,657)
--------------------------------------------------------------------------------------- ----- ---------- ----------
Operating cash flow before working capital changes 622,592 496,115
--------------------------------------------------------------------------------------- ----- ---------- ----------
Changes in working capital:
Increase in trade and other receivables (23,479) (12,785)
Increase in inventories (37,152) (87,999)
Increase in trade and other payables (incl. accrued and contract liabilities) 19,590 1,903
Decrease/(increase) in other taxes recoverable and payable (incl. VAT) 11,371 (17,530)
--------------------------------------------------------------------------------------- ----- ---------- ----------
Cash generated from operating activities 592,922 379,704
--------------------------------------------------------------------------------------- ----- ---------- ----------
Interest paid (33,932) (42,768)
Income tax paid 8 (83,730) (43,509)
Post-employment benefits paid (1,884) (1,702)
--------------------------------------------------------------------------------------- ----- ---------- ----------
Net cash flows from operating activities 473,376 291,725
--------------------------------------------------------------------------------------- ----- ---------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets (247,478) (135,113)
Proceeds from disposal of property, plant and equipment and intangible assets 1,165 800
Interest received 1,344 827
Dividends from associates 3,519 4,137
Acquisition of non-controlling interests (2,189) -
--------------------------------------------------------------------------------------- ----- ---------- ----------
Net cash flows used in investing activities (243,639) (129,349)
--------------------------------------------------------------------------------------- ----- ---------- ----------
Cash flows from financing activities
Proceeds from borrowings and finance 13 225,000 214,317
Repayment of borrowings and finance 13 (223,774) (308,817)
Principal elements of lease payments 13 (5,118) -
Arrangement fees paid (131) (5,817)
Dividends paid to equity shareholders of Ferrexpo plc (154,922) (96,559)
--------------------------------------------------------------------------------------- ----- ---------- ----------
Net cash flows used in financing activities (158,945) (196,876)
--------------------------------------------------------------------------------------- ----- ---------- ----------
Net increase/(decrease) in cash and cash equivalents 70,792 (34,500)
Cash and cash equivalents at the beginning of the year 62,996 97,742
Currency translation differences (2,768) (246)
--------------------------------------------------------------------------------------- ----- ---------- ----------
Cash and cash equivalents at the end of the year 12 131,020 62,996
--------------------------------------------------------------------------------------- ----- ---------- ----------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders of Ferrexpo plc
---------------------------------------------------------
Total
Retained capital and Non-controlling Total
US$000 Issued capital Share premium Other reserves earnings reserves interests Equity
--------------- -------------- -------------- --------------- ---------- ------------ --------------- ---------
At 1 January
2018 121,628 185,112 (2,020,864) 2,330,580 616,456 370 616,826
Profit for the
year - - - 333,616 333,616 1,605 335,221
Other
comprehensive
income - - 10,110 861 10,971 75 11,046
--------------- -------------- -------------- --------------- ---------- ------------ --------------- ---------
Total
comprehensive
income for the
year - - 10,110 334,477 344,587 1,680 346,267
--------------- -------------- -------------- --------------- ---------- ------------ --------------- ---------
Share-based
payments - - 674 - 674 - 674
Equity
dividends to
shareholders
of Ferrexpo
plc - - - (96,870) (96,870) - (96,870)
--------------- -------------- -------------- --------------- ---------- ------------ --------------- ---------
At 31 December
2018 121,628 185,112 (2,010,080) 2,568,187 864,847 2,050 866,897
--------------- -------------- -------------- --------------- ---------- ------------ --------------- ---------
Profit for the
year - - - 402,370 402,370 923 403,293
Other
comprehensive
income - - 244,250 (6,898) 237,352 1,426 238,778
--------------- -------------- -------------- --------------- ---------- ------------ --------------- ---------
Total
comprehensive
income for the
year - - 244,250 395,472 639,722 2,349 642,071
--------------- -------------- -------------- --------------- ---------- ------------ --------------- ---------
Share-based
payments - - 1,022 - 1,022 - 1,022
Equity
dividends to
shareholders
of Ferrexpo
plc - - - (155,087) (155,087) - (155,087)
Effect from
increase of
shareholding
in subsidiary - - - 2,050 2,050 (4,321) (2,271)
--------------- -------------- -------------- --------------- ---------- ------------ --------------- ---------
At 31 December
2019 121,628 185,112 (1,764,808) 2,810,622 1,352,554 78 1,352,632
--------------- -------------- -------------- --------------- ---------- ------------ --------------- ---------
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. This set of financial results was approved by
the Board on 17 March 2020. The financial information for the years
ended 31 December 2019 and 31 December 2018 has been extracted from
the statutory accounts for each year.
The auditors' report on the 2019 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. The audited
statutory accounts for the year ended 31 December 2018 have been
delivered to the Registrar of Companies and the auditors' report
under section 495 of the Companies Act 2006 in relation to those
accounts was qualified and contained a statement under section
498(3) of the Companies Act 2006. The auditors' report did not
contain a statement under section 498(2) of the Companies Act
2016.
Ferrexpo plc will publish on or around 15 April 2020 its Annual
Report and Accounts for the year ended 31 December 2019 on its
corporate website www.ferrexpo.com . The audited statutory accounts
for the year ended 31 December 2019 will be delivered to the
Registrar of Companies following the Company's annual meeting
convened for Thursday, 28 May 2020.
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
topoff services. 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-Lavrykivske ("GPL") and
Yerystivske deposits.
The majority shareholder of the Group is Fevamotinico S.a.r.l.
("Fevamotinico"), a company incorporated in Luxembourg.
Fevamotinico is ultimately wholly owned by The Minco Trust, of
which Kostyantin Zhevago, the Group's previous Chief Executive
Officer, is one of the beneficiaries. At the time this report was
published, Fevamotinico held 50.3% (2018: 50.3%) of Ferrexpo plc's
issued share capital.
Note 2: Basis of preparation
Whilst the preliminary announcement has been prepared in
accordance with International Financial Reporting Standards
('IFRS') and International Financial Reporting Interpretation
Committee ("IFRIC") interpretations adopted for use by the European
Union and with those parts of the Companies Act 2006 applicable to
companies reporting under IFRS, this announcement does not itself
contain sufficient information to comply with IFRS. The Board
approved the full financial statements that comply with IFRS on 17
March 2020. The financial statements have been prepared under the
historical cost convention as modified by the recording of pension
assets and liabilities and the revaluation of certain financial
instruments.
The Group's principal risks likely to affect its future
development, performance and position are set out on pages 22 to
28. The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the Financial
Review on pages 10 to 13.
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, 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 2018
except for the adoption of new amendments and improvements to IFRSs
effective as of 1 January 2019.
New standards and interpretations adopted with an impact on the
Group's consolidated financial statements
IFRS 16 Leases
The Group applied IFRS 16 Leases, as issued in January 2016, for
the first time as of 1 January 2019. The standard replaces 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") and eliminates
the classification of leases as either operating or finance for the
lessee 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.
In accordance with the transition provisions set out in IFRS 16,
the Group elected to apply the standard retrospectively, with the
cumulative impact of the first-time adoption recognised at the date
of initial application. On transition, the Group grandfathered its
previous assessment of operating leases under IAS 17 and recognised
for these lease contracts right-of-use assets and corresponding
lease liabilities in the consolidated statement of financial
position with no impact on retained earnings. The lease liabilities
were measured at the present value of the remaining lease payments,
discounted using the Group's incremental borrowing rate at initial
application which is the interest rate that the Group would have to
pay to borrow over a similar term the funds necessary to obtain an
asset of a similar value to the right-of-use asset in a similar
economic environment. The corresponding right-of-use assets were
measured at an amount equal to the lease liability, adjusted by the
amount of any prepaid or accrued lease payments relating to that
lease recognised in the consolidated statement of financial
position as at the end of the comparative year ended 31 December
2018. The balance of lease liabilities and right-of-use assets
relating to leases classified as finance leases as at the end of
the comparative year ended 31 December 2018 was carried forward to
the date of initial application. The new requirements of the
standard as to whether a contract contains a lease component or not
were applied to the identification of new lease contracts signed
subsequent to 1 January 2019.
On transition, the Group elected to apply the following
practical expedients and exemptions, as permitted under the
transition provisions set out in the standard:
- application of a single discount rate to a portfolio of leases with similar characteristics;
- recognition exemption for low-value and short-term leases,
which are therefore recognised in the consolidated income statement
on a straight-line basis; and
- accounting for each lease component and any associated
non-lease components as a single lease component instead of
separating the non-lease components from the lease ones.
Currently, the Group leases land, buildings and equipment. The
vast majority of land leases are for land used for the extraction
of ore and are not within the scope of IFRS 16, according to the
scope exemptions set out in the standard. The new standard
primarily resulted in the recognition of right-of-use assets and
lease liabilities in respect of long-term rental contracts for
several of the Group's office premises with rental periods of five
to ten years, land not used for the direct extraction of ore as
well as for leased equipment.
The following table provides a reconciliation between the
balance of operating lease commitments as at 31 December 2018 and
the lease liability recognised on 1 January 2019:
Balance as at
US$000 01.01.19
---------------------------------------------------- -------------
Operating lease commitments as at 31 December 2018 8,827
Recognition exemption for mining land(1) (331)
Land under permanent use(2) 971
Short-term leases recognition exemption (348)
Total minimum lease payments 9,119
Less: amounts representing finance charges (1,418)
Add: leases previously classified as finance leases 2,074
---------------------------------------------------- -------------
Lease liabilities recognised as at 1 January 2019 9,775
Thereof non-current portion 4,799
Thereof current portion 4,976
---------------------------------------------------- -------------
1 Leases used for the extraction of ore are not within the scope
of IFRS 16 according to the scope exemptions set out in the
standard.
2 Land not used for the direct extraction of ore in Ukraine, the
country of the Group's mining operations. These lease agreements
with the Ukrainian government typically have a duration of up to 49
years requiring land lease payments in the form of rental taxes
based on annually determined rates by the government.
The lease liability is measured at the net present value of the
remaining lease payments, discounted using the interest rate
implicit in the lease or, when not available, the incremental
borrowing rate computed for a group of leases with similar
characteristics as regards to type of asset, lease term, contract
currency and economic environment.
The following tables provide the details of the cumulative
effects from the application of the new standard IFRS 16 Leases on
the consolidated statement of financial position as of 1 January
2019 and the consolidated statement of financial position and the
consolidated income statement as at 31 December 2019:
Balance Effect from
as at application of Year ended
US$000 Notes 01.01.19 IFRS 16 31.12.18
---------------------------------------------------- ----- ----------- --------------- ----------------
Consolidated statement of financial position
Assets
Property, plant and equipment 699,495 (1,881) 701,376
Right-of-use assets 10 9,582 9,582 -
Liabilities
Interest-bearing loans and borrowings - non-current 13 (4,799) (4,799) -
Interest-bearing loans and borrowings - current 13 (4,976) (2,902) (2,074)
---------------------------------------------------- ----- ----------- --------------- ----------------
As reported Effect from Balance without
as at application of effect from new
US$000 Notes 31.12.19 IFRS 16 IFRSs
---------------------------------------------------- ----- ----------- --------------- ----------------
Consolidated income statement
Operating expenses 5 (968,443) 160 (968,603)
Net finance expense 5 (23,191) (503) (22,688)
Consolidated statement of financial position
Assets
Property, plant and equipment 1,044,426 (1,881) 1,046,307
Right-of-use assets 10 10,976 10,976 -
Liabilities
Interest-bearing loans and borrowings - non-current 13 (274,011) (3,844) (270,167)
Interest-bearing loans and borrowings - current 13 (138,367) (3,264) (135,103)
---------------------------------------------------- ----- ----------- --------------- ----------------
The adoption of IFRS 16 Leases has not had any material impact
on the underlying EBITDA and on basic and diluted earnings per
share.
The impact on the net cash flows from operating activities from
payments for short-term and low-value leases was US$425 thousand
for the year ended 31 December 2019.
Further information in relation to the Group's leases and
lease-related commitments are provided in Note 10 Leases and Note
14 Commitments, contingencies and legal disputes.
Amendment to IAS 19 Employee benefits: Plan amendment,
curtailment or settlement
The Group applies the new amendment to IAS 19 Employee benefits,
as published by IASB on 7 February 2018, for the first time as of 1
January 2019. The purpose of the new amendments is to harmonise the
accounting practices in terms of plan amendments, curtailments and
settlements and to provide further relevant information on such
changes to the plan. As at 1 January 2020, the collective pension
plan (multi-employer plan) in Switzerland is going to harmonise the
conversion rates for the mandatory and the supplementary portion of
the scheme, which is considered to be a plan amendment. The plan
amendment occurred on 1 April, 2019. The effect of US$409 thousand
is reflected in the past service costs as of 31 December 2019 as a
one-time effect in the Group's consolidated income statement. The
service cost and net interest cost have been adjusted in line with
the amended IAS 19.
New standards, interpretations and amendments adopted without an
impact on the Group's consolidated financial statements
- Annual Improvements to IFRS Standards 2015-2017 Cycle contains
amendments to IFRS 3 Business combinations and IFRS 11 Joint
arrangements, IAS 12 Income taxes and IAS 23 Borrowing costs.
- Amendments to IAS 28 Long-term interests in associates and
joint ventures clarifies that other interests in associates and
joint ventures, including long-term interests not accounted for
using the equity method of accounting and that, in substance, form
part of the net investment in those associates and joint ventures,
fall within the scope of IFRS 9.
- IFRIC 23 Uncertainty over income tax treatments clarifies and
changes the method of calculating provisions for uncertain income
tax positions accounted for under IAS 12 Income taxes. The new
interpretation requires the determination of the provision based on
the single most likely amount in a range of possible outcomes or
the sum of the probability-weighted amounts in a range of possible
outcomes, if it is not probable that the tax authorities accept a
tax treatment. The Group applied IFRIC 23 for the first time as of
1 January 2019 and the first-time application had no material
impact on the Group's taxable results, tax bases, unused tax
losses, unused tax credits and tax rates. See Note 8 Taxation in
respect of critical judgement involved in the assessment of the
Group's tax position in accordance with IFRIC 23.
- Amendments to IFRS 9 Financial instruments: Prepayment
features with negative compensation clarifies the classification of
particular pre-payable financial assets and the accounting for
financial liabilities following a modification.
New standards, interpretations and amendments not yet
adopted
The Group has elected not to adopt early any revised and amended
standards or interpretations that are not yet mandatory in the EU.
The standards and interpretations below could have an impact on the
consolidated financial statements of the Group.
Amendments to References to the Conceptual Framework in IFRS
standards
The revised Conceptual Framework was issued in March 2018 and is
effective for the financial year beginning on 1 January 2020
subject to EU endorsement. The amendments introduce a new chapter
on measurement, guidance on reporting financial performance,
improved definitions of an asset and a liability and clarifications
in areas such as the roles of stewardship, prudence and measurement
uncertainty in financial reporting. The Group does not expect a
material impact on its consolidated financial statements from these
amendments.
Amendments to IAS 1 and IAS 8: Definition of material
The amendments were issued in October 2018 and are effective for
the financial year beginning on 1 January 2020 subject to EU
endorsement. The amendments introduce a revised definition of
material information. In the new definition, reference is made to
the concepts of obscured information and reasonable expectation
that the information is going to influence the decisions that the
primary users of general purpose financial statements make on the
basis of those financial statements. The Group does not expect a
material impact on its consolidated financial statements from these
amendments.
Furthermore, 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 IFRSs 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:
Critical estimates
- Note 11 Inventories - lean and weathered ore
Critical judgements
- Note 5 Operating expenses - nature of the Group's community
support donations -- Note 8 Taxation - tax legislation in
Ukraine
- Note 15 Related party disclosure - completeness
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 Alternative Performance Measures ("APM")
section on page 55.
Year ended Year ended
US$000 31.12.19 31.12.18
---------------------------------------------------- ----- ---------- ----------
Profit before tax and finance 501,257 432,939
Losses on disposal of property, plant and equipment 417 5,701
Share-based payments 1,022 674
Write-offs 1,241 1,489
Depreciation and amortisation 82,130 62,094
---------------------------------------------------- ----- ---------- ----------
Underlying EBITDA 586,067 502,897
---------------------------------------------------- ----- ---------- ----------
Year ended Year ended
US$000 Notes 31.12.19 31.12.18
---------------------------------------------------- ----- ---------- ----------
Revenue 4 1,506,724 1,274,030
Cost of sales 5 (581,743) (507,939)
---------------------------------------------------- ----- ---------- ----------
Gross profit 924,981 766,091
---------------------------------------------------- ----- ---------- ----------
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 31.12.19 31.12.18
---------------------------------------------------- ----- --------- ---------
Cash and cash equivalents 12 131,020 62,996
Interest-bearing loans and borrowings - current 13 (138,367) (204,600)
Interest-bearing loans and borrowings - non-current 13 (274,011) (197,258)
---------------------------------------------------- ----- --------- ---------
Net debt (281,358) (338,862)
---------------------------------------------------- ----- --------- ---------
The Group made debt repayments of US$229,374 thousand during the
year ended 31 December 2019 (2018: US$308,817 thousand). Net debt
is an APM. Further information on the APMs used by the Group,
including the definitions, is provided on pages 55 to 57.
Net debt as at 31 December 2019 included an effect of US$7,108
thousand as a result of the first-time application of the new
standard IFRS 16 Leases. For further information on the impact of
the adoption of the new standard IFRS 16 Leases see Note 2 Basis of
preparation.
Disclosure of revenue and non-current assets
The Group does not generate significant revenues from external
customers attributable to the UK, 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
Revenue. 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 2019 consisted of the
following:
Year ended Year ended
US$000 31.12.19 31.12.18
--------------------------------------------------------------------- ---------- ----------
Revenue from sales of iron ore pellets and concentrate 1,352,953 1,146,734
Freight revenue related to sales of iron ore pellets and concentrate 94,617 74,929
--------------------------------------------------------------------- ---------- ----------
Total revenue from sales of iron ore pellets and concentrate 1,447,570 1,221,663
--------------------------------------------------------------------- ---------- ----------
Revenue from logistics and bunker business 54,168 48,778
Revenue from other sales and services provided 4,986 3,589
--------------------------------------------------------------------- ---------- ----------
Total revenue 1,506,724 1,274,030
--------------------------------------------------------------------- ---------- ----------
Revenue for the year ended 31 December 2019 includes the effect
from the derecognition of contract liabilities of US$4,637 thousand
(2018: US$6,006 thousand) deferred as revenue in the comparative
year ended 31 December 2018. As at 31 December 2019,
freight-related revenue in the amount of US$8,572 thousand was
deferred in relation to the performance obligations not fulfilled
and included in the balance of the contract liabilities.
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 31.12.19 31.12.18
---------------------------- ---------- ----------
Central Europe 529,159 565,820
Austria 331,964 290,825
Others 197,195 274,995
---------------------------- ---------- ----------
Western Europe 183,560 193,540
---------------------------- ---------- ----------
Germany 168,875 172,108
Others 14,685 21,432
---------------------------- ---------- ----------
North East Asia 250,721 221,985
---------------------------- ---------- ----------
Japan 161,186 127,336
Others 89,535 94,649
---------------------------- ---------- ----------
China & South East Asia 412,613 176,135
---------------------------- ---------- ----------
China 347,892 125,315
Others 64,721 50,820
---------------------------- ---------- ----------
Turkey, Middle East & India 62,717 64,183
---------------------------- ---------- ----------
Turkey 62,717 64,183
---------------------------- ---------- ----------
Other 8,800 -
---------------------------- ---------- ----------
Total exports 1,447,570 1,221,663
---------------------------- ---------- ----------
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.
During the year ended 31 December 2019, sales made to three
customers accounted for 40% of the revenues from export sales of
ore pellets and concentrate (2018: 40%).
Sales to one customer that individually represented more than
10% of total sales in either the current or prior year amounted to
US$331,964 thousand (2018: US$290,825 thousand).
Note 5: Operating expenses
Critical judgements
Nature of the Group's community support donations
On 4 February 2019, the Group announced that it had established
the Independent Review Committee ("IRC") to carry out an
independent review into the use of funds donated by the Group to
the third party charity fund Blooming Land (the "Charity") prior to
the financial year 2019. Whilst a significant amount of work was
undertaken by the IRC and its advisers during the financial year
2019, it has not been possible to explain some discrepancies
outlined in the 2018 Annual Report & Accounts in respect of the
ultimate use of funds donated by the Group to the Charity. For
further information see the Independent Review Committee Report in
the 2018 Annual Report and Accounts.
Taking into account the conclusions of the IRC, as announced by
the Group on 30 August 2019, and in absence of conclusive evidence
that funds have not been used as intended, the Group has judged
that it remains appropriate for it to present the amount of
US$9,500 thousand of its community support donations to the Charity
during the comparative year ended 31 December 2018 as such and
within operating expenses in the comparative year included in its
consolidated financial statements. The Group has not made any
further donations to the Charity since May 2018 and therefore no
donations to the Charity are included in the table below for the
financial year ended 31 December 2019.
In certain circumstances, the Group could be exposed to
regulatory and other actions resulting in potential legal claims or
penalties, fines or other liabilities. See Note 14 Commitments,
contingencies and legal disputes on page 49 for further
information.
Operating expenses for the year ended 31 December 2019 consisted
of the following:
Year ended Year ended
US$000 31.12.19 31.12.18
---------------------------------------------------------------------- ----- ---------- ----------
Cost of sales 581,743 507,939
Selling and distribution expenses 294,336 260,422
General and administrative expenses 66,036 45,246
Other operating expenses 26,328 30,863
---------------------------------------------------------------------- ----- ---------- ----------
Total operating expenses 968,443 844,470
---------------------------------------------------------------------- ----- ---------- ----------
Operating expenses include:
Year ended Year ended
US$000 Notes 31.12.19 31.12.18
---------------------------------------------------------------------- ----- ---------- ----------
Inventories recognised as an expense upon sale of goods 551,141 481,366
Employee costs (excl. logistics and bunker business) 101,770 79,471
Inventory movements (2,673) (34,801)
Depreciation of property, plant and equipment and right-of-use assets 81,240 61,377
Amortisation of intangible assets 890 718
Royalties and levies 30,506 29,742
Costs of logistics and bunker business 49,587 50,270
Audit and non-audit services 3,229 1,691
Community support donations 14/15 5,893 15,130
Write-offs 1,241 1,489
Losses on disposal of property, plant and equipment 417 5,701
---------------------------------------------------------------------- ----- ---------- ----------
Write-offs for the year ended 31 December 2019 primarily
consisted of obsolete inventories and property, plant and equipment
as outlined below:
As at As at
US$000 31.12.19 31.12.18
------------------------------------------- --------- ---------
(Write-back)/Write-off of inventories (103) 1,072
Write-off of property, plant and equipment 1,271 395
Write-off of receivables and prepayments 73 22
------------------------------------------- --------- ---------
Total write-offs 1,241 1,489
------------------------------------------- --------- ---------
Auditor remuneration
Year ended Year ended
US$000 31.12.19 31.12.18
---------------------------------------------------------------------------------------------- ---------- ----------
Audit services
Ferrexpo plc Annual Report 1,178 1,352
Additional fees charged by the previous auditor for the audit of the 2018 Ferrexpo plc Annual
Report 1,834 -
Subsidiary entities 217 182
---------------------------------------------------------------------------------------------- ---------- ----------
Total audit services 3,229 1,534
---------------------------------------------------------------------------------------------- ---------- ----------
Audit-related assurance services - 150
---------------------------------------------------------------------------------------------- ---------- ----------
Total audit and audit-related assurance services 3,229 1,684
---------------------------------------------------------------------------------------------- ---------- ----------
Non-audit services
Other services - 7
---------------------------------------------------------------------------------------------- ---------- ----------
Total non-audit services - 7
---------------------------------------------------------------------------------------------- ---------- ----------
Total auditor remuneration 3,229 1,691
---------------------------------------------------------------------------------------------- ---------- ----------
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.
Audit services for the year ended 31 December 2019 include
US$1,834 thousand relating to audit services provided by the
previous audit firm of the Group for the comparative year ended 31
December 2018.
Note 6: Foreign exchange gains and losses
Foreign exchange gains and losses for the year ended 31 December
2019 consisted of the following:
Year ended Year ended
US$000 31.12.19 31.12.18
-------------------------------------------- ---------- ----------
Operating foreign exchange losses
Revaluation of trade receivables (47,229) (4,922)
Revaluation of trade payables 523 (358)
Other (46) (15)
-------------------------------------------- ---------- ----------
Total operating foreign exchange losses (46,752) (5,295)
-------------------------------------------- ---------- ----------
Non-operating foreign exchange losses
Revaluation of interest-bearing loans (1,240) 95
Conversion of cash and cash equivalents (4,255) (801)
Other (12,996) (879)
-------------------------------------------- ---------- ----------
Total non-operating foreign exchange losses (18,491) (1,585)
-------------------------------------------- ---------- ----------
Total foreign exchange losses (65,243) (6,880)
-------------------------------------------- ---------- ----------
The translation differences and foreign exchange gains and
losses are predominantly dependent on the fluctuation of the
exchange rate of the Ukrainian Hryvnia against the US Dollar. The
table below shows the closing and average rates of the most
relevant currencies of the Group compared to the US Dollar.
Average exchange rates Closing exchange rates
---- ------------------------ ------------------------
As at As at Year ended Year ended
US$ 31.12.19 31.12.18 31.12.19 31.12.18
---- ----------- ----------- ----------- -----------
UAH 25.846 27.200 23.686 27.688
EUR 0.893 0.847 0.893 0.874
---- ----------- ----------- ----------- -----------
Exchange differences arising on translation of non-US Dollar
functional currency operations (mainly in Ukrainian Hryvnia) are
included in the translation reserve.
Note 7: Net finance expense
Finance expense and income for the year ended 31 December 2019
consisted of the following:
Year ended Year ended
US$000 31.12.19 31.12.18
----------------------------------------- ---------- ----------
Finance expense
Interest expense on loans and borrowings (33,589) (43,468)
Less capitalised borrowing costs 14,617 8,125
Interest on defined benefit plans (2,730) (2,390)
Bank charges (710) (778)
Interest expense on lease liabilities (630) -
Other finance costs (1,585) (1,713)
------------------------------------------ ---------- ----------
Total finance expense (24,627) (40,224)
------------------------------------------ ---------- ----------
Finance income
Interest income 1,379 843
Other finance income 57 49
------------------------------------------ ---------- ----------
Total finance income 1,436 892
------------------------------------------ ---------- ----------
Net finance expense (23,191) (39,332)
------------------------------------------ ---------- ----------
Note 8: Taxation
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 costs. 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 for the period from 1 September 2013 to 31 December
2015 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. Following the completion of this audit,
the SFS issued its official tax audit report on 27 December 2018,
claiming a tax adjustment totalling UAH448 million (US$18,914
thousand as at 31 December 2019) and issued the formal claim on 12
March 2019. The Group's subsidiary initiated legal proceedings and
filed a claim to the first court instance in Poltava on 22 March
2019. The Poltava court of first court instance confirmed on 4
September 2019 the position of the Group's major subsidiary. The
SFS filed its appeal in November 2019 and the Second Administrative
Court of Appeal confirmed on 21 December 2019 the decision of the
first court instance and supported the position of the Group's
subsidiary in full. The SFS subsequently filed an application of
cassation to the Supreme Court of Ukraine. As of the date of
approval of these financial statements, the case has not yet been
heard by the Supreme Court of Ukraine.
On 18 February 2020, the SFS commenced two new tax audits for
cross-border transactions between the Group's major subsidiary in
Ukraine and the two other subsidiaries of the Group. The audits are
covering transactions during the financial years 2015 to 2017 and
2016 to 2017, respectively.
The Group considers that it has complied with applicable
legislation for all cross-border transactions undertaken and
continues to expect that it can successfully defend its methodology
applied to determine the prices between its subsidiaries.
Consequently, no provision has been recorded as at 31 December
2019, neither for the years subject to the aforementioned court
proceedings nor for transactions and years subject to the newly
commenced audits by the SFS in Ukraine. As of the date of approval
of these financial statements, no claim has been made by the SFS in
respect of the newly commenced audits.
Upon the application of new interpretation IFRIC 23 Uncertainty
over income tax treatments as of 1 January 2019 (see also Note 2
Basis of preparation for further information), the Group reviewed
and reassessed its exposure in respect of the ongoing court
proceedings and the newly commenced audits of cross-border
transactions in Ukraine under the provisions of the new
interpretation. Considering the two favourable court decisions and
further third party advice obtained, the management of the Group
concluded that it is probable that the last court instance will
also rule in favour of the Group's major subsidiary in Ukraine and
that, if any new claims should be made by the SFS, the Group will
continue to successfully defend its pricing methodology applied
during these years. An unexpected outcome of the ongoing court
proceeding would have an adverse impact on the Group's tax expense
and its tax rate in a future period.
The income tax expense for the year ended 31 December 2019
consisted of the following:
Year ended Year ended
US$000 31.12.19 31.12.18
-------------------------------------------------- ---------- ----------
Current income tax
Current income tax charge 52,106 44,086
Amounts related to previous years 10,297 (569)
-------------------------------------------------- ---------- ----------
Total current income tax 62,403 43,517
-------------------------------------------------- ---------- ----------
Deferred income tax
Origination and reversal of temporary differences (6,121) 13,284
-------------------------------------------------- ---------- ----------
Total deferred income tax (6,121) 13,284
-------------------------------------------------- ---------- ----------
Total income tax expense 56,282 56,801
-------------------------------------------------- ---------- ----------
Tax effects on items recognised in the statement of other
comprehensive income consisted of the following for the year ended
31 December 2019:
Year ended Year ended
US$000 31.12.19 31.12.18
------------------------------------------------------------------------------- ---------- ----------
Tax effect of exchange differences arising on translating foreign operations 20,487 2,007
-------------------------------------------------------------------------------- ---------- ----------
Total income tax effects recognised in statement of other comprehensive income 20,487 2,007
-------------------------------------------------------------------------------- ---------- ----------
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 11.3%
for the financial year 2019 (2018: 15.5%). 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 2019 is as
follows:
Year ended Year ended
US$000 31.12.19 31.12.18
---------------------------------------------------------------------------------------------- ---------- ----------
Profit before tax 459,575 392,022
Notional tax charge computed at the weighted average statutory tax rate of 11.3% (2018: 15.5%) 52,072 60,629
(Recognition)/derecognition of deferred tax assets(1) (10,433) (8,576)
Credit for Ukrainian fuel excise tax against income tax(2) (3,686) (7,408)
Expenses not deductible for local tax purposes(3) 2,539 3,795
Income exempted for local tax purposes (25) (56)
Reassessment of prior year temporary differences(4) 4,911 7,719
Effect of different tax rates on local profit streams(5) 646 1,157
Prior year adjustments to current tax(6) 10,297 (569)
Effect from share of profit from associates(7) (783) (974)
Other (including translation differences) 744 1,084
---------------------------------------------------------------------------------------------- ---------- ----------
Total income tax expense 56,282 56,801
---------------------------------------------------------------------------------------------- ---------- ----------
1 Recognition in 2019 primarily relates to the change of the tax
law in Switzerland and is in connection with available transitional
measures for companies losing the special tax status available
under the old tax law. Recognition in 2018 relates to temporary
differences arising from inflationary adjustments made in the past
to the tax basis of property, plant and equipment for two Ukrainian
subsidiaries. Both effects are considered to be of a non-recurring
nature
2 Effective 1 January 2018, a temporary provision in the
Ukrainian tax code allows a reduction in income tax payable for the
amount of excise tax included in prices of fuel used for mining
equipment. This provision still applies for 2020 and is considered
to be of a recurring nature
3 Effect predominantly relates to expenses not deductible in
Ukraine, which 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
4 Effective 1 January 2019, the relevant accounting framework
for tax purposes changed from local GAAP to IFRSs resulting in a
reduction of temporary differences as of 31 December 2018 being of
a non-recurring nature
5 Effect in 2019 and 2018 related to different tax rates
applying to different income streams in Swiss subsidiaries as a
result of their specific tax status. The effect is of a recurring
nature
6 Effect in 2019 relates to a retrospective tax adjustment made
for the financial year 2018 in respect of prices charged by the
Ukrainian subsidiaries to the Group's sales companies in
Switzerland and the United Arab Emirates and an allowance
recognised on the reduction of the income tax payable for the
amount of excise tax in 2018. The amount in 2018 related to final
tax assessments received in Switzerland. These effects are
considered to be of a non-recurring nature
7 Share of profit from associates is recognised net of taxes of
the associates. This effect is of a recurring nature
The Group operates across a number of jurisdictions and its
effective tax rate is subject to various factors outside of the
Group's controls. This includes the volatility in the global iron
ore pellet market and foreign exchange rate movements, primarily
between the Ukrainian Hryvnia and the US Dollar. The effective tax
rate of the financial year 2019 was 12.2% (2018: 14.5%), reflecting
the appreciation of the Ukrainian Hryvnia against the US Dollar,
negatively impacting the profitability of the Group's local
subsidiaries, as well as lower global pellet premiums compared with
2018. The effective tax rate of the comparative year ended 31
December 2018 reflected strong pellet premiums in the Chinese spot
market.
The Group expects that its future effective tax rate will be in
a range of 11.0% to 16.0% depending on the aforementioned effects.
As mentioned under critical judgements on page 43, the Group is
involved in ongoing court proceedings in respect of its
cross-border transactions and an unexpected adverse outcome would
have an adverse impact on the Group's total income tax expense and
its effective tax rate in the future. The Group's future effective
tax rate could also be impacted by legislative changes and changes
in the statutory tax rates in any of its key jurisdictions.
The net balance of income tax payable changed as follows during
the financial year 2019:
Year ended Year ended
US$000 31.12.19 31.12.18
------------------------------------------ ---------- ----------
Opening balance (20,510) (18,247)
Income statement charge (62,403) (43,517)
Booked through other comprehensive income (20,487) (2,007)
Tax paid 83,730 43,509
Translation differences (1,394) (248)
------------------------------------------ ---------- ----------
Closing balance (21,064) (20,510)
------------------------------------------ ---------- ----------
The net income tax payable as at 31 December 2019 consisted of the following:
As at As at
US$000 31.12.19 31.12.18
------------------------------------------------------------------------------ --------- ---------
Income tax receivable balance 184 61
Income tax payable balance (21,248) (20,571)
------------------------------------------------------------------------------ --------- ---------
Net income tax payable (21,064) (20,510)
------------------------------------------------------------------------------ --------- ---------
Temporary differences at the reporting date between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes and the recognition of available tax
loss carry forwards result in the following deferred income tax
assets and liabilities at 31 December 2019:
As at As at
US$000 31.12.19 31.12.18
------------------------- --------- ---------
Deferred tax assets 38,608 27,946
Deferred tax liabilities (140) (352)
------------------------- --------- ---------
Net income tax payable 38,468 27,594
------------------------- --------- ---------
The movement in the deferred income tax balance is as
follows:
Year ended Year ended
US$000 31.12.19 31.12.18
------------------------ ---------- ----------
Opening balance 27,594 40,027
Income statement charge 6,121 (13,284)
Translation differences 4,753 851
------------------------ ---------- ----------
Closing balance 38,468 27,594
------------------------ ---------- ----------
As at 31 December 2019, the Group had available tax loss carry
forwards in the amount of US$112,889 thousand (2018: US$92,654
thousand) for which no deferred tax assets were recognised.
US$76,411 thousand (2018: US$59,883 thousand) are related to losses
incurred in Ukraine and Austria and those losses do not expire. The
remaining balance totalling US$36,478 thousand (2018: US$32,771
thousand) relates to losses incurred in Hungary, of which US$23,627
thousand (2018: US$22,923 thousand) expire after more than eight
years.
No deferred tax liabilities have been recognised on temporary
differences in the amount of US$715,834 thousand (2018: US$440,328
thousand) arising from undistributed profits from subsidiaries as
no distributions are planned. Other temporary differences of US$660
thousand have not been recognised as of 31 December 2019 (2018:
US$19,963 thousand), of which the vast majority relates to
temporary differences on property, plant and equipment in
Ukraine.
Note 9: 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 2019.
Year ended Year ended
31.12.19 31.12.18
---------------------------------------------------------------------------------- ---------- ----------
Earnings for the year attributable to equity shareholders - per share in US cents
Basic 68.6 56.9
Diluted 68.4 56.7
Profit for the year attributable to equity shareholders - US$000
Basic and diluted earnings 402,370 333,616
Weighted average number of shares - thousands
Basic number of Ordinary Shares outstanding 586,715 586,117
Effect of dilutive potential Ordinary Shares 1,568 1,948
---------------------------------------------------------------------------------- ---------- ----------
Diluted number of Ordinary Shares outstanding 588,283 588,065
---------------------------------------------------------------------------------- ---------- ----------
Dividends proposed and paid
Prior to the dividend proposed below and 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$201,647 thousand as of
31 December 2019 (2018: US$167,611 thousand).
Year ended
US$000 31.12.19
----------------------------------------------------------------- ----------
Dividends proposed
----------------------------------------------------------------- ----------
Interim special dividend for 2019: 6.6 US cents per Ordinary
Share 38,736
----------------------------------------------------------------- ----------
Total dividends proposed 38,736
----------------------------------------------------------------- ----------
The interim special dividend for 2019 was declared on 2 January
2020 and paid on 17 January 2020.
Year ended
US$000 31.12.19
----------------------------------------------------------------- ----------
Dividends paid during the year
----------------------------------------------------------------- ----------
Interim dividend for 2019: 6.6 US cents per Ordinary Share 38,621
Final dividend for 2018: 6.6 US cents per Ordinary Share 38,621
Final special dividend for 2018: 6.6 US cents per Ordinary Share 38,847
Interim special dividend for 2018: 6.6 US cents per Ordinary
Share 38,833
----------------------------------------------------------------- ----------
Total dividends paid during the year 154,922
----------------------------------------------------------------- ----------
Although accounts are published in US Dollars and dividends are
declared in US Dollars, the shares are denominated in UK Pounds
Sterling and dividends are therefore paid in UK Pounds
Sterling.
Year ended
US$000 31.12.18
------------------------------------------------------------------- ----------
Dividends proposed
------------------------------------------------------------------- ----------
Final ordinary dividend for 2018: 6.6 US cents per Ordinary Share 38,695
Final special dividend for 2018: 6.6 US cents per Ordinary Share 38,695
Interim special dividend for 2018: 6.6 US cents per Ordinary Share 38,695
------------------------------------------------------------------- ----------
Total dividends proposed 116,085
------------------------------------------------------------------- ----------
Year ended
US$000 31.12.18
------------------------------------------------------------------- ----------
Dividends paid during the year
------------------------------------------------------------------- ----------
Interim dividend for 2018: 3.3 US cents per Ordinary Share 19,376
Final dividend for 2017: 3.3 US cents per Ordinary Share 18,929
Special dividend for 2017: 6.6 US cents per Ordinary Share 38,615
Special dividend for 2017: 3.3 US cents per Ordinary Share 19,639
------------------------------------------------------------------- ----------
Total dividends paid during the year 96,559
------------------------------------------------------------------- ----------
Note 10: Leases
As at 31 December 2019, the net book value of the right-of-use
assets included in the consolidated statement of financial position
and the associated depreciation charge included in the consolidated
income statement comprised:
Buildings
Exploration and Fixtures
and Mining tailings Plant and and Assets under
US$000 evaluation Land assets dam Vessels equipment Vehicles fittings construction Total
------------- ----------- ----- ------- --------- ------- ---------- -------- ---------- ------------ ------
Net book
value at:
At 1 January
2019 - 1,907 - 5,683 - 1,881 94 17 - 9,582
At 31
December
2019 - 2,244 - 4,665 - 4,003 52 12 - 10,976
Depreciation
charge:
Year ended 31
December
2019 - 2,159 - 1,217 - 1,843 41 5 - 5,265
------------- ----------- ----- ------- --------- ------- ---------- -------- ---------- ------------ ------
During the year ended 31 December 2019, the additions to
right-of-use assets totalled US$7,222 thousand.
Leased assets and assets under hire purchase contracts are
pledged as security for the related finance leases and hire
purchase liabilities.
As at 31 December 2019, the carrying amount of the lease
liabilities consisted of the following:
Year ended At 1 January
US$000 Note 31.12.19 2019
------------ ---- ---------- ------------
Non-current 13 6,580 4,799
Current 13 3,540 4,976
------------ ---- ---------- ------------
The total cash outflow for leases falling under the scope of
IFRS 16 Leases during the year ended 31 December 2019 was US$5,982
thousand. During the year ended 31 December 2019, US$425 thousand
was recognised as an expense in the consolidated income statement
in respect of short-term leases with a corresponding impact on the
net cash flows from operating activities. Furthermore, interest
expense on lease liabilities in the amount of US$630 thousand was
recognised in the consolidated income statement during the year
ended 31 December 2019.
For further information on the impact of the first-time adoption
of the new standard IFRS 16 Leases, including the impact on the
consolidated income statement as at 31 December 2019, see Note 2
Basis of preparation and Note 14 Commitments, contingencies and
legal disputes in terms of lease-related commitments, including the
Group's operating lease commitments at the end of the comparative
year ended 31 December 2018 accounted for under the old standard
IAS 17 Leases.
Note 11: Inventories
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, 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 in the second half of the financial year 2020 and, as a
consequence, a portion of the balance has been reclassified to
current.
As at 31 December 2019, the stockpiled ore valued at cost
totalled US$257,252 thousand (2018: US$217,688 thousand). Critical
estimates in determining the net realisable value of lean and
weathered ore include: i) utilisation of the ore over the period
from 2020 to 2034, representing an average of 10% of total
available processing capacity, and using an asset specific WACC
based pre-tax discount rate of 14.5%; and ii) forecast long-term
iron ore prices of US$91.7 per tonne of 65% Fe fines CFR North
China.
The net realisable value of lean and weathered ore is most
sensitive to delays in the commencement of utilising the ore in the
production process, which depends on the completion of the capacity
upgrade programme at FPM. Two separate stress tests assuming a
one-year delay and a US$5 per tonne lower forecast long-term iron
ore price would result in a reduction in the net realisable value
of US$36,500 thousand and US$39,600 thousand, respectively.
At 31 December 2019, inventories comprised:
As at As at
US$000 31.12.19 31.12.18
-------------------------------- --------- ---------
Lean and weathered ore 2,226 -
Raw materials and consumables 43,008 39,083
Spare parts 81,782 56,873
Finished ore pellets 59,010 43,097
Work in progress 11,393 3,153
Other 2,295 2,713
-------------------------------- --------- ---------
Total inventories - current 199,714 144,919
-------------------------------- --------- ---------
Lean and weathered ore 255,026 217,688
-------------------------------- --------- ---------
Total inventories - non-current 255,026 217,688
-------------------------------- --------- ---------
Total inventories 454,740 362,607
-------------------------------- --------- ---------
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 2019, cash and cash equivalents comprised:
As at As at
US$000 31.12.19 31.12.18
-------------------------------- --------- ---------
Cash at bank and on hand 131,020 62,996
-------------------------------- --------- ---------
Total cash and cash equivalents 131,020 62,996
-------------------------------- --------- ---------
The debt repayments during the financial year ended 31 December
2019 totalled US$229,374 thousand (2018: US$308,817 thousand)
affecting the balance of cash and cash equivalents. Further
information on the Group's gross debt is provided in Note 13
Interest-bearing loans and borrowings.
The balance of cash and cash equivalents held in Ukraine amounts
to US$28,351 thousand as at 31 December 2019 (2018: US$21,416
thousand).
Note 14 Commitments, contingencies and legal disputes provides
details on the Group's balance of restricted cash and deposits,
which has been fully provided for during the financial years 2015
and 2016 as 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 Notes 31.12.19 31.12.18
-------------------------------------------------------- ----- --------- ---------
Current
Eurobond issued - 172,454
Syndicated bank loans - secured 133,333 -
Other bank loans - secured - 9,262
Other bank loans - unsecured 1,494 1,494
Lease liabilities 14 3,540 2,074
Trade finance facilities - 19,316
-------------------------------------------------------- ----- --------- ---------
Total current interest-bearing loans and borrowings 138,367 204,600
-------------------------------------------------------- ----- --------- ---------
Non-current
Syndicated bank loans - secured 266,667 195,000
Other bank loans - secured - -
Other bank loans - unsecured 764 2,258
Lease liabilities 14 6,580 -
-------------------------------------------------------- ----- --------- ---------
Total non-current interest-bearing loans and borrowings 274,011 197,258
-------------------------------------------------------- ----- --------- ---------
Total interest-bearing loans and borrowings 412,378 401,858
-------------------------------------------------------- ----- --------- ---------
At 31 December 2019, the Group has a syndicated revolving
US$400,000 thousand pre-export finance facility, which is fully
drawn. As at the end of the comparative year ended 31 December
2018, US$205,000 thousand were available and US$195,000 thousand
were drawn by the Group. The initial facility agreement for a total
amount of US$195,000 thousand was signed on 16 November 2017 and
fully drawn in March 2018. In August 2018, an amendment to the
aforementioned facility agreement was signed, increasing the
facility from US$195,000 thousand to US$400,000 thousand and
extending the tenor by one year. The effective date of the increase
and extension was 6 November 2018. Following a one-year grace
period, the facility will be amortised in 12 quarterly instalments,
with the first instalment due on 7 February 2020 and the final
repayment due on 6 November 2022.
The aforementioned bank debt facility was guaranteed and secured
as follows:
- Ferrexpo AG and Ferrexpo Middle East FZE, which are also joint
borrowers, 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 certain assigned
sales contracts are exclusively received.
As at the end of the comparative year ended 31 December 2018,
the Group had outstanding unsecured Notes at par value totalling
US$173,181 thousand in addition to the major bank debt facility
listed above. The final payment was made on 7 April 2019. The Notes
had a 10.375% interest coupon payable semi-annually.
As at 31 December 2019, the Group had no open trade finance
facilities (2018: US$19,316 thousand). Trade finance facilities are
secured against receivable balances related to these specific
trades.
The outstanding unsecured Notes were shown net of associated
arrangement fees while for the revolving syndicated pre-export
finance facility, 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:
Year ended Year ended
US$000 Notes 31.12.19 31.12.18
--------------------------------------------------------- ----- ---------- ----------
Opening balance of interest-bearing loans and borrowings 401,858 491,706
Cash movements
Repayments of Eurobond issued (173,181) (173,181)
Proceeds from syndicated bank loans - secured 225,000 195,000
Repayments of syndicated bank loans - secured (20,000) (112,500)
Repayments of other bank loans - secured (9,560) (17,189)
Repayments of other bank loans - unsecured (1,717) (1,512)
Principal and interest elements of lease payments (5,600) (3,753)
Change of trade finance facilities, net (19,316) 19,288
--------------------------------------------------------- ----- ---------- ----------
Total cash movements (4,374) (93,847)
--------------------------------------------------------- ----- ---------- ----------
Non-cash movements
Amortisation of prepaid arrangement fees 1,462 4,696
First-time adoption IFRS 16 2 7,701 -
Additions to lease liabilities 5,297 -
Others (incl. translation differences) 434 (697)
--------------------------------------------------------- ----- ---------- ----------
Total non-cash movements 14,894 3,999
--------------------------------------------------------- ----- ---------- ----------
Closing balance of interest-bearing loans and borrowings 412,378 401,858
--------------------------------------------------------- ----- ---------- ----------
Note 14: Commitments, contingencies and legal disputes
Commitments
Commitments as at 31 December 2019 consisted of the
following:
Year ended Year ended
US$000 31.12.19 31.12.18
----------------------------------------------------------------------------- ---------- ----------
Total commitments for the lease of mining land (out of the scope of IFRS 16) 29,910 30,724
Total future contingent rental payments (IFRS 16) 15,068 5,704
Total capital commitments on purchase of property, plant and equipment 116,509 67,529
----------------------------------------------------------------------------- ---------- ----------
Commitments before first-time adoption of IFRS 16 Leases as of 1
January 2019
For further information on the impact of the first-time adoption
of this new standard see Note 2 Basis of preparation.
Operating lease commitments
Operating leases commitments as at the end of the comparative
year 31 December 2018 consisted of the following:
Year ended
US$000 31.12.18
---------------------------------- ----------
Less than one year 2,807
Between one and five years 4,587
More than five years 1,433
---------------------------------- ----------
Total operating lease commitments 8,827
---------------------------------- ----------
During the comparative year ended 31 December 2018, US$2,903
thousand was recognised as an expense in the income statement in
respect of operating leases.
Finance lease commitments
Future minimum lease payments under finance leases together with
the present value of the net minimum lease payments were as follows
as at the end of the comparative year ended 31 December 2018:
As at 31.12.18
------------------------------------------- ------------------------
Minimum Present value
US$000 payments of payments
------------------------------------------- --------- -------------
Less than one year 2,267 2,074
Total minimum lease payments 2,267 2,074
------------------------------------------- --------- -------------
Less: amounts representing finance charges (193) -
------------------------------------------- --------- -------------
Present value of minimum lease payments 2,074 2,074
------------------------------------------- --------- -------------
Contingencies
On 4 February 2019, the Group announced that it had commissioned
an independent review (the "Independent Review") into the Group's
relationship with third party charity fund Blooming Land (the
"Charity") and the use of the total funds of US$110,000 thousand
donated by the Group to the Charity during the financial years 2013
to 2018, of which US$9,500 thousand during the comparative year
ended 31 December 2018.
The Group may be exposed to the risk of civil, criminal or
regulatory actions and liabilities in relation to matters
considered by the Independent Review.
Whilst a significant amount of work has been undertaken in
connection with the Independent Review by the Independent Review
Committee ("IRC") and its advisers, it has not been possible to
explain some discrepancies outlined in the 2018 Annual Report &
Accounts in respect of the ultimate use of funds donated by the
Group to the Charity.
After careful consideration of the report received from its
advisers together with the work of the IRC itself, the IRC
announced on 30 August 2019 that it is satisfied that none of the
Group's Directors, management or employees have had any involvement
in any possible misappropriation of funds by the Charity. At the
same time, the IRC reaffirmed its conclusion that the Charity is
not a related party of the Group, Kostyantin Zhevago (the Group's
previous Chief Executive Officer and a controlling shareholder of
Ferrexpo plc) or its executive management, as defined under
applicable accounting standards or Chapter 11 of the UK Listing
Rules. For further information see Independent Review Committee
Report in the 2018 Annual Report and Accounts.
If any of the critical judgements outlined in Note 5 Operating
expenses and/or Note 15 Related party disclosures and/or the
conclusions of the IRC are incorrect, in whole or in part,
including as a result of information not currently known to the
Group, or new information becomes available, which enables the
Group to form conclusions, which were not or could not be reached
by the IRC, liabilities (including fines and penalties) may accrue
to the Group. At the current time, the existence, timing and
quantum of potential future liability, if any, including fines,
penalties or damages, which could be material or other consequences
arising from the Independent Review cannot be determined and
measured reliably and, as a consequence, no associated liabilities
have been recognised in relation to these matters in the
consolidated statement of financial position as of 31 December
2019.
The Board is currently making enquiries into a loan relationship
between related parties of the Group involving FC Vorskla. If it
transpires that any of the payments made by the Group to FC Vorskla
or the loan provided by FC Vorskla to Collaton Limited were not
used for the legitimate purposes of the football club in Ukraine,
or there has been any non-compliance with legal, regulatory or
other requirements, liabilities (including fines and penalties) may
accrue to the Group. At the current time, the existence, timing or
quantum of potential future liability, if any, including fines,
penalties or damages, which could be material, or other
consequences arising from the payments made by the Group to FC
Vorskla, cannot be determined and measured reliably and, as a
consequence, no associated liabilities have been recognised in
relation to these matters in the consolidated statement of
financial position as of 31 December 2019. See Note 15 Related
party disclosures for further information.
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,
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.
Following the commencement of the liquidation process of BFC and
in accordance with the applicable local legislation, PJSC Ferrexpo
Poltava Mining ("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$179,936 thousand as of 31 December 2019).
On 22 April 2016, the liquidator of BFC issued certificates
recognising UAH540 million (US$22,798 thousand as of 31 December
2019) of these claims and recognised these claims in the ninth
rank. The aforementioned Ukrainian subsidiaries are still involved
in legal proceedings in respect of the under-recognition of the
claims amounting to UAH3,722 million (US$157,138 thousand as of 31
December 2019) 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 several hearings took place
following the filing of FPM's appeal without a ruling on the
parties' motions by the Kyiv Commercial Court of Appeal. During the
hearing on 18 July 2018, the court ruled in favour of FPM and the
counterparty subsequently filed its cassation appeal against this
decision. On 11 December 2018, the Supreme Court of Ukraine upheld
the cassation appeal and the case was directed for new
consideration to the Northern Commercial Court of Appeal. On 19
June 2019, the Northern Commercial Court of Appeal satisfied the
claim of FPM and the opposing party filed a cassation appeal. On 31
October 2019, the Supreme Court cancelled the decision of the
Northern Commercial Court of Appeal and directed the case to this
court instance for new consideration. The hearing by the Northern
Commercial Court of Appeal was scheduled to take place on 17 March
2020, but did not take place and was postponed and the new date is
currently unknown. FYM's claim on the same matter was dismissed by
the Kyiv Commercial Court on 6 February 2019 and FYM filed its
appeal against this decision on 28 February 2019. On 20 May 2019,
the Northern Commercial Court of Appeal dismissed the appellate
claim of FYM in full and FYM filed its cassation claim on 18 June
2019. On 20 August 2019, the Supreme Court upheld the appeal of FYM
and directed the case to the court of first instance for new
consideration. The hearing by Kyiv Commercial Court is scheduled to
take place on 19 March 2020. In relation to the claims of FBM, the
Northern Commercial Court of Appeal dismissed FBM's appeal on 11
March 2019 and FBM filed its cassation appeal on 2 April 2019. On
19 June 2019, the Supreme Court of Ukraine dismissed the cassation
appeal of FBM.
The outcomes of the aforementioned legal proceedings will not
have an adverse impact on the Group's financial result in future
periods as a full allowance was recorded for the claimed amounts
during the financial year 2015.
In relation to the aforementioned insolvency of BFC, an
investigating judge of the Pecherskyi District Court of Kyiv City
granted in November 2019 an order to arrest (freeze) certain assets
in connection with the investigation involving Kostyantin Zhevago
and BFC (the "Order"). The assets subject to the Order include
50.3% of Ferrexpo AG's ("FAG") shareholding in FPM. FAG filed an
appeal against the Order and the hearing before the Court of Appeal
is scheduled for 2 April 2020.
Based on legal advice received, the Board of Ferrexpo expects
that an appeal should be successful as the Order has no proper or
reasonable basis under Ukrainian law. The Order does not affect
ownership of the shares in FPM, but prohibits their transfer, and
has had no impact on the operations of the Group. As the
possibility of an outflow of economic resources is considered to be
remote, the Order does not constitute a contingent liability.
Note 15: Related party disclosures
During the years presented, the Group entered into arm's length
transactions with entities under the common control of Kostyantin
Zhevago, a controlling shareholder of Ferrexpo plc, 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 49.9% (2018: 49.5%). This is
the only associated company of the Group.
Critical judgements
Completeness
In the course of the preparation of the consolidated financial
statements of the Group for previous financial years, the Board
concluded that neither Kostyantin Zhevago (the Group's previous
Chief Executive Officer and a controlling shareholder of Ferrexpo
plc) nor the Group's executive management control or exercise
significant influence over Blooming Land or its sub-funds (the
"Charity") pursuant to relevant accounting standards IFRS 10
Consolidated financial statements and IAS 28 Investments in joint
ventures and associates or under Chapter 11 of the UK Listing
Rules. During the comparative year ended 31 December 2018, the
Group made donations of US$9,500 thousand to the Charity. The
donations were ceased in May 2018 and no donations were made in the
year ended 31 December 2019.
After a significant amount of work undertaken by the Independent
Review Committee ("IRC") and its advisers during the financial year
2019, the IRC reaffirmed its conclusion that the Charity is not a
related party of the Group, Kostyantin Zhevago (the Group's
previous Chief Executive Officer and the controlling shareholder of
Ferrexpo plc) or its executive management, as defined under
applicable accounting standards or Chapter 11 of the UK Listing
Rules. Nevertheless, the Group may, under certain circumstances, be
exposed to regulatory and other actions resulting in potential
legal claims or penalties, fines or other liabilities. See Note 14
Commitments, contingencies and legal disputes on page 49 in respect
of the Group's potential exposures under certain circumstances.
Related party transactions entered into by the Group during the
years presented are summarised in the following tables:
Revenue, expenses, finance income and expense
Year ended 31.12.19 Year ended 31.12.18
-------------------------------------------- ------------------------------ --------------------------------------
Entities Entities
under Other under
common Associated related common Associated Other
US$000 control companies parties control companies related parties
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Other sales (a) 1,152 - 14 877 - 111
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Total related party transactions within
revenue 1,152 - 14 877 - 111
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Materials (b) 7,913 - - 8,429 - 3
Spare parts and consumables (c) 4,537 - - 2,959 - -
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Total related party transactions within cost
of sales 12,450 - - 11,388 - 3
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Selling and distribution expenses (d) 10,824 18,477 - 10,702 19,138 702
General and administration expenses (e) 1,650 - 393 788 - 529
Finance expense 19 - - 119 - -
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Total related party transactions within
expenses 24,943 18,477 393 22,997 19,138 1,234
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Other income (f) 319 - - - - -
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Total related party transactions 26,414 18,477 407 23,874 19,138 1,345
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
A description of the most material transactions, which are in
aggregate over US$200 thousand in the current or comparative year
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 Sales of power, steam and water and other materials for US$113
thousand (2018: US$109 thousand) and income from premises leased to
Kislorod PCC of US$76 thousand (2018: US$131 thousand);
a Sales of diesel to DVD Trans totalling US$322 thousand (2018:
US$376 thousand). The company ceased to be a related party in
September 2018; in accordance with the Listing Rules, all
transactions with DVD Trans within one year from cessation are
still considered as related party transactions and disclosed as
such; and
a Sales of scrap metal to OJSC Uzhgorodsky Turbogas totalling
US$239 thousand (2018: US$250 thousand).
b Purchases of compressed air and oxygen and scrap metal from
Kislorod PCC for US$3,645 thousand (2018: US$4,536 thousand);
b Purchases of cast iron balls from AutoKraZ Holding Co. for
US$274 thousand during the comparative year ended 31 December 2018.
No such purchases during the year ended 31 December 2019; and
b Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas
for US$4,194 thousand (2018: US$3,536 thousand).
c Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship
Repair Plant ("KSRSSZ") in the amount of US$963 thousand (2018:
US$1,201 thousand);
c Purchases of spare parts from OJSC Uzhgorodsky Turbogas in the
amount of US$436 thousand (2018: US$533 thousand);
c Purchases of spare parts from Valsa GTV of US$1,165 thousand (2018: US$455 thousand); and
c Purchases of spare parts from OJSC Berdichev Machine-Building
Plant Progress of US$1,931 thousand (2018: US$724 thousand).
d Purchases of advertisement, marketing and general public
relations services from FC Vorskla of US$10,824 thousand (2018:
US$10,702 thousand). See page 53 in respect of a loan relationship
between FC Vorskla and another related party.
e Insurance premiums of US$1,156 thousand (2018: US$535
thousand) paid to ASK Omega for workmen's insurance and other
insurances; and
e Purchase of marketing services from TV & Radio Company of
US$296 thousand (2018: US$100 thousand).
f Other income is related to payments of US$319 thousand
received from ASK Omega in respect of a claims made under insurance
policies in place (2018: nil).
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.
d Purchases of logistics services in the amount of US$18,477
thousand (2018: US$19,138 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 a controlling shareholder of
Ferrexpo plc. All transactions were carried out on an arm's length
basis in the normal course of business.
d Purchases of logistics management services from Slavutich Ruda
Ltd. relating to customs clearance services and the coordination of
rail transit totalling US$702 thousand in the comparative year
ended 31 December 2018. Effective 20 April 2018, this company is no
longer a related party.
e Legal services in the amount of US$362 thousand (2018: US$375
thousand) 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
also received Directors' fees of US$100 thousand (2018: US$100
thousand).
Purchases of property, plant and equipment
The table below details the transactions of a capital nature,
which were undertaken between Group companies and entities under
common control, associated companies and other related parties
during the years presented.
Year ended 31.12.19 Year ended 31.12.18
-------------------------------------------- ------------------------------ --------------------------------------
Entities Entities
under Other under
common Associated related common Associated Other
US$000 control companies parties control companies related parties
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Purchases in the ordinary course of business 8,935 - - 4,678 - -
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Total purchases of property, plant and
equipment 8,935 - - 4,678 - -
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
During the year ended 31 December 2019, the Group purchased
major spare parts and equipment from OJSC Berdichev
Machine-Building Plant Progress totaling US$6,910 thousand (2018:
US$2,821 thousand) in respect of the construction of the
concentrate stockyard, from CJSC Kyiv Shipbuilding and Ship Repair
Plant ("KSRSSZ") totalling US$816 thousand (2018: US$67 thousand)
for several ongoing major projects, including the construction of
the concentrate stockyard, the upgrade of benefication sections and
the refurbishment of the pellet loading area. The balance of the
comparative year ended 31 December 2018 included purchases from
AutoKraZ Holding Co. totaling US$398 thousand for cranes and
lifters installed on truck chassis and from Valsa GTV totaling
US$212 thousand for rubber-lined steel cover sheets for the
mills.
The Group further procured services relating to the top soil
removal and relocation of waste material and gravel in the amount
of US$861 thousand (2018: US$1,165 thousand) from DVD Trans. The
company ceased to be a related party in September 2018; in
accordance with the Listing Rules, all transactions with DVD Trans
within one year from the cessation are still considered as related
party transactions and disclosed as such.
The FPM Charity Fund owns 75% of the Sport & Recreation
Centre ("SRC") in Horishni Plavni and made contributions totalling
US$129 thousand during the year ended 31 December 2019 (2018:
US$199 thousand) for the construction and maintenance of the
building, including costs related to electricity, gas and water
consumption. The remaining stake of 25% is owned by JSC F&C
Realty, which is under the control of Kostyantin Zhevago.
Balances with related parties
The outstanding balances, as a result of transactions with
related parties, for the years presented are shown in the table
below:
As at 31.12.19 As at 31.12.18
-------------------------------------------- ------------------------------ --------------------------------------
Entities Entities
under Other under
common Associated related common Associated Other
US$000 control companies parties control companies related parties
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Prepayments for property, plant and
equipment(f) 1,093 - - 6,121 - -
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Total non-current assets 1,093 - - 6,121 - -
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Trade and other receivables (g) 104 2,472 2 214 1,302 1
Prepayments and other current assets (h) 1,662 - - 1,181 - -
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Total current assets 1,766 2,472 2 1,395 1,302 1
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Trade and other payables (i) 1,001 898 - 465 963 -
Accrued and contract liabilities - - 1 - - -
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
Total current liabilities 1,001 898 1 465 963 -
-------------------------------------------- -------- ---------- -------- -------- ---------- ----------------
A description of the balances over US$200 thousand in the
current or comparative year is given below.
Entities under common control
f As at 31 December 2019, prepayments for property, plant and
equipment totalling US$1,052 thousand (2018: US$5,980 thousand)
were made to OJSC Berdichev Machine-Building Plant Progress.
h Prepayments and other current assets totalling US$921 thousand
as at 31 December 2019 related to prepayments made to FC Vorskla
for advertisement, marketing and general public relations services
(2018: US$858 thousand) and US$605 thousand to ASK Omega for
insurance premiums (2018: US$124 thousand).
i Trade and other payables included US$246 thousand (2018:
US$213 thousand) related to the purchase of compressed air, oxygen
and scrap metal from Kislorod PCC and US$418 thousand (2018: US$21
thousand) related to the purchase of spare parts from OJSC
Berdichev Machine-Building Plant Progress.
Associated companies
g As at 31 December 2019, trade and other receivables included
US$2,472 thousand (2018: US$1,302 thousand) related to dividends
declared by TIS Ruda LLC.
i As at 31 December 2019, trade and other payables included
US$898 thousand (2018: US$963 thousand) related to purchases of
logistics services from TIS Ruda LLC.
Loan relationship between related parties of the Group
The Group has supported FC Vorskla with sponsorship for many
years. FC Vorskla is a professional football club in Poltava,
Ukraine that competes in the Ukrainian Premier League. The Group's
sponsorship provides brand recognition for the Group both within
Ukraine and internationally, and in addition given FC Vorskla's
proximity to the Group's operations, provides benefit to the local
community surrounding the mines.
The sponsorship payments are made by Ferrexpo Middle East FZE to
two entities: FC Vorskla Cyprus Limited, a company incorporated in
the Republic of Cyprus, and Football Club "Vorskla" LLC, a company
incorporated in Ukraine (together, "FC Vorskla"). During the
financial year 2019, the Group made total payments to FC Vorskla of
US$10,824 thousand (2018: US$10,702 thousand) for advertisement,
marketing and general public relations services. FC Vorskla is
considered to be a related party of the Group as Kostyantin
Zhevago, the Group's previous Chief Executive Officer and a
controlling shareholder of Ferrexpo plc, controls FC Vorskla and is
the honorary president. The payments made to FC Vorskla were
considered to be in the ordinary course of business.
In January 2020, the Group received the audited financial
statements of FC Vorskla for the financial year 2017, which showed
that FC Vorskla had provided a loan in the amount of US$3,990
thousand to another related party, Collaton Limited, which is
controlled by Kostyantin Zhevago.
Based on the audited financial statements of FC Vorskla for the
financial year 2018, received by the Group in March 2020, the loan
to Collaton Limited had increased to US$10,809 thousand as at 31
December 2018. In absence of the availability of the audited
financial statements of FC Vorskla for the financial year 2019, the
Group received unaudited management accounts showing a further
increase in the loan to US$16,978 thousand as at 31 December
2019.
Following the identification of the loan provided by FC Vorskla
to Collaton Limited, the Board has taken steps to obtain further
information in relation to the arrangements, and has engaged third
party advisers to assess the situation.
As of the date of approval of these financial statements, the
Board's enquiries remain ongoing. Based on the responses received
to date from FC Vorskla, the Group understands that the loan to
Collaton Limited was made in connection with the construction and
renovation of certain sports facilities of FC Vorskla, including
its central stadium and training facilities in Poltava. Collaton
Limited has not provided information requested by the Group to
confirm the usage of the funds provided to it by FC Vorskla. Given
that the enquiries by the Board and its advisers remain ongoing,
the Board is unable to conclude at this stage whether the payments
made to FC Vorskla have been used in their entirety for the
legitimate purposes of the football club in Ukraine. If it
transpires that any of the payments made by the Group to FC Vorskla
or the loan provided by FC Vorskla to Collaton Limited were not
used for the legitimate purposes of the football club in Ukraine,
or there has been any non-compliance with legal, regulatory or
other requirements, liabilities (including fines and penalties) may
accrue to the Group. See also Note 14 Commitments, contingencies
and legal disputes.
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 9 Earnings per share and dividends paid and
proposed.
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 ("IFRSs").
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 IFRSs.
Ferrexpo makes reference to the following APMs in the 2019
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.
As at As at
US$000 31.12.19 31.12.18
---------------------------------- ---------- ----------
C1 cash costs 502,887 454,560
Non-C1 cost components 48,245 26,800
Cost of sales - pellet production 551,132 481,360
Own ore produced (tonnes) 10,518,954 10,506,164
----------------------------------- ---------- ----------
C1 cash cost per tonne (US$) 47.8 43.3
----------------------------------- ---------- ----------
Underlying EBITDA
Definition: The Group calculates the underlying EBITDA as profit
before tax and finance plus depreciation and amortisation, net
gains and losses from disposal of investments and property, plant
and equipment, share-based payments and write-offs and impairment
losses. 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 5 Segment information for further
details.
Closest equivalent IFRSs 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. Also it aids
comparability across peer groups as it is a measurement that is
often used.
Reconciliation to closest IFRSs equivalent:
As at As at
US$000 Notes 31.12.19 31.12.18
---------------------------------------------------- ----- --------- ---------
Underlying EBITDA 586,067 502,897
Losses on disposal of property, plant and equipment (417) (5,701)
Share-based payments (1,022) (674)
Write-offs 5 (1,241) (1,489)
Depreciation and amortization (82,130) (62,094)
---------------------------------------------------- ----- --------- ---------
Profit before tax and finance 501,257 432,939
---------------------------------------------------- ----- --------- ---------
Diluted earnings per share
Definition: Earnings per share calculated using the diluted
number of Ordinary Shares outstanding.
Closest equivalent IFRSs measure: Diluted earnings per
share.
Rationale for adjustment: Excludes the impact of special items
that can mask underlying changes in performance.
Reconciliation to closest IFRSs equivalent:
Year ended Year ended
31.12.19 31.12.18
---------------------------------------------------------------------------------- ---------- ----------
Earnings for the year attributable to equity shareholders - per share in US cents
Basic 68.6 56.9
Diluted 68.4 56.7
---------------------------------------------------------------------------------- ---------- ----------
Net debt to underlying EBITDA
Definition: Net debt divided by the underlying EBITDA (for the
last 12 months):
As at As at
31.12.19 31.12.18
------------------------------ --------- ---------
Net debt (US$000) (281,358) (338,862)
Underlying EBITDA (US$000) 586,067 502,897
------------------------------ --------- ---------
Net debt to underlying EBITDA 0.48x 0.67x
------------------------------ --------- ---------
Net debt as at 31 December 2019 included an effect of US$7,108
thousand as a result of the first-time application of the new
standard IFRS 16 Leases. For further information on the impact of
the adoption of the new standard IFRS 16 Leases see Note 2 Basis of
preparation.
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 to net debt:
As at As at
US$000 Notes 31.12.19 31.12.18
---------------------------------------------------- ----- --------- ---------
Cash and cash equivalents 12 131,020 62,996
Interest-bearing loans and borrowings - current 13 (138,367) (204,600)
Interest-bearing loans and borrowings - non-current 13 (274,011) (197,258)
---------------------------------------------------- ----- --------- ---------
Net debt (281,358) (338,862)
---------------------------------------------------- ----- --------- ---------
For a reconciliation of underlying EBITDA to profit before tax
and finance see page 39.
Capital investment
Definition: Capital expenditure for the purchase of property,
plant and equipment and intangible assets.
Closest equivalent IFRSs 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 IFRSs equivalent:
As at As at
US$000 31.12.19 31.12.18
--------------------------------------------------------------------------------------------- --------- ---------
Purchase of property, plant and equipment and intangible assets (net cash flows used in
investing
activities) 247,478 135,113
---------------------------------------------------------------------------------------------- --------- ---------
Total liquidity
Definition: Sum of cash and cash equivalents and available
facilities.
Closest equivalent IFRSs 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 IFRSs equivalent:
As at As at
US$000 31.12.19 31.12.18
------------------------------- --------- ---------
Cash and cash equivalents 131,020 62,996
Available committed facilities - 205,000
------------------------------- --------- ---------
Total liquidity 131,020 267,996
------------------------------- --------- ---------
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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