• Ferrexpo :
• Anual Report and Accounts 2010 :
• Overview :

Chairman's and
Chief Executive Officer's
Statement

• Introduction

  

  

  We are pleased to report that for the year ended 31 December 2010, Ferrexpo responded to increased iron ore demand and prices with record production, record sales volumes and robust cost control. These factors underpinned the highest EBITDA recorded in the Group’s history of US$585 million compared to US$138 million in 2009.

  In 2009, Ferrexpo’s priority was to conserve cash and to protect margins by producing and selling at near full capacity levels throughout the period. As industry fundamentals recovered in 2010, Ferrexpo was well placed to benefit from higher prices as it continued to produce at full capacity. The Group’s increased cash generation and profitability allowed it to recommence its capital investment programme to further develop growth opportunities.

  The Board approved, in November 2010, US$647 million of capital expenditure as part of an investment programme to increase significantly the quantity and quality of its production. This initial phase is focused on achieving first ore at the Ferrexpo Yeristovskoye Mine (‘FYM’), extending the life of the Ferrexpo Poltava Mine (‘FPM’) as well as on increasing the quality of the Group’s pellet output.

  Ferrexpo’s Board believes the Group’s resource base is one of the largest in the world with estimated iron ore resources of over 20 billion tonnes. This will support steady production growth while low cost mining facilities and integrated infrastructure from mine to rail, river and port means that the Group is well placed to deliver sustainable value to shareholders, employees and its country of operation throughout the commodities cycle.

• Summary of results

  The Company’s sales volumes increased 8% to 9.7 million tonnes of pellets (2009: 9 million tonnes). The Group achieved significant price increases throughout the year compared with 2009. These higher sales volumes and prices saw Group revenues almost double to US$1.3 billion (2009: US$649 million). The Group produced at full capacity throughout the period which allowed for full absorption of the fixed cost base.

  Together these factors resulted in an increase in EBITDA of over four fold to US$585 million (2009: US$138 million). Group profit after tax increased 500% to US$425 million (2009: US$71 million).

  Operating cash flow for the year improved significantly and as a result net debt reduced by US$153 million to US$104 million (2009: US$258 million). As of 31 December 2010 the Group had cash balances of US$320 million compared with US$12 million as of 31 December 2009.

• Pricing Environment and Strategy

  In 2010, European steel mills recovered from the lows of the 2009 downturn while Chinese iron ore requirements continued to underpin world demand. The reduction of capacity by the major iron ore pellet suppliers during 2009 proved an ideal scenario for pellet price recovery in 2010.

  The iron ore pricing methodology, however, adjusted throughout the year as the industry moved from an annual global benchmark pricing system, which covered the entire fragmented steel industry, to shorter-term individual pricing negotiations with steel mills.

  Currently in the global iron ore market, there are a number of pricing methodologies being applied depending on geography and customer. In 2010, Ferrexpo agreed a mixture of pricing arrangements with its customers including quarterly and six monthly pricing agreements. As the new pricing mechanisms are increasingly based on shorter time periods, Ferrexpo believes there is likely to be increased pricing volatility.

  Industry fundamentals recovered in 2010, and Ferrexpo was well placed to benefit from higher prices as it continued to produce at full capacity. The Group’s increased cash generation and profitability allowed it to recommence its capital investment programme to further develop growth opportunities.

  Ferrexpo will continue to focus on maximising prices relative to its competitors’ based on ‘value in use’ to the customer. Ferrexpo believes that its geographic proximity to key steel markets represents an attractive alternative to the major seaborne suppliers due to the lower costs of transporting pellets over a shorter distance from Ukraine.

• Marketing and logistics strategy

  Ferrexpo’s logistics strategy is to manage and control as much of the delivery chain as possible. This includes further developing the Group’s port and barge facilities to allow for CFR delivery to customers in Asia and Western Europe.

  Ferrexpo already has a significant logistics cost advantage for delivery of pellets via rail and barge direct to customers in Central and Eastern Europe. The port terminal on the Black Sea of TIS-Ruda, an associated company of the Group, provides independent access to the seaborne markets in Asia as well as to markets in Turkey and the Middle East.

  The TIS-Ruda port enables Ferrexpo to diversify its customer mix, avoiding dependence on any one customer group for pricing and product demand. Ferrexpo is looking to further develop its ship loading capabilities ahead of the ramp up of the Yeristovskoye deposit, which will increase the Group’s pellet production, allowing the Group to increase its exports to key Asian markets.

  The Group made further investments in logistics during the year. It purchased 300 rail cars bringing the Company’s total holding at 31 December 2010 to over 900. In February 2011 Ferrexpo signed contracts to acquire an additional 400 rail cars over the next year with an option to purchase a further 600. Purchase of these additional rail cars should ensure near self sufficiency and full rail car availability for pellet transportation to the Ukrainian border as well as a tariff discount from the railway authorities of over 8%.

  In December 2010 Ferrexpo acquired Vienna-based Helogistics, one of the largest inland waterway transportation companies in Europe. It transports iron ore as well as other bulk cargos, mainly by barge, along the Danube and Rhine rivers from Ukraine and Rotterdam to various locations in Northern, Central and Eastern Europe. This includes transportation of Ferrexpo pellets to core customers in Central Europe. Helogistics will enable the Group to further secure the supply chain, improving service to existing customers as well as provide further access to markets throughout Europe, enhancing Ferrexpo’s presence as the regional market leader in iron ore pellet supply.

  In general, Ferrexpo believes that a developed logistics infrastructure is essential in high volume bulk commodity markets like iron ore. It is therefore further expanding its logistics infrastructure ahead of planned production growth.

  In 2010, over 90% of the Group’s sales volumes, from own ore, were based on long-term volume framework agreements compared with circa 70% in 2009. It is Ferrexpo’s ongoing strategy to allocate approximately 10% of sales to potential new customers, especially first class Asian steel mills, through trial spot cargos ahead of its planned Yeristovskoye mine expansion.

• Production

  FPM has been producing iron ore pellets continuously for the last 30 years – through the Soviet administration, the fall of the Berlin wall, Ukrainian independence and several Ukrainian governments.

  In 2010, the mine produced record levels of pellets operating at full capacity throughout the period. In September 2010, FPM achieved the highest monthly pellet production since 1987, while in October 2010 FPM produced the highest monthly output of 65% Fe pellets on record.

  In total, production increased by 14% in 2010 to approximately 10 million tonnes of pellets compared with 8.8 million tonnes of pellets produced in 2009.

  Production from own ore increased 5% to 9.0 million tonnes (2009: 8.6 million tonnes) while processing of third party concentrate increased substantially to meet higher demand.

  The Group produces a mix of 62% and 65% Fe pellets. Of the total 10 million tonnes of pellets produced, 49% were higher grade 65% Fe pellets in line with the proportion of 65% Fe pellet production in 2009.

  The higher production levels achieved illustrate the benefits of continuous improvements in production efficiencies as well as the sustainability of the Group’s operations given the reduced levels of capital investment in 2009 and 2010.

• Costs

  The Board believes Ferrexpo is one of the lowest cost pellet producers in the world on a FOB basis. The Group aims to reduce costs within its control by at least 1% to 2% per annum principally through increased output and efficiency enhancements achieved through the Business Improvement Programme (‘BIP’). Since the inception of the BIP in 2006, cumulative productivity gains have saved approximately US$5.3 per tonne of pellets produced, or US$48 million on a cumulative basis to 31 December 2010.

  Not all costs are directly within Ferrexpo’s control, such as gas and electricity tariffs. The Group is investigating managing these exposures, most likely through acquisitions and partnerships which can secure raw material supply.

  The cost environment in 2010 was impacted by Ukrainian PPI inflation of 21% as well as cost increases associated with a stronger commodity price environment.

  Approximately 70% of total operating costs, including freight, are denominated in Ukrainian hryvnia while all revenues are received in US dollars. The hryvnia has remained broadly stable on average in 2010 compared to 2009 at around UAH8 to the US dollar.

  Overall the average C1 cash cost of production was below US$40 per tonne for 2010. This represented a circa 15% increase compared to the average 2009 C1 cash cost of US$34 per tonne but this was, however, lower than the local inflation rate of approximately 21% for the period.

• Ukraine

  Ukraine has recovered in many respects in 2010 compared to the hardships experienced in 2009. There has been a stable political environment since the presidential elections in February 2010. In terms of economic recovery, the steel industry (which is the largest contributor to the economy) increased production by an estimated 13%1 in 2010 (2009: negative 20%1). Overall, GDP growth in 2010 was 4%1 compared to a decline of 15%1 in 2009.

  In general, continued political stability, growing credibility of Government fiscal policies, improving macroeconomic fundamentals and renewed IMF support have led to a significant improvement of Ukraine’s credit rating. During 2010, Fitch and Standard & Poor’s raised Ukraine’s sovereign rating to B (from B-) and B+ (from B) respectively with a stable outlook.

  Ferrexpo continues to regard Ukraine as a good place for business. The Group is the largest employer in the town of Komsomolsk and benefits from a well educated workforce which is able to transfer its skills to the further development of the Group’s resources.

• Investing activities and funding

  Ferrexpo’s capital expenditure projects are aimed at the expansion and upgrade of the existing mine and processing facilities and to unlock the considerable value in the Group’s under exploited reserves and resources, starting with FYM.

  During the year, Ferrexpo spent US$167 million on capital expenditure. In November the Board approved US$647 million of capital investment as part of the first stage of the Group’s investment programme.

• Dividend

  It is the Board’s view that cash generated by the Group should principally finance future growth projects and that the Group should pay modest consistent dividends throughout the economic cycle. The Directors therefore recommend a final dividend in respect of profits generated for the Group in 2010 of 3.3 US cents per Ordinary Share (2009 final dividend: 3.3 US cents per Ordinary Share) for payment on 3 June 2011 to shareholders on the register at the close of business on 3 May 2011. The dividend will be paid in UK pounds sterling with an election to receive US dollars.

• People

  The Board would like to thank all the management and staff for their continued hard work and commitment which formed the foundation for another year of significant progress.

  As previously announced, Simon Wandke the Group Marketing Officer resigned from the Company during 2010. Simon’s experience was much valued by the Board and it would like to thank him for his contribution to the Group.

  Ferrexpo is very pleased to welcome Jason Keys as the new Group Marketing Officer. Jason joins Ferrexpo from BHP Billiton where he is currently Global Marketing Manager for Iron Ore. He has significant industry experience in both the European and Asian iron ore markets, having led BHP Billiton’s Iron Ore commercial marketing team over the last five years.

  As part of the continuing development of the Group’s capabilities, Ferrexpo appointed Brian Maynard as the Group Chief Operating Officer in January 2011. Brian has worked extensively in the mining industry for the last 30 years and is already making a considerable impact on our operations.

• Corporate governance and social responsibility

  Ferrexpo has a balanced and experienced Board which maintains the highest standards of corporate governance throughout the Group and complies with the UK Combined Code on Corporate Governance.

  The Board’s Corporate Safety and Social Responsibility (‘CSR’) Committee monitors the management of the Group’s health, safety, environmental and community programmes on a regular basis in line with best practice for mining companies. Safety is fundamental to the success of Ferrexpo’s future, and safety procedures are integral to the culture of the Group. Ferrexpo deeply regrets that Ivan Kharchenko, a machinery repairman, was fatally injured in the second half of the year in consequence of a failure to observe the Group’s safety standards. Ferrexpo is implementing measures to ensure that the Group’s safety controls are further improved going forward.

• Outlook

  Following a successful 2010, the new financial year has started well with strong demand for Ferrexpo’s product. The Group is, however, aware that it operates in a cyclical environment and will always look to mitigate any softening in demand across the industry through its broad, high quality customer base and established infrastructure for serving seaborne and regional markets. This should allow Ferrexpo to continue to produce at full capacity underpinning a strong financial performance for the rest of the year.

  Michael Abrahams CBE DL Chairman

  Kostyantin Zhevago Chief Executive Officer