Interim Results for six months ended 30 June 2021

4 August 2021

Ferrexpo plc

("Ferrexpo", the "Group" or the "Company")

Interim Results for the six months ended 30 June 2021

 

 

Investment in high grade pellets enables strong financial performance, with further growth ahead

 

Financial Highlights

·   Revenues rise by 74% to US$1,353 million, reflecting market conditions and investments in increasing pellet quality.

·   Underlying EBITDA^A increases by 147% to US$868 million (1H 2020: US$352 million).

·   Profit after tax of US$661 million, representing an increase of 165% (1H 2020: US$250 million).

·   Net cash^A position of US$213 million (31 December 2020: US$4 million).

·   Capital investment increases to US$142 million (1H 2020: US$96 million).

·   Interim dividend of 39.6 US cents per share (1H 2020: 13.2 US cents per share) in respect of strong performance in 1H 2021.

 

Lucio Genovese, Non-executive Chair, said:

"Today's strong interim financial results reflect our multi-year investment programme in our assets, which has enabled us to not only take full advantage of the current strength of the iron ore market through our high grade iron ore products, but also deliver these results alongside excellent safety performance and continued progress in cutting carbon emissions.

The Group has shown resilience throughout the global COVID-19 pandemic, and we remain vigilant in our approach to protect our workforce and local communities from the spread of this virus. We continue to deliver growth, in terms of our operations, marketing and financial results, culminating in underlying EBITDA^A of US$868 million for the first half of 2021, an increase of 147%. This strong all-round performance has enabled the Group to repay its pre-export finance facility early, whilst also investing for the future, as the Group grows from one phase of growth to another. We are also pleased to announce today an interim dividend of 39.6 US cents per share, reflecting the Group's healthy balance sheet and strong performance to date in 2021.

Looking ahead, we are at an exciting time in the Group's development. We are currently undertaking expansion work that will deliver growth in the near-term, having invested US$93 million in growth capex in the first half, and we are already looking ahead to our next phase of growth. On product quality, we have secured our first long-term contract for our latest product offering, high-grade (67% Fe) direct reduction pellets, which represent the future of global steel production as economies worldwide seek to decarbonise, and we also continue to cut our own carbon emissions. Finally, on corporate governance, we welcomed Ann-Christin Andersen as a further Independent Non-executive Director during the period.

I would like to conclude by thanking our workforce for delivering the interim results presented here, and to all stakeholders for their continued support in our business going forward."

 

Financial Summary:

US$ million (unless otherwise stated)	6 months ended 30.06.21	6 months ended 30.06.20	Change	Year ended 31.12.20
Total pellet production (kt)	5,563	5,598	(1%)	11,218
Sales volumes (kt)	5,567	6,107	(9%)	12,062
Average Platts 62% Fe iron ore fines price (US$/t)	184	91	+102%	109
Average Platts 65% Fe iron ore fines price (US$/t)	212	106	+100%	122
Revenue	1,353	776	+74%	1,700
Average C1 cash cost of productionA (US$/t)	46.6	40.9	+14%	41.5
Underlying EBITDAA	868	352	+147%	859
Profit after tax for the period	661	250	+165%	635
Diluted EPS (US cents)	112.3	42.4	+165%	107.9
Dividends per share declared (US cents)	39.6	13.2	+200%	85.8
Net cash flow from operating activities	661	258	+156%	687
Capital investmentA	142	96	+48%	206
Closing net cash / (net debt)	213	(174)	+387	4
Closing cash and cash equivalents	235	169	+39%	270

 

 

Health and Safety

·   Solid safety performance continues, with no work related fatalities in 1H 2021 (FY2020: one), and a lost time injury frequency rate ("LTIFR") of 0.37, which continues to remain below the Group's five-year trailing full-year average LTIFR[1]. This also compares favourably against LTIFR for iron ore miners in Western Australia, which was 1.60 for 2019-20 (most recent data available)[2].

·   COVID-19 update: The Group's facilities continue to operate with minimal impact on operations to date, and the Group continues to closely monitor its workforce. The infection rate in the local communities surrounding the Group's operations remains low.

 

Operational Highlights

·   Pellet production of 5.6 million tonnes in 1H 2021, representing a level in line with 1H 2020, despite pelletiser upgrade work during the period.

·   An additional 149 kilotonnes of commercial high grade (67% Fe) concentrate was shipped in the period (1H 2020: none), correlating to periods of pelletiser upgrade work.

·   Sales volumes decreased by 9% compared to 1H 2020, relating to stockpile drawdown process completed in the prior period.

·   Market balance for pellet sales returning to historic levels, following temporary shift in sales to China in 2020.

·   C1 cash cost of production^A of US$46.6 per tonne, increasing by US$5.7 compared to 1H 2020, reflecting higher commodity prices and plant maintenance costs.

·   Capital investment^A of US$142 million in 1H 2021 (1H 2020: US$96 million), reflecting pellet line upgrade work and increased waste stripping activities ahead of further growth phase.

·   Pelletiser upgrade work completed on three out of four lines, with final line to be completed in 3Q 2021. Once complete, this project will add a 0.5-1.0 million tonnes per annum of pelletiser capacity.

·   First long-term contract signed for Group's high grade (67% Fe) direct reduction ("DR") pellets.

 

Market Environment

·   High grade (65% Fe) iron ore prices as assessed by S&P Global Platts increased significantly during 1H 2021 compared to 1H 2020.

·   Tight market conditions for global iron ore pellet supply, combined with increasing demand for pellets as steelmakers seek to increase productivity and lower emissions, resulted in the S&P Global Platts Atlantic pellet premium rising to US$54 per tonne in 1H 2021 (compared to US$30 per tonne in 1H 2020).

·   C3 freight rates[3] rose by 72%, or the equivalent of US$9, to an average of US$22 per tonne in 1H 2021 as a result of higher oil prices and an increase in demand for vessels.

 

Board of Directors and Corporate Governance

·   Ann-Christin Andersen appointed as an Independent Non-executive Director of the Board of Directors in March 2021.

·   Appointment of Nikolay Kladiev as Group Chief Financial Officer with effect from today.

 

Environment, Social and Governance ("ESG")

·   Release of annual Responsible Business Report on the Group's website today, covering ESG activities in 2020.

·   Carbon emissions footprint decreases 6% in 1H 2021 against FY2020, on a per tonne basis.[4]

 

 

Alternative performance measures

Words with the symbol A are defined in the Alternative Performance Measures section on pages 38 and 39.

 

Conference call and webcast

 

Ferrexpo will host a presentation today (4 August 2021) via a video webcast that will start at 9:00am (UK).

 

To join the webcast, and view the live presentation, please use the following link:

 

https://webcasting.brrmedia.co.uk/broadcast/60eef3c20166921ec8acea58

 

You will be able to ask questions via the link above. If, however, you wish to join this conference call via telephone, please see following dial in details and instructions:

 

10 minutes prior to the start of the call, dial the dial in shown below and provide the confirmation code when prompted.

 

Note: due to regional restrictions some participants may receive operator assistance when joining this conference call and may not be automatically connected.

 

Event Title:                                                                                                           Ferrexpo PLC - Interim Results

 

Participant dial in numbers:

·   United Kingdom (local):                                                                       +44 (0)330 336 9126

·   Switzerland (Geneva):                                                                         +41 (0)22 567 5729

·   Switzerland (Zurich):                                                                            +41 (0)44 580 7206

·   Ukraine:                                                                                                0800 503 441

·   United States of America:                                                                    +1 929-477-0324

 

Confirmation Code:                                                                                   1881856

 

 

Ferrexpo:
Rob Simmons	[email protected]	+44 207 389 8305
Tavistock:
Jos Simson Gareth Tredway	[email protected]	+44 207 920 3150 +44 7785 974 264

 

 

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 over 40 years. In 2020, the Group produced 11.2 Mt of iron ore pellets, a 7% increase on the prior year. The Company is ranked as the world's 3^rd largest exporter of pellets to the global steel industry with a market share of approximately 9%. 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 under the ticker FXPO. For further information, please visit www.ferrexpo.com.

 

 

Introduction

The Group continues to make good progress on embedding a strong culture of safety at both its operations in Ukraine and logistics business in central Europe ("First-DDSG"), with three out of the Group's four main operating entities registering no lost time injuries during the period. As a result, the Group's LTIFR fell to 0.37 in 1H 2021 (FY2020: 0.79) and the Group had no fatalities at its operations (FY2020: one).

The Group remains vigilant with safeguards to protect both its workforce and local communities from the global COVID-19 pandemic, and to date operations have experienced minimal disruption as a result of this virus. Infection rates in local communities remain low, and to date the Group has approved US$3.5 million of direct funding through its COVID-19 Response Fund to help fight the spread of the virus locally.

The financial performance of the Group remained strong in 1H 2021, reflecting strong market conditions and recent investments that have enabled the Group to take full advantage of the increased demand for high grade iron ore products, particularly those that offer steelmakers the opportunity to lower carbon emissions, such as iron ore pellets. Pellet production volumes remained in line in 1H 2021, with high grade products (65% Fe and above) representing 100% of output (1H 2020: 99%). The Group's underlying EBITDA^A result of US$868 million for the period reflects strong market conditions, the Group's production of high grade (65% Fe and above) iron ore pellets, combined with rigorous cost control measures. For further details of the Group's financial performance, please see the Financial Review Section on page 6.

The Group continues to invest and develop its assets, with a focus on growth in product volume and quality, whilst also seeking to lower carbon emissions through early adoption of modern technology in its production processes. During the period, the Group signed agreements for the supply of equipment for its crushing and beneficiation plant, which will form the foundation for delivering the Group's next milestone in growing output by a further three million tonnes per annum. Further details of this latest phase of investment in growth are provided in the Operational Review Section (Capital investment for future growth) on page 11.

Shareholder returns

Through strong cash generation, the Group is now in a net cash position, with the Group's net cash increasing to US$213 million as of 30 June 2021 (31 December 2020: US$4 million), including a cash position of US$235 million. In light of the current strength of the Group's balance sheet, the Board of Directors (the "Board") is pleased to announce an interim dividend of 39.6 US cents per Ordinary Share payable on 26 August 2021 to shareholders on the register at the close of business on 13 August 2021. The ex-dividend date will be 12 August 2021. All dividends are paid in UK Pounds Sterling, with an election to receive in US Dollars.

Board membership and executive management

The Board of Ferrexpo remains committed to maintaining strong levels of corporate governance practices and transparency throughout the Group.

In March 2021, Ann-Christin Andersen was announced as an Independent Non-executive Director of the Group, taking the total number of independent directors of the Group to four out of six directors, in addition to the Group's Chair.

As previously communicated in the Group's Annual Report and Accounts for 2020, the Nominations Committee is looking to make a further appointment of an Independent Non-executive Director to strengthen the Board.

With effect from today, and as announced on 7 July 2021, the Group has appointed Nikolay Kladiev as Group Chief Financial Officer ("CFO"). Nikolay has been the CFO of the Group's main operating entity in Ukraine - Ferrexpo Poltava Mining, since 2007, whilst also serving on the Group's Executive Committee during this time, and has been directly responsible for maintaining the Group's position as a low cost pellet producer.

 

Iron ore market review

Iron ore pricing

The following market review focuses on the high grade fines index (65% Fe), as published by S&P Global Platts ("Platts") as this is the basis for pricing Ferrexpo's iron ore products, 100% of which graded 65% Fe or higher in 1H 2021.

Demand for high grade iron ore increased significantly during the period, rising from an average of US$106 per tonne during 1H 2020 to an average of US$212 per tonne in 1H 2021, as assessed by Platts. The key driver for this increase in demand in iron ore in 1H 2021 relates to governments around the world providing economic stimulus packages in response to the global COVID-19 pandemic, which in turn has driven end-user demand for a range of steel products. The supply-side response to this increase in demand has seen a 10% increase in apparent iron ore production in 1H 2021 on a global basis[5] (versus 1H 2020), the equivalent of approximately 110 million tonnes of additional iron ore. Approximately 90% of this additional supply in 1H 2021 has come from three geographic locations - China, Australia and Brazil[6], representing the three main centres of global iron ore production.

Further to the increase seen in the iron ore fines price in 1H 2021, increased demand for high grade iron ore has driven the premium paid for high grade 65% Fe material higher, rising 91% to an average of US$28 per tonne in 1H 2021 (1H 2020: US$15 per tonne). Through the Group's growth programme of investments in its operations, which have enabled a pivot to 100% high grade production in recent years, the Group is able to take full advantage of this shift. The principal drivers for this increase in demand of high grade products relate to both short term and longer term factors. In the short term, steelmakers have been seeking to utilise high grade ores to increase blast furnace productivity at a time when steel margins remain at the present elevated levels. In the longer term, a structural shift is underway towards higher grade iron ores, as increasing environmental controls drive steelmakers towards input materials that reduce carbon emissions. High grade ores contain fewer impurities and therefore require less heat to convert to steel, with this heat typically generated through the combustion of coal in the blast furnace method of steelmaking.

In tandem with increasing demand for higher grade iron ores, the demand for iron ore pellets has also increased, reflecting the additional blast furnace productivity that is provided for by steelmakers utilising iron ore pellets over sinter fines. In addition, pellets generate lower emissions in the steelmaking process compared to sinter fines, as the latter need to be sintered, which is a process requiring additional coal before prior to the addition of material to the blast furnace. By contrast, pellets are a direct charge material and therefore do not require sintering. As a result of this increased demand, the Platts Atlantic pellet premium rose to average US$54 for 1H 2021 (1H 2020: US$30 per tonne). During the course of 1H 2021, the S&P Global Platts China pellet premium tracked the Atlantic pellet premium, and averaged US$57 per tonne for the period (1H 2020: US$27 per tonne).

Freight

The C3 freight rate[7], which is principally used as a freight reference in the pricing of the Group's sales contracts, averaged US$22 per tonne in 1H 2021 (1H 2020: US$13 per tonne), with this 72% increase reflecting higher oil prices and reduced shipping activity in the Atlantic basin.

Iron ore fines supply

Published sales data for the major iron ore producers in 1H 2021 indicates that iron ore shipments from the Pilbara Region of Western Australia remained in line in 1H 2021 relative to 1H 2020, whereas published sales data for a major iron ore fines producer in Brazil shows an increase of approximately 15%, or the equivalent of approximately 20 million tonnes. This limited supply-side response to rising demand from steelmakers, particularly for high-grade iron ore, is a key factor in the recent strength of iron ore prices.

Expectations for the remainder of 2021 are that additional iron ore fines supply will enter the market, with projects in India and Australia expected to add approximately 40 million tonnes of material into the global market³. Expectations are that scrap supply in China will also increase in 2H 2021, with steelmakers currently showing a heightened preference for scrap substitution during the current period of elevated iron ore prices.

Iron ore pellet supply

Global pellet export volumes have remained in line in 1H 2021 on a year on year basis[8], reflecting reduced pellet supply from pellet producers in Brazil and Canada, which have been counterbalanced by increasing supply from producers in the CIS region and India. Whilst overall pellet volumes have remained in line, the above shift in supply balance in 1H 2021 has resulted in an overall shortage of high quality iron ore pellets. The return of a major iron ore pellet producer in Brazil in late 2020, following a tailings dam breach in 2015, has resulted in partial reduction in the overall shortfall of Brazilian pellet supply.

It is expected that the current global shortage of iron ore pellets will ease during the remainder of the year, with pellet supply recovering and global steel demand easing.

 

Iron ore pellet demand

The Group exports its iron ore pellets to steelmakers throughout the world, with Europe and North East Asia being the traditional destinations for exported blast furnace iron ore pellets, and China has become an increasingly active buyer in more recent years. In 2020, overall iron ore pellet trade volumes shifted to Chinese steelmakers, owing to this country's rapid response to the global COVID-19 pandemic. The timing of each country's response to the pandemic has varied between locations, and as such, the subsequent timing and speed of recovery in demand for iron ore pellets has varied between regions.

The Group has seen a strong recovery in demand for pellets in Europe in 1H 2021, with demand in North East Asia flat year-on-year. Demand for iron ore pellets from steelmakers in China remains strong, despite the global market balance reverting to its historic sales patterns. In 1H 2021, global pellet exports to China have averaged approximately 2.1 million tonnes a month, which represents a level in line with 2019 (2019 average: 2.4 million tonnes a month) and significantly ahead of the average of 1.1 million tonnes a month seen during 2018[9]. This longer term increase in Chinese demand for iron ore pellet imports reflects a shift towards stronger environmental controls and efforts to reduce steelmakers' emissions. With China representing approximately 73% of the global consumption of iron ore fines in 2021 (equivalent to 999 million tonnes)[10], any increase in pellet demand from this destination will likely have a material impact on global iron ore pellet export trade, which is much smaller than the global export trade in iron ore fines[11].

The Group has recently commenced production and sales of commercial volumes of DR pellets, which are typically utilised by steelmakers in the Middle East and North America. These two geographic regions collectively represent approximately a third of global pellet exports and therefore represent significant new markets for the Group to develop new customer relationships. Overall demand for iron ore pellets has remained strong in these two regions in 1H 2021, with exports up 9% and 7% to the Middle East and Americas respectively¹.

Global steel production

In April 2021, the World Steel Association reported that global crude steel production had risen to 1,878 million tonnes in 2020, up from 1,874 million tonnes a year earlier, with this growth coming despite the global COVID-19 pandemic restricting economies around the world. This growth in production in 2020 is symptomatic to the robust global response to the pandemic, which has stimulated demand throughout the steel value chain.

Further to the increase seen in 2020, global steel production has seen a further increase in 2021, rising by 14% for the first six months of 2021, including a 14% and 18% increase in steel output from Asia/Oceania and Europe (EU-27) respectively, which are regions typically associated with customers buying blast furnace iron ore pellets[12]. Regions that are typically associated with purchasing DR pellets, such as the Middle East and North America, have also seen growth in steel output in 1H 2021.

Looking further ahead, the World Steel Association expects that the growth in global steel demand will slow during the remainder of the year, with demand increasing by 6% for the full year 2021^[13]. Global steel demand is forecast to increase by a further 3% in 2022⁵.

In the longer term, the Group expects that tighter emissions controls and government regulation, particularly in the EU, will result in additional demand for high grade, low impurity pellets in the future. Independent research by CRU has demonstrated the advantage of lower CO₂ emissions from using additional pellets in the blast furnace burden instead of sinter fines, primarily as a result of higher pellet rates having a lower requirement for coke (a product derived from coal), and also as a consequence of steel producers not needing to sinter material before it enters the blast furnace (which is a process that typically requires coal). This research estimates that steel mills produce approximately 40% less CO₂ for each tonne of Ferrexpo's high grade iron ore pellets used in place of sinter fines.

Financial review

Through its investments to grow production and product quality, the Group has been able to deliver strong financial performance in 1H 2021, translating strong spot pricing through to the Group's profitability. Iron ore pellet quality was 100% high grade pellets in 1H 2021 (grading 65% Fe and above). Despite iron ore sales volumes decreasing 9% in 1H 2021, as a result of the stockpile drawdown process completed in the comparative period, revenues increased by 74% in 1H 2021 due to an increase in high grade iron ore prices and an increase in the Platts Atlantic pellet premium, offset by lower sales volumes, in addition to higher C1 cash costs and freight costs. Through this increase in market indices, strong operational performance and robust cost control of C1 cash costs in 1H 2021, profit after tax rose to US$661 million (1H 2020: US$250 million). In turn, this profitability enabled funding early repayment of the Group's pre-export finance ('PXF') facility, shareholder returns and increased levels of capital investment during the period.

Revenue

Revenues in 1H 2021 benefited from higher iron ore pricing and pellet premiums, offset by higher international freight costs, and as a result, increased significantly to US$1,353 million in 1H 2021 (1H 2020: US$776 million). This positive movement was partially offset by a 9% reduction in sales volumes to 5.6 million tonnes (1H 2020: 6.1 million tonnes), after a destocking process was completed in 2020.

Headline pricing 1H 2021 vs. 1H 2020

US$ per tonne	1H 2021	1H 2020	Change
Average Platts 62% Fe iron ore fines price	184	91	+102%
Average Platts 65% Fe iron ore fines price	212	106	+100%
Average high grade premium (Platts)	28	15	+91%
Average Platts Atlantic blast furnace pellet premium	54	30	+82%
Average Platts direct reduction pellet premium	70	41	+69%

 

In 1H 2020, the Group noted a considerable shift in sales towards China, which was a shift in demand related to the global COVID-19 pandemic. Since this time, iron ore markets have shown a gradual return to the historic balance of demand, and in 1H 2021, the Group's sales distribution was in line with previous years. In 1H 2021, the Group has seen 13 and 10 percentage-point increases in sales to Central Europe and Western Europe respectively, reflecting the recovery of these markets following the disruption seen in 2020. The Group has also seen a significant increase in demand from Turkey, along with shipments to new customers in the Middle East and North Africa, with sales to these markets collectively accounting for 13% of exports in 1H 2021, compared to 2% in the prior period. For further information, see sections Iron Ore Market Review Section (Iron ore pricing), and Operational Review Section (Marketing).

Higher freight rates during 1H 2021, as the Baltic Dry C3 Index averaged US$22 per tonne (1H 2020: US$13 per tonne), negatively impacted the Group's revenue net of freight. For further information, see section titled Iron Ore Market Review Section (Iron ore pricing).

Costs

C1 cash cost of production^A

The Group's average C1 cash cost of production^A increased to US$46.6 per tonne in 1H 2021 compared with US$40.9 per tonne in 1H 2020, with this movement in costs reflecting a recovery in input costs with industrial activity resuming as the global COVID-19 pandemic eases in 2021. The Group's production costs increased in 1H 2021 as a result of higher energy prices, including the cost of fuel (including diesel), natural gas and electricity, which collectively account for approximately 40% of the Group's C1 cash costs of production^A. The prices for fuel (including diesel) and natural gas were affected by the increase of prices on the global market during the first half of 2021 whereas costs for electricity were affected by an increase of the tariffs in Ukraine. Higher prices for fuel (including diesel) and natural gas negatively impacted the Group's C1 cash cost of production^A by US$0.5 per tonne and US$2.2 per tonne respectively, compared to 1H 2020. The impact of higher tariffs for electricity was US$0.9 per tonne.

It is expected that the Group's production costs in 2H 2021 remain subject to fluctuations in the local currency (Ukrainian Hryvnia) exchange rate, and further inflationary pressure on commodity input prices.
 

The table below shows the composition of the Group's C1 cash cost of production^A:

US$ per tonne	% of C1 cost 1H 2021	% of C1 cost 1H 2020	% Change
Electricity	23%	23%	0%
Natural gas and sunflower husks	10%	7%	+43%
Fuel (including diesel)	7%	7%	0%
Materials	10%	13%	(23%)
Spare parts	11%	11%	0%
Personnel	9%	12%	(25%)
Maintenance and repairs	12%	10%	+20%
Grinding media	9%	8%	+13%
Royalties	7%	7%	0%
Explosives	2%	2%	0%

Please note: figures in table above may not add up to 100% due to rounding. The Group's C1 cash cost of production^A 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.

Selling and distribution costs

Total selling and distribution costs were US$152 million (1H 2020: US$162 million). This decrease was primarily driven by a decreased proportion of sales to China under CFR terms, counterbalanced by higher international freight costs, with the C3 freight rate[14] rising by 72% to US$22 per tonne in 1H 2021.

General, administrative and other operating expenses

General and administrative and other operating expenses increased by US$4 million to US$54 million. The increase is caused by higher losses on the disposal and liquidation of property, plant and equipment, and write-offs of property, plant and equipment and intangible assets in relation to a mining licence, totalling US$6 million as of 30 June 2021 (1H 2020: US$1 million). For further details, please see the Operational Review Section (Exploration projects) on page 11.

Currency

Ferrexpo prepares its consolidated accounts in US Dollars. The functional currency of the Group's Ukrainian operations is the Hryvnia ("UAH") and approximately half of the Group's operating costs are in local currency. In 1H 2021, the Hryvnia appreciated from UAH28.275 per US Dollar on 1 January to UAH27.176 per US Dollar as of 30 June 2021, whereas the local currency depreciated during the comparative period ended 30 June 2020. For further information, see section titled Costs (C1 cash cost of production^A). The total operating forex losses of US$38 million in 1H 2021 predominantly resulted from the conversion of US Dollar denominated assets in Ukraine, compared to a gain of US$36 million in 1H 2020.

 

Ukrainian Hryvnia vs. US Dollar

	Spot 30.07.2021	Opening rate 01.01.2021	Closing rate 30.06.2021	Average 1H 2021	Average 1H 2020
UAH per US$	26.887	28.275	27.176	27.779	25.979

Source: National Bank of Ukraine

Underlying EBITDA^A

Underlying EBITDA^A in 1H 2021 increased to US$868 million compared to US$352 million in 1H 2020, with this increase driven by higher iron ore prices and pellet premiums, offset by lower sales volumes and a higher C1 cash cost of production^A.

Interest

The Group's interest expense declined by 25% to US$6 million compared to US$8 million in 1H 2020 due to a lower outstanding debt balance. The average cost of debt for the period ended 30 June 2021 was 4.7% (average 1H 2020: 5.6%).

 

Further details on finance expense are disclosed in Note 7 Net finance expense of the accounts.

 

Tax

The income tax expense for 1H 2021 of US$135 million increased by 207% compared to US$44 million in 1H 2020, based on an expected weighted average tax rate for the full year 2021 of 17.0%. The increase of the expected tax rate is primarily due to the change of the profit split between the Group's major subsidiaries. The Group operates across a number of jurisdictions and its effective tax rate is subject to various factors outside of the Group's control. 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 2020 was 15.1%.

Further details on taxation are disclosed in Note 8 Taxation and Note 17 Commitments, contingencies and legal disputes of the accounts in respect of ongoing tax-related court proceedings.

Profit for the period

Profit for the period was US$661 million, compared with US$250 million in 1H 2020, reflecting the net effect of the higher underlying EBITDA^A.

Cash flows

The net cash flow from operating activities was US$661 million (1H 2020: US$258 million), with this increase driven by higher prices for iron ore products in the first half of 2021. Working capital reflected a net outflow of US$126 million (1H 2020: US$25 million), which is as a result of higher trade receivables due to the high prices, and an increase of inventories due to inflation of purchase prices, including raw materials, spare parts and finished goods.

During 1H 2021, dividend payments totalled US$310 million, compared to US$58 million in 1H 2020. A further dividend payment of US$78 million, the equivalent of 13.2 US cents per share, was made on 1 July 2021, following approval of the final dividend for 2020 at the Group's AGM in May 2021. In addition, in respect of the robust performance of the Group in 2021 and continue strong balance sheet metrics, the Group's Board has approved an interim dividend for 2021 of 39.6 US cents per share on 3 August 2021.

Capital investment^A

Capital investment^A in 1H 2021 was US$142 million, compared to US$96 million in 1H 2020. During 1H 2021, US$49 million was spent on sustaining and US$93 million spent on development capital investments. In terms of the major development projects, the Group spent US$29 million on stripping activities for future production growth, US$21 million on the new press filtration plant and US$20 million on the pelletiser upgrade project. Further expenditure was made during the period in relation to the Group's concentrate expansion programme, including the concentrate stockyard (US$6 million), further development of the Bilanivske pit (US$6 million), solar power pilot project (US$3 million) and fleet automation (US$2 million) in addition to smaller business improvement projects.

Debt

At the end of 2020, the Group announced that it had entered into a net cash position of US$4 million, and following continued strong operational and financial performance during 1H 2021, the Group elected to repay its pre-export finance facility ("PXF facility") on 30 June 2021 in full. The Group's PXF facility was previously scheduled to be repayable in quarterly installments between 2020 and 2022, and had a total amount outstanding as of the end of 2020 of US$257 million. Following repayment of the PXF facility in 1H 2021, the Group has low levels of overall debt, with remaining debt primarily relating to trade financing arrangements, amounting to a gross debt balance of US$22 million as of 30 June 2021 (30 June 2020: US$343 million). As at 30 June 2021, the Group had a cash balance of US$235 million, following the repayment of the Group's PXF facility, compared to a cash balance of US$270 million as of 31 December 2020. The Group's net cash position as of 30 June 2021 was therefore US$213 million (31 December 2020: net cash positon of US$4 million).

Following a period of deleveraging of the Group's balance sheet, it is the Group's intention to maintain strong balance sheet metrics whilst continuing to invest in the next phase of the Group's organic growth programme, in addition to maintaining a suitable level of shareholder returns.

Related party transactions

Related party transactions are disclosed in Note 19 Related party disclosure to the accounts.

 

 

Operational review

Health and safety

The Group recorded strong safety performance in 1H 2021, with no fatalities during the period (FY2020: one), and a lost time injury frequency of 0.37, which continues to track materially below the Group's five-year trailing full-year average LTIFR of 0.98.

 

LTIFR	1H 2021	1H 2020[15]	2020
- FPM	0.48	0.94	0.95
- FYM	-	0.82	0.39
- FBM	-	-	-
Ukraine	0.39	0.92	0.83
- Barging	-	-	-
Group	0.37	0.87	0.79

 

Pellet production and pellet quality

The Group's production facilities continue to operate with minimal impact from COVID-19 to date, and the Group continues to closely monitor its workforce. In addition, the infection rate in the local communities surrounding the Group's operations remains low.

The Group's pellet production was 5.6 million tonnes in 1H 2021, with pellet production falling by just 0.8% despite pelletiser upgrade work being completed on two out of four pelletiser lines during the period. In addition, the Group is now able to ship additional high grade (67% Fe) commercial concentrate during times of pelletiser downtime, with 149 kilotonnes of this product shipped during the period. Work has now been completed on three out of the Group's four pelletiser lines as of the end of June 2021, with work on one final pelletiser line planned for 3Q 2021. Once fully completed, this work will collectively provide an additional 0.5 to 1.0 million tonnes of pelletiser capacity on an annual basis. Furthermore, as a result of this work nearing completion, pellet production in 2H 2021 is expected to be higher than 1H 2021.

Overall pellet quality continues to increase as investments throughout the Group's operations are completed, with high grade pellets, grading 65% Fe and above, representing 100% of 1H 2021 production (1H 2020: 99%). The Group continues to develop its DR pellet offering, which are higher grade (67% Fe), lower impurity pellets, and the Group produced 135 kilotonnes of this product in 1H 2021 (1H 2020: 187 kilotonnes) for trial cargoes with potential long-term customers. The Group has also secured its first long-term contract for its DR pellets, marking a key milestone in developing new relationships within this segment of the global pellet export market. DR pellets represent approximately a third of the global pellet export market, and are therefore a key growth market for the Group to market its products into.

For more information on DR pellets, and how this product type will lower the Group's future Scope 3 emissions, please see Responsible Business activities section on pages 12 and 13.

Iron ore production

000' tonnes (Note: all production from own ore)	Product Grade	1H   2021	1H   2020	Change
Total commercial production (comprising pellets and concentrate)		5,712	5,598	+2%
Total pellet production		5,563	5,598	(0.6%)
Pellet production comprised of:
-             Direct Reduction pellets	67% Fe	135	187	(28%)
-             Ferrexpo Premium Pellets	65% Fe	5,428	5,313	+2%
-             Ferrexpo Basic Pellets	62% Fe	-	98	(100%)
Total concentrate production	67% Fe	149	-	N/A

 

 

The Group is currently undertaking an investment programme to upgrade capacity on each of its four pelletiser lines, with this work set to increase the overall nameplate capacity of the Group's pelletiser by 0.5 to 1.0 million tonnes per annum once completed. As of the end of the period, upgrade work on three out of four pelletiser lines was completed, with work on the fourth and final line to be undertaken in 3Q 2021.

Technology and innovation

The Group continues to progress its project to deploy autonomous haul trucks at Yeristovo, which were the first large scale haul trucks to be deployed in Europe when they were introduced in 2020. The Group is pleased to report that it now has five CAT 793D operating in production areas in autonomous mode, with the conversion of the Group's remaining CAT 793D trucks planned as this project advances. Fleet automation represents a significant advancement in modern mining techniques, removing individuals from potentially hazardous production areas, whilst also providing benefits in terms of productivity and maintenance.

Exploration projects

During the period, the Group was made aware of a formal notice on the President of Ukraine's website, whereby one of the Group's licences for a project in the exploration phase, Galeschynske, had been revoked. The Galeschynske deposit lies to the north of the Group's existing mining operations, has a JORC-Compliant Mineral Resource of 326 million tonnes, representing 5% of the Group's JORC-compliant Mineral Resources, and does not yet have an Ore Reserve estimate. It is a hematite deposit at depth that has the potential for exploitation via underground mining methods, but owing to the early stage nature of this project, and difference in mineralogy of this deposit to the Group's active mines, it does not currently feature in any of the Group's long-term mine plans. The Group's mining and pellet production activities remain unaffected by this decision, and the Group is currently reviewing its options for appealing this decision.

Capital investment^A during 1H 2021

A summary of current projects under execution in 1H 2021 is shown in the table below. For further information on capital investment made during the period, please see Financial Review Section (Capital investment^A) on page 9.

 

Projects to reach 12MTPA	Description	Status	Expected completion	Total cost	Spend in 1H 2021	Remaining spend
Concentrate stockyard	Decoupling of concentrator & pellet plant by providing concentrate storage capacity	Produces concentrate since February 2021. Works on the improvement of loading complex are underway	2H 2021	US$42.2M	US$2.7M	US$4.1M
Further Growth Projects
Press filtration  plant	Replacement of disc filtration to reduce moisture in balling plant	Construction & assembly works underway	To be completed in 3 phases of 6MTPA in 2024. Partial ramp up end of 2021, phase 1 to complete in 1H 2022.	US$115M	US$21.1M	US$26.3M
Medium-and Fine Crushing (MFC-2)	2 new tracts with average capacity of 800t/h each	Construction & assembly works underway	4Q 2021	US$40M	US$2.8M	US$7.1M
Wave 1 Expansion (pelletiser)	3 MTPA of additional pellets	Utilities relocation & equipment procurement	2024	US$181M	US$1.8M	US$178.2M
Wave 1 Expansion (concentrator)	4.1 MTPA of additional concentrate for delivery to pelletiser	Design & main equipment procurement	2024	US$240M	US$0.6M	US$235.9M
Logistics
Rail cars	Increasing number of Ferrexpo-owned railcars, minimising reliance on state railcars.	No wagons were purchased in 1H 2021.	N/A	-	-	-

Capital investment for future growth ("Wave 1 Expansion")

The Group successfully added concentrator capacity in 2020, and is now undertaking a pelletiser expansion project to ensure that the Group has sufficient pelletiser capacity to pelletise all of the concentrate that it produces.

Beyond this current phase of growth, the Group is undertaking further investments to grow overall production volumes and provide operational flexibility to produce a greater proportion of higher grade (67% Fe) DR pellets. In order to achieve this growth, the Group has begun signing preliminary agreements with equipment suppliers for increasing concentrator capacity from the existing run rate of 30-35 million tonnes of raw ore processing per annum to over 50 million tonnes per annum. This will facilitate the next module of incremental growth, which will ultimately deliver an additional three million tonnes of pellet production per annum once completed, and is the first of several waves providing incremental growth.

Marketing

Ferrexpo's sales volumes for 1H 2021 decreased by 9% to 5.6 million tonnes (1H 2020: 6.1 million tonnes), with this decrease reflecting the destocking process undertaken in 1H 2020, following a build up of inventories in late 2019.

Ferrexpo benefits from a diversified sales portfolio with leading steel mills throughout the world, with a central geographic location and logistics capacity that enabled the Group to pivot sales between markets to match global demand. This flexibility proved to be crucial in 2020, with the Group matching a shift in demand in the face of the global COVID-19 pandemic, and in 2021 the Group has noted that global pellet export markets are reverting back to the overall balance seen prior to the pandemic. This overall shift in sales in 1H 2021 can be seen in the table below, which shows a strong recovery in demand from Ferrexpo's traditional customer base in Europe, in addition to a recovery being seen in the North East Asia region.

As shown in the table below, sales to customers in Western and Central Europe increased by 10 and 13 percentage points respectively in 1H 2021. Sales to customers in Europe collectively accounted for 48% of sales in 1H 2021, which represents a return to the level seen in FY2019, when sales to these regions collectively amounted to 49%. Additionally, strong demand for pellets has been seen from longstanding customers in Turkey, alongside new demand for Ferrexpo pellets in the Middle East and North Africa, with these regions collectively seeing its proportion of sales rise from 2% in 1H 2020 to 13% in 1H 2021. The Middle East and North Africa are key growth areas for Ferrexpo as the Group develops its offering of DR pellets, which is the primary type of pellet used in these two regions. Turkey represents a long and valued destination for the Group's sales, which is located in close proximity to the Group's operations across the Black Sea.

The table below shows the breakdown of sales by key market regions. Sales to China and South East Asia include sales to Vietnam and Taiwan.

Table: sales volume by market regions

	1H 2021	1H 2020	Movement (percentage points)
Central Europe	34%	21%	+13pp
Western Europe	14%	4%	+10pp
North East Asia	8%	3%	+5pp
China and South East Asia	29%	68%[16]	(39pp)
Turkey, Middle East and North Africa	13%	2%	+12pp
North America	2%	3%	(1pp)
Total sales volume (thousand tonnes)	5,567	6,107	-

 

For further information on iron ore prices and freight see Iron Ore Market Review Section.

Responsible Business activities

Responsible Business Report 2020

The Group is proud to report the publication of its 6^th annual Responsible Business Report, which is published in accordance with the Global Reporting Initiative framework and is available on the Group's website at the following address:

 

 https://www.ferrexpo.com/investor-relations/news/results-reports-presentations

Safety

The Group is pleased to report that there were no fatalities at its operations in 1H 2021, and operations continue to perform materially below the Group's five-year trailing average for its lost time injury frequency rate. For further information, please see page 10 (Operational Review Section, Health and safety).
 

Pathway to low carbon production

Scope 1 and 2 emissions continue to fall on a per tonne basis across the Group's operations in Ukraine and logistics business in central Europe, as the Group implements a range of initiatives across its business to improve productivity, modernise equipment and reduce consumption rates. In 1H 2021, the Group achieved a 6% reduction year to date in Scope 1 and 2 emissions combined. Following upgrade work on the pelletiser in 1H 2021, the Group expects production volumes to increase in 2H 2021 and as a result the Group expects a further reduction in the Group's CO₂e footprint on a per tonne basis as a result.

The Group has a number of key initiatives that are being implemented, which will have a positive impact in helping to further lower the Group's carbon footprint:

·   5MW solar power project: during 1H 2021, the Group has constructed a 5MW solar power project at its operations in Ukraine, to trial the effectiveness of this form of power generation at its geographic location, ahead of potentially utilising solar power on a larger scale. Commissioning of this facility took place in July 2021.

·   Mining electrification: the Group expects to make a decision in 2H 2021 regarding the selection of a provider for the installation of pantograph network in the Group's mines, which represents a network an overhead power cables that will enable haul trucks to ascend from the Group's open pit mines using electricity rather than diesel fuel. This technology is expected to provide a significant reduction in each truck's diesel consumption whilst driving up haul ramps, which will directly reduce the Group's Scope 1 emissions footprint per tonne.

·   Clean electricity purchasing: in 1H 2021 the Group continued to selectively purchase clean forms of electricity, comprising electricity from hydroelectric and nuclear sources, directly from producers located in Ukraine. This move follows changes to Ukrainian legislation in 2019 that has enabled selective purchasing to take place. Clean electricity purchasing represented 41% of total electricity consumption in 1H 2021 (FY2020: 22%).

·   Biofuel (sunflower husk) consumption: the Group continues to utilise sunflower husks in its pelletiser as a substitute for natural gas, with sunflower husks an abundant byproduct of Ukraine's sizeable sunflower oil industry. In 1H 2021, the Group's consumption of sunflower husks fell to 16% (FY2020: 25%) as a result of test work around the Group increasing its output of high grade, direct reduction ("DR") pellets. The Group is currently trialing production of this pellet type and therefore utilises less sunflower husk whilst trials are being conducted, to ensure pellet quality is not negatively impacted. Longer term, the Group intends to increase consumption of sunflower husks above the level seen in 1H 2021.

As part of the steel value chain, the Group understands the importance of the shift in thinking towards Green Steel, which is the carbon-free production of steel. Whilst the projects outlined above will reduce the Group's carbon footprint on a per tonne basis for Scope 1 and 2 emissions, over 90% of the Group's overall carbon footprint per tonne relates to Scope 3 emissions, which predominantly relate to the conversion of iron ore to steel. In the short term, steelmakers are incentivised to use iron ore pellets as they offer blast furnace steelmakers the opportunity to lower their carbon emissions by 40% for every tonne of sinter fines substituted, but this is an existing benefit that will not materially affect the Group's Scope 3 emissions. Longer term, the Group is planning to lower its Scope 3 emissions by producing more DR pellets, which are typically converted to steel using either electricity or natural gas in the conversion process, and therefore have a materially lower carbon footprint.

Update on principal risks

The Group considers that the principal risks facing the business, as highlighted on pages 48 to 60 of the 2020 Annual Report and Accounts (published in April 2021), remain relevant. An update on material developments that relate to the Group's principal risks during the first half of 2021 is provided below.

COVID-19 pandemic update and going concern

Update on 1H 2021

The safety and wellbeing of our employees is paramount and the Group took appropriate precautions to mitigate the risk of infection from the COVID-19 virus at its mining and processing operations in Ukraine, and also at its other jurisdictions where employees are based. Ferrexpo has followed, and will continue to follow, the advice from health authorities in its different jurisdictions.

The Group continues to monitor developments both locally within Ukraine, where its main operating base is located, and on a broader global perspective in locations where corporate, marketing and logistics employees, as well as customers, are situated. The Group responded quickly to the global COVID-19 pandemic in all locations where it is located and a number of these measures continue to remain in place, with the Group exercising vigilance around further waves of infection in individual locations. Through these measures, and the continued cooperation of the Group's workforce, the Group is able to continue to operate with minimal impact from COVID-19 on production volumes, C1 cash costs of production^A and the Group's ability to distribute its pellets globally.

The Group notes that variants of the original COVID-19 virus continue to appear and therefore the situation with regards to the global COVID-19 pandemic continues to evolve. As such, the Group continues to review its policies and procedures with regards to protecting its workforce and continuing to operate, and has the ability to re-introduce measures previously implemented during the course of the pandemic.

Regional demand for iron ore pellets was impacted in 2020 by the COVID-19 pandemic, with the Group able to effectively reschedule its sales portfolio to meet rising demand for its products in China, whilst economies in Europe and Asia (excluding China) contracted. In 1H 2021, the Group has seen a gradual unwinding of this impact, with a strong recovery in demand seen in Europe in particular. The Group continues to monitor regional outbreaks of COVID-19 and how this may potentially affect customers and demand for iron ore pellets.

Consideration of significant judgements and material uncertainties

The key judgements for the Group's going concern assessment are still related to the expected prices for iron ore pellets and their demand in the Group's key markets. The Group has successfully navigated through the COVID-19 outbreak in 2020 and remained highly cash generative in 2020 as well as in the first half of 2021. However, the Board appreciates that the continued spread of COVID-19 and the appearances of new variants in some countries could pose a significant threat to the recovery of the global economy seen earlier this year.

As of the date of the approval of these interim condensed consolidated financial statements, the Board considers the risk of material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern to be low, but will continue to monitor future developments. Following repayment of the PXF facility in 1H 2021, the Group has a very low level of overall debt, which was taken into consideration by the Board when forming its conclusion. This conclusion is further based on the Group's successful immediate response to the COVID-19 outbreak and later throughout the pandemic, its continued high cash generation and the forecasted available balance of cash and cash equivalents.  The mitigating factors identified in the past, such as working capital measures, the timing of development capital expenditures and shareholder distributions, remain available to the Group and are considered to be sufficient to address any significant adverse changes.

The Group's Board has concluded that the COVID-19 pandemic does not represent an indicator of impairment for any of the Group's assets, as of the date of the approval of the interim condensed consolidated financial statements for the half year period ended 30 June 2021. This conclusion is supported by the very strong cash generation in 1H 2021, strong production performance since the beginning of the pandemic, and the Group's continued ability to deliver high quality pellets and the expected realisation of firm cash flows in 2H 2021 and beyond. Consequently, no significant judgement has been applied in this respect.

Stress testing and going concern assessment

Considering the fact that the Group operates in an industry with a history of a high price volatility and the currently very high prices for iron ore products, the risk in respect of the Group's future price realisations has been thoroughly addressed in its going concern assessment. The Group's current going concern assessment is based on its latest long-term model covering the years 2021 to 2025, which was updated in June 2021 in order to reflect latest price and cost assumptions. As in the past, various sensitivity scenarios for lower realised prices, higher production costs and lower production and sales volumes have been performed in addition to the base case scenario. Additionally, in light of the uncertainties in terms of recovery of the global economy due to the ongoing COVID-19 pandemic, the Group performed reverse stress tests addressing more severe demand disruptions in the Group's key markets and adverse price changes for the period to be covered by the going concern assessment.

The spike of the prices for iron ore products in the second half of 2020 and the first half of 2021 is seen as an indication that the Group produces and markets a product that is high in demand with a positive effect on Group's long-term viability. In addition to the demand and prospects of the Group's products on the global market, the projected cash flow generation for the period of the going concern assessment, the debt repayment profile and the balance of cash and cash equivalents available as well as any mitigating factors available to react to possible adverse developments was considered to assess the Group's resilience to adverse changes.

The Group's going concern assessment did also cover a period of 5 months beyond the 12 months from the approval of these interim condensed consolidated financial statements. As of 30 June 2021, the Group had available cash and cash equivalents totalling US$235 million and was in a Net Cash position of US$213 million with no significant debt repayments within the next 12 months. The Group does further have access to uncommitted trade finance facilities of US$140 million, of which US$15 million were used as of 30 June 2021. Although the Group does currently not have any committed undrawn bank debt facilities available, the Directors concluded that the Group has sufficient liquidity to meet its present obligations and cover working capital needs for the period to be covered by the going concern assessment. Consequently, it is the Directors' view that the Group is resilient to the current uncertainties in the global economy, and as a result, the Group continues to adopt the going concern basis of accounting for the preparation of these interim condensed consolidated financial statements.

 

 

Following the repayment of the Group's major debt facility as of 30 June 2021, there are no debt covenants, such as Net Debt to EBITDA or covenants that relate to distributable reserves, which are relevant to the Group going forward.

Outlook

Even with the experience of having successfully navigated through the COVID-19 pandemic, it is still extremely difficult to predict its future development and its impact on the global economy. It is the Group's view the associated uncertainties will persist for a prolonged period, resulting in a certain volatility in the global market that might require swift reactions and decisions. The Group expects to be able to rely on the experience gained since the beginning of the pandemic when it was able to redirect its pellet sales in order to benefit from favourable demand dynamics in the respective markets.

To date, iron ore fines prices have remained strong throughout the majority of the global COVID-19 pandemic, which relates to a direct response by sovereign governments to stimulate economies and counter the financial effects of measures taken to stem the spread of COVID-19. The Group expects the influence of these fiscal policies to ease in the second half of the year, with demand for iron ore declining from the record levels being seen at present. As of July 2021, the consensus forecast for iron ore prices (62% Fe) in 2021, based on a grouping of 11 investment banks, was US$170 per tonne for the full year, implying a decrease in the average iron ore price by approximately US$15 per tonne in 2H 2021 from the level seen in 1H 2021. Iron ore futures contracts also indicate a fall in iron ore pricing in the second half of 2021, with contracts for delivery of iron ore (62% Fe) December 2021 priced at US$180 per tonne as of 28 July 2021[17], compared to a spot iron ore price of US$201 per tonne as of the same date[18].

For further information, please see Iron Ore Market Review Section on page 4 as well as the Going Concern Statement on page 24.

Ukraine country risk

The Group's mining and processing operations are located in Ukraine, which is a country exposed to regional geopolitical risks, with an ongoing territorial dispute with a neighbouring country. During 1H 2021, the Group notes that there have been periods of heightened tension between sovereign states in the region in which the Group operates and the Group continues to monitor the situation closely.

The independence of the judicial system, and its immunity from economic and political influences in Ukraine, remains questionable, and the stability of existing legal frameworks may weaken further with future political changes in Ukraine. As a result, the Group is still exposed to an unclear fiscal and legal system in Ukraine affecting the risks around the Group's tax position, including risks relating to policies applied relating to transfer pricing, the timely return of VAT refunds and the independence of the legal system for any cases heard by the courts.

As referenced in the Group's 2020 Annual Report and Accounts, there are outstanding matters in Ukraine relating to the Group's controlling shareholder that remain unresolved, and there is a risk that assets owned or controlled (or alleged to be owned or controlled) by him may be subject to restrictions, in Ukraine or elsewhere, or that the Group may be impacted by or become involved in legal proceedings relating to these matters, in Ukraine or elsewhere.

As at the date of approval of these interim condensed consolidated financial statements, the share dispute lodged by four claimants to invalidate a share sale and purchase agreement concluded in 2002 remains ongoing. Following a statement of defence filed by FAG earlier in 2021, the relevant court in Ukraine ruled on 27 May 2021 in favour of FAG. The opposing parties filed their appeals in June 2021 and the next hearing is expected to take place in September 2021.

For further information on ongoing legal disputes, please see Note 17 Commitments, contingences and legal disputes.

The Group is currently also engaged in discussions with the Government of Ukraine following the cancellation of the licence for Galeschynske in July 2021, which is a project in the exploration phase that is situated to the north of the Group's active mining operations. The legal reason for this decision remains unclear, as the government had only recently confirmed the validity and good standing of this licence, and the Group is seeking to engage with the Government of Ukraine to determine the next steps that the Group will take in respect of restoring this project's licence. Whilst the Group is focused on returning this licence to its previous state, there can be no guarantees as to a successful outcome to this process. For further details of the Galeschynske deposit, please see the Operational Review Section (Exploration projects) on page 11.

Global steel demand and realised prices for iron ore pellets

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. Steel prices have risen in 1H 2021, with hot rolled coil pricing increases of 61%, 99% and 201% seen in China, Europe and ASEAN markets respectively, protecting margins for steelmakers. As mentioned in the section titled 'COVID-19 pandemic update and going concern', the Group expects a gradual unwinding of fiscal measures implemented by sovereign governments in 2H 2021, and as a result, a gradual lowering of demand for iron ore and steel products. With this reduction in demand, prices are expected to decrease, with lower iron ore fines prices reducing the Group's realised price for iron ore pellets and the Group's overall profitability. For further information, see Iron ore market review on page 4.

Pellet premiums

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, which in turn will lower profitability.

Market mix

In 1H 2021, the Platts China pellet premium averaged US$57 per tonne compared with the average Platts Atlantic blast furnace pellet premium of US$54 per tonne, with the pellet premium to China typically reflective of spot sales rather than sales under long-term contract. A temporary change in sales mix with more volume sold under short-term spot contracts and less under long-term contracts could have an impact on the average realised price and the Group profitability.

Freight rates

The Group's received price is subject to freight market volatility with higher freight rates reducing the Group's realised price returns. In 1H 2021, the Baltic Exchange C3 freight index[19] increased by 72%, or the equivalent of US$9 per tonne, to an average of US$22 per tonne compared to 1H 2020. Freight rates are largely influenced by the price of oil and demand for seagoing vessels from bulk commodity producers. As of 27 July 2021, C3 freight rates have risen to US$28 per tonne, representing a level that is a further US$6 above the average for 1H 2021. An increase in freight rates will reduce the Group's received price and its profitability.

 

 

 

 

Directors' Responsibility Statement

 

The Interim Report complies with the Disclosure and Transparency Rules ("DTR") of the United Kingdom's Financial Conduct Authority in respect of the requirement to produce a half-yearly financial report. The preparation of the Interim Report for the six months ended 30 June 2021 in accordance with applicable laws, regulations and accounting standards is the responsibility of, and has been approved by, the Directors.

 

We confirm that to the best of our knowledge:

·   the condensed set of consolidated financial statements has been prepared in accordance with IAS 34 as contained in UK adopted IFRS.

·   the Interim Management Report includes a fair review of the important events that have occurred during the first six months of the financial year and their impact on the condensed financial statements, and description of the principal risks and uncertainties for the remaining six months of the financial year, as required by DTR4.2.7R; and

·   the Interim Management Report includes a fair review of disclosures of material related party transactions that have occurred in the first six months of the financial year and of material changes in the related party transactions described in the 2020 Annual Report, as required by DTR 4.2.8R.

 

The Directors are also responsible for the maintenance and integrity of the Ferrexpo plc website.

 

A list of current Directors is maintained on the Ferrexpo plc website which can be found at www.ferrexpo.com.

 

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

For and on behalf of the Board

 

 

Lucio Genovese

Non-executive Chair

 

 

Jim North

Interim Chief Executive Officer and Executive Director

3 August 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Independent Review Report to Ferrexpo Plc

Introduction

We have been engaged by Ferrexpo plc (the 'Company) to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2021 which comprises the Interim Consolidated Income Statement, the Interim Consolidated Statement of Comprehensive Income, the Interim Consolidated Statement of Financial Position, the Interim Consolidated Statement of Cash Flows, the Interim Consolidated Statement of Changes in Equity, and the related notes 1 to 20. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely for the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed. 

Directors' responsibilities 

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority. 

As disclosed in note 2, the financial statements for the year ended 31 December 2020 were prepared in accordance with International Financial Reporting Standards ('IFRSs') issued by the International Accounting Standard Board ('IASB'), as adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and with the Companies Act 2006.

The financial statements for the year ended 31 December 2021 will be prepared in accordance with UK-adopted International Financial Reporting Standards.

The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted for use in the United Kingdom.

Our responsibility 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 

Conclusion 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2021 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted for use in the United Kingdom and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

 

 

 

MHA MacIntyre Hudson

Statutory Auditor

London

 

 

Interim Consolidated Income Statement

US$000	Notes	6 months ended 30.06.21 (unaudited)	6 months ended 30.06.20 (unaudited)	Year-ended 31.12.20 (audited)
Revenue	3/4	1,352,656	775,831	1,700,321
Operating expenses	5	(513,850)	(516,236)	(1,018,109)
Other operating income		4,421	2,019	5,432
Operating foreign exchange (losses)/gains	6	(38,022)	35,773	61,023
Operating profit		805,205	297,387	748,667
Share of profit from associates		1,368	2,476	5,624
Profit before tax and finance		806,573	299,863	754,291
Net finance expense	7	(6,243)	(7,504)	(11,733)
Non-operating foreign exchange (losses)/gains	6	(3,431)	1,635	5,302
Profit before tax		796,899	293,994	747,860
Income tax expense	8	(135,473)	(44,086)	(112,568)
Profit for the period/year		661,426	249,908	635,292
Profit attributable to:
Equity shareholders of Ferrexpo plc		661,417	249,904	635,292
Non-controlling interests		9	4	−
Profit for the period/year		661,426	249,908	635,292
Earnings per share:
Basic (US cents)	9	112.5	42.6	108.1
Diluted (US cents)	9	112.3	42.4	107.9

 

 

Interim Consolidated Statement of Comprehensive Income

US$000	Notes	6 months ended 30.06.21	6 months ended 30.06.20	Year ended 31.12.20
		(unaudited)	(unaudited)	(audited)
Profit for the period/year		661,426	249,908	635,292
Items that may subsequently be reclassified to profit or loss:
Exchange differences on translating foreign operations	6	95,770	(213,632)	(317,674)
Income tax effect		(3,688)	10,977	16,278
Net other comprehensive income/(loss) that may be reclassified to profit or loss in subsequent periods		92,082	(202,655)	(301,396)
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gains/(losses) on defined benefit pension liability		1,304	71	(1,057)
Net other comprehensive income/(loss) not being reclassified to profit or loss in subsequent periods		1,304	71	(1,057)
Other comprehensive income/(loss) for the period/year, net of tax		93,386	(202,584)	(302,453)
Total comprehensive income for the period/year, net of tax		754,812	47,324	332,839
Total comprehensive income attributable to:
Equity shareholders of Ferrexpo plc		754,825	47,315	332,822
Non-controlling interests		(13)	9	17
		754,812	47,324	332,839

 

Interim Consolidated Statement of Financial Position

US$000	Notes	As at 30.06.21	As at 31.12.20	As at 30.06.20
		(unaudited)	(audited)	(unaudited)
Assets
Property, plant and equipment	10	1,107,143	1,004,385	989,894
Right-of-use assets	11	6,319	8,313	7,893
Goodwill and other intangible assets		43,195	40,734	41,711
Investments in associates		5,712	5,873	6,462
Inventories	13	230,000	213,685	218,414
Other non-current assets		41,005	25,480	18,510
Deferred tax assets		37,830	30,574	34,268
Total non-current assets		1,471,204	1,329,044	1,317,152
Inventories	13	192,600	144,605	167,260
Trade and other receivables		209,694	152,750	108,970
Prepayments and other current assets		31,114	25,884	37,315
Income taxes recoverable and prepaid	8	1,130	1,351	174
Other taxes recoverable and prepaid	12	39,226	31,323	28,993
Cash and cash equivalents	3/14	234,669	270,006	169,226
Total current assets		708,433	625,919	511,938
Total assets		2,179,637	1,954,963	1,829,090
Equity and liabilities
Issued capital	18	121,628	121,628	121,628
Share premium		185,112	185,112	185,112
Other reserves	18	(1,973,463)	(2,065,896)	(1,967,035)
Retained earnings		3,525,374	3,250,534	2,982,638
Equity attributable to equity shareholders of Ferrexpo plc		1,858,651	1,491,378	1,322,343
Non-controlling interest		82	95	87
Total equity		1,858,733	1,491,473	1,322,430
Interest-bearing loans and borrowings	3/15	2,686	132,129	204,950
Defined benefit pension liability		33,279	32,475	31,492
Provision for site restoration		3,137	2,846	2,840
Deferred tax liabilities		262	101	102
Total non-current liabilities		39,364	167,551	239,384
Interest-bearing loans and borrowings	3/15	19,475	134,349	138,538
Trade and other payables		117,242	43,749	54,382
Accrued and contract liabilities		30,971	45,542	28,284
Income taxes payable	8	97,002	58,483	34,768
Other taxes payable		16,850	13,816	11,304
Total current liabilities		281,540	295,939	267,276
Total liabilities		320,904	463,490	506,660
Total equity and liabilities		2,179,637	1,954,963	1,829,090

The financial statements were approved by the Board of Directors on 3 August 2021.

Lucio Genovese                                                                           Jim North

Non-executive Chair                                                                      Interim Chief Executive Officer and Executive Director
 

Interim Consolidated Statement of Cash Flows

US$000	Notes	6 months ended 30.06.21	6 months ended 30.06.20	Year ended 31.12.20
		(unaudited)	(unaudited)	(audited)
Profit before tax		796,899	293,994	747,860
Adjustments for:
Depreciation of property, plant and equipment, right-of-use assets and amortisation of intangible assets	5	55,427	51,374	102,475
Finance expense	7	5,302	6,248	9,113
Finance income	7	(254)	(372)	(553)
Losses on disposal and liquidation of property, plant and equipment	5	2,975	877	1,303
Write-offs/(write-backs)	5	3,060	(71)	192
Share of profit from associates		(1,368)	(2,476)	(5,624)
Movement in allowance for doubtful receivables		410	1,385	724
Movement in site restoration provision		172	167	18
Employee benefits		2,229	2,450	4,779
Share-based payments		329	399	291
Operating foreign exchange losses/(gains)	6	38,022	(35,773)	(61,023)
Non-operating foreign exchange losses/(gains)	6	3,431	(1,635)	(5,302)
Other adjustments		(5,508)	(1,018)	(2,546)
Operating cash flow before working capital changes		901,126	315,549	791,707
Changes in working capital:
Increase in trade and other receivables		(67,352)	(8,378)	(49,538)
(Increase)/decrease in inventories		(44,119)	18,270	27,034
Decrease in trade and other payables (incl. accrued and contract liabilities)		(10,855)	(38,947)	(4,798)
(Increase)/decrease in other taxes recoverable and payable (incl. VAT)		(3,791)	4,153	3,214
Cash generated from operating activities		775,009	290,647	767,619
Interest paid		(6,326)	(12,949)	(21,439)
Income tax paid		(106,872)	(18,758)	(56,571)
Post-employment benefits paid		(1,231)	(968)	(2,391)
Net cash flows from operating activities		660,580	257,972	687,218
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets		(142,451)	(95,989)	(205,779)
Proceeds from disposal of property, plant and equipment and intangible assets		328	469	836
Interest received		229	289	442
Dividends from associates		2,067	1,987	4,027
Advance payment for investment in joint venture		-	-	(5,000)
Net cash flows used in investing activities		(139,827)	(93,244)	(205,474)
Cash flows from financing activities
Proceeds from borrowings and finance	15	15,346	-	−
Repayment of borrowings and finance	15	(257,433)	(67,459)	(144,904)
Principal elements of lease payments	15	(2,612)	(1,111)	(3,082)
Dividends paid to equity shareholders of Ferrexpo plc	9	(310,476)	(58,419)	(195,446)
Net cash flows used in financing activities		(555,175)	(126,989)	(343,432)
Net (decrease)/increase in cash and cash equivalents		(34,422)	37,739	138,312
Cash and cash equivalents at the beginning of the period/year		270,006	131,020	131,020
Currency translation differences		(915)	467	674
Cash and cash equivalents at the end of the period/year	14	234,669	169,226	270,006

 

 

Interim Consolidated Statement of Changes in Equity

For the financial year 2020 and the six months ended 30 June 2021		Attributable to equity shareholders of Ferrexpo plc
US$000	Issued  capital	Share  premium	Other reserves (Note 18)	Retained  Earnings	Total capital and reserves	Non-controlling interests	Total equity
At 31 December 2019 (audited)	121,628	185,112	(1,764,774)	2,810,588	1,352,554	78	1,352,632
Profit for the period	-	-	-	635,292	635,292	-	635,292
Other comprehensive (loss)/income	-	-	(301,413)	(1,057)	(302,470)	17	(302,453)
Total comprehensive (loss)/income for the year	-	-	(301,413)	634,235	332,822	17	332,839
Equity dividends to the shareholders of Ferrexpo plc (Note 9)	-	-	-	(194,289)	(194,289)	-	(194,289)
Share-based payments	-	-	291	-	291	-	291
At 31 December 2020 (audited)	121,628	185,112	(2,065,896)	3,250,534	1,491,378	95	1,491,473
Profit for the period	-	-	-	661,417	661,417	9	661,426
Other comprehensive income/(loss)	-	-	92,104	1,304	93,408	(22)	93,386
Total comprehensive income/(loss) for the period	-	-	92,104	662,721	754,825	(13)	754,812
Equity dividends paid to shareholders of Ferrexpo plc (Note 9)	-	-	-	(387,881)	(387,881)	-	(387,881)
Share-based payments	-	-	329	-	329	-	329
At 30 June 2021 (unaudited)	121,628	185,112	(1,973,463)	3,525,374	1,858,651	82	1,858,733

 

 

For the six months ended 30 June 2020		Attributable to equity shareholders of Ferrexpo plc
US$000	Issued  capital	Share  premium	Other reserves (Note 18)	Retained earnings	Total capital and reserves	Non-controlling interests	Total equity
At 31 December 2019 (audited)	121,628	185,112	(1,764,774)	2,810,588	1,352,554	78	1,352,632
Profit for the period	-	-	-	249,904	249,904	4	249,908
Other comprehensive (loss)/income	-	-	(202,660)	71	(202,589)	5	(202,584)
Total comprehensive (loss)/income for the period	-	-	(202,660)	249,975	47,315	9	47,324
Equity dividends paid to shareholders of Ferrexpo plc (Note 9)	-	-	-	(77,925)	(77,925)	-	(77,925)
Share-based payments	-	-	399	-	399	-	399
At 30 June 2020 (unaudited)	121,628	185,112	(1,967,035)	2,982,638	1,322,343	87	1,322,430