TEXT-Fitch affirms Ferrexpo plc at 'B'; outlook stable

(The following statement was released by the rating agency)

Oct 05 - Fitch Ratings has affirmed UK-incorporated Ukrainian iron ore pellets producer Ferrexpo Plc's (Ferrexpo) Long-term foreign currency Issue Default Rating (IDR) at 'B', and its Short-term foreign currency IDR at 'B'. The Outlook on the Long-term foreign currency IDR is Stable. In addition, Ferrexpo Finance plc.'s guaranteed notes issue (GNs) senior unsecured rating was affirmed at 'B' with a Recovery Rating (RR) of 'RR4'.

Ferrexpo's ratings are constrained by Ukraine's sovereign rating and Country Ceiling of 'B'/Stable, and an adjustment to the sovereign rating may lead to a rating action on Ferrexpo.

The ratings are supported by Ferrexpo's extensive iron ore reserve base with reserves of over 40 years, and the expected increase to its production capacity to 12,000 tpa of pellets by 2014 from the ramp-up of the Yeristova mine. Cash costs rose markedly to USD60 per tonne in H112 due to higher Ukrainian energy tariffs, inflation and oil costs, but Fitch notes that the increase in production of its own ore should yield some scale and substitution benefits over the coming years (given the higher iron content of the new production), which should translate into improved cash costs of below USD50 per tonne over the medium-term.

The company is considered to be cost-competitive among global peers, with average cash costs currently in the higher-second quartile of global iron ore producers. This favourable cost position, specifically related to transport costs to central Europe, provides some financial flexibility in a possible protracted commodity price downturn scenario. The ratings also reflect Ferrexpo's favourable geographic location and its access to Black Sea ports.

The ratings however remain constrained by the concentration of sales in a single commodity, iron ore pellets, which exposes the company to fluctuations in commodity prices and cyclical demand factors, a key factor in weaker profitability in the half-year to end-June-2012. The company also remains reliant on one key mining asset in Ukraine, and is exposed to high end-user concentration of sales with four key customers accounting for the majority of total sales volumes in 2011. Furthermore, the company's relatively limited scale of operations (with EBITDAR below USD1bn) constrains financial flexibility, particularly in the event of a further industry downturn, although Fitch takes some comfort that flexibility exists in the execution of the planned five-year capital expenditure programme.

In H112 Ferrexpo reported weaker revenue growth, mainly as a result of a sharp decline in global iron ore prices, with revenues weakening 15% yoy to USD731m, from USD855m at H111. Fitch expects iron ore spot iron prices to average around USD95 per tonne over the remainder of 2012, in line with the agency's long-term price assumption of USD90 per tonne. In the short term Chinese stock levels and underlying demand expectations will be the dominant influence on prices.

Longer-term price falls are expected as substantial new iron ore production capacity in Australia and Brazil commences over 2013-2015, although some deferral of planned projects is possible. This will translate into Ferrexpo's EBITDA coming under increasing pressure in 2012 and 2013, with gross leverage forecast to weaken to above 2.5x in 2012 before recovering annually thereafter. Over the medium-term, increasing output will be the main driver of revenue growth in a declining price environment.

Ferrexpo remains significantly exposed to domestic mining cost inflation in Ukraine (notably rising electricity and gas prices) and exchange rate fluctuations, although the company's low cost position mitigates this threat over the next two years to end-2014.

Ferrexpo is a Swiss-headquartered iron ore producer with production assets located in Ukraine. The company produces iron ore pellets used in the manufacture of steel and is the largest exporter in the CIS region. The company's resource base is one of the largest iron ore deposits globally and it produced approximately 9.7m tonnes of iron ore pellets in 2011.


Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

- FFO net leverage is sustained above 2x over the medium-term -The Ukrainian sovereign rating is downgraded - EBITDA margins are sustained below 18%.

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

- The Ukrainian sovereign rating is upgraded to a cap of up to 'B+'

- The company maintains strong liquidity and sustains FFO net leverage below 1x over the medium term.

- A reduction in key customer concentration and an increase in scale and diversification would also be considered rating positive.

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((Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net))