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Sitting in the basic materials sector, Swiss-based Ferrexpo, as its name suggests, is in the iron ore business. It makes iron pellets for the metallurgical industry – the pellets are consumed by blast furnaces.
With resources stocks continuing to outperform on hopes of the recovery in industrial production spreading out from China to the rest of the world, companies involved with the production of the metal inputs for industry are being rerated accordingly.
The latest comes from Credit Suisse, which slapped a price target on the stock of 470p, assuming coverage with an outperform rating.
That comes on the back of strong production figures released on 6 April, with quarterly production coming in at 2.7 million tonnes. Ferrexpo also expects capacity to increase by between 0.5 to 1 million tonnes per annum.
First-quarter production also improved in terms of quality. High-quality pellets which contain 65-67% Fe (measure of iron purity content) made up 100% of production in Q1, compared to 97% in the same period last year.
Production of high-grade concentrates also increased and an upgrade of one of the company’s pelletizer lines was completed with other improvement work continuing.
In its full-year results reported on 16 March, the numbers showed that despite Covid the company was able to successfully maintain operations and improve performance by upping production and controlling costs. A well-executed pivot to China and a strong rebound in iron ore prices underlay the robust financial performance, which was reflected in a special dividend payment and an overall increase last year of 26% in payouts to shareholders.
Revenue increased 13% to $1.7 billion (Ferrexpo reports in US dollars), which reflected rising production volumes and destocking.
Underlying EBITDA was an impressive 46% better at $859 million compared to $586 million in 2019, while net cash flow from operations grew 45% to $687 million from $473 million the previous year.
Total amount paid out in dividends in 2020 was $195 million (2019: $155 million).
The pleasing dividend position was achieved notwithstanding reinvesting $206 million of profits into continuing operations and paying off debt of $148 million, placing the company in a $4 million net cash position.
Commenting on the full-year results, Ferrexpo chairman Lucio Genovese said: “Although COVID-19 caused disruption to global iron ore demand patterns, our central geographic location between Europe and Asia, coupled with flexibility our logistics capacity, enabled us to efficiently pivot towards China in 2020, as it quickly emerged from the pandemic with a strong growth focus on metals. The resultant rise in iron ore prices, coupled with the Group’s increase in production and cost control, has driven the strong financial performance for the Group in 2020.”
Earnings per share has been climbing since 2015 and in 2020 was $1.08 a share – a growth rate of 57% on the previous year, with EPS forecast to rise to $1.43 in 2021.
Dividend yield was 2.57% in 2020 and is projected at 8.36% for this year.
The company’s vertically integrated business encompasses iron ore mining through to the production of iron ore concentrates and pellets, plus allied logistic and sales interests.
Ferrexpo owns two mines in Ukraine and a processing plant as well as port interests in Odessa. In addition it also operates a fleet of vessels that work on the major European waterways plus an ocean-going vessel that plies international sea routes.
As of 1 June 2020, the company reported proven and probable iron ore reserves of 1.7 billion tonnes. Ferrexpo supplies steel mills in Austria, Slovakia, the Czech Republic, Germany and other European countries, as well as mills in China, India, Japan, Taiwan and South Korea.
Ferrexpo’s strong anchor for earnings growth
Although it may still be too early to talk of a commodities super-cycle that persists across economic cycles, judging by the strengthening industrial production figures from China, demand in 2021 should underpin continued momentum for earnings growth and the share price.
Ferrexpo is currently priced at 411p, 11% behind the analysts’ consensus price target of 482p, according to Stockopedia.
There are risks associated with any setbacks on the progress with reopening economies, given the Covid pandemic continuing to grow in size at the global level, despite the prospect of improved vaccine rollouts in the economically advanced countries, particularly those in Europe as far as much of Ferrexpo’s business is concerned.
In addition, its operations in Ukraine may be disrupted if there is a Russian invasion of the country. However, Ferrexpo’s worked deposits at theYerystivske and Poltava mining complexes are near the city of Kremenchuk, which sits of the Dnieper river and is around 200 miles west of Donetsk, so hopefully out of harms way.
Of the nine broker analysts covering the stock, two rate it a strong buy, two a buy and two a hold. Two rate it a sell and one a strong sell.
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