Ferrexpo - ESG iron ore from Eastern Ukraine

[Pohjolan_Eka]

Ferrexpo is the world’s third-largest producer of iron ore pellets. The iron ore pellets produced by the company are high-quality (65%/67% Fe) and have low carbon emissions (89kg/t):

Ferrexpo has three operational mines and a processing plant in the Poltava region, far from the front lines. In addition, the company has many untapped deposits and unexplored opportunities for additional mining operations in the surrounding area, so the company’s mining operations have a bright future.

Iron pellets are transported from the mining area abroad primarily through a port located near Odesa, so keeping maritime connections open is critical for Ferrexpo. Some volume can also be transported via the Danube and through rail connections to Europe, but Ukraine has only a limited amount of rail capacity, and without functioning sea routes, production must be restricted significantly.

The cost profile of the mines is very moderate, and there is plenty of room to cut costs as production scales up and the war ends. About half of the costs are due to energy expenses, so unfortunately, Russian missile strikes against Ukraine’s energy infrastructure are weighing on the company’s cost side.

The production and sale of iron pellets has suffered immensely due to the war in Ukraine, and the company’s four pellet lines are significantly underutilized. Production is limited by, among other things, electricity supply, availability of transport equipment, labor availability, the mobilization of workers to the front, and workers moving to Western Ukraine for fear of a Russian breakthrough.

Fortunately, 24Q1 began to show clear signs of recovery in production as the company finally begins to demonstrate an ability to adapt to the wartime situation and Black Sea shipping routes have started to function. Production grew by +200%, and just under two million tonnes of pellets were produced in the quarter, which is already a respectable figure, as before the war production was about three million tonnes per quarter.

If production continues at these high levels, Ferrexpo will be deeply profitable. Operations could generate a cash flow of +500 MUSD, with a nice amount remaining even after mandatory investments (-100 MUSD – -150 MUSD). The company’s market value at the time of writing is just under 400 MUSD, so it is a true value stock.

Most importantly, strong cash flow would enable the resumption of dividend payments. The plan is to pay out 30% of Free Cash Flow as dividends, so the “investor’s paycheck” could be quite substantial at these share prices.

The company’s ownership structure is somewhat messy. Founder-oligarch Kostyantyn Zhevago, who owns about half of the firm, is in exile in France, and the Ukrainian state seized his holdings in late 2022. The management has changed at a rapid pace, and former executives have faced corruption and other charges at such a rate that it is somewhat unclear to me who actually owns the company. Ukraine is a quite corrupt country, so there is some degree of risk regarding the nationalization of the company or the misappropriation of funds.

Ferrexpo has a vast number of various legal cases ongoing, but of critical importance is particularly a 124 MUSD dispute that the company has lost in lower courts and whose next Supreme Court hearing is on May 27th. Losing that would be disastrous for the company’s stock price and could lead to unpredictable consequences.

Despite all the corruption and war, ESG efforts are progressing. Ferrexpo aims to halve carbon emissions by 2030 and achieve net-zero emissions by 2050.

This company genuinely has ten-bagger potential. If you have the knowledge, the skill, the courage, and that famous vision, an armchair general could potentially forge massive returns from this stock

Investor materials:
https://www.ferrexpo.com/investors/results-reports-and-presentations/
Investor calendar:
https://www.ferrexpo.com/investors/financial-calendar/

[DayTraderXL]

This project beats any mine in Canada hands down
“A true find”

[karttu]

Where can I buy Ferrexpo? What about the daily volume?

Thanks!

[Pohjolan_Eka]

I would also strongly recommend browsing the annual report to Note 30: Commitments, contingencies and legal disputes and understanding them.

https://www.ferrexpo.com/media/4kffbpny/44653_ferrexpo-ar23_int.pdf

These two in particular involve large sums of money:

On paper, the company is worth dozens of times its current share price, and even this year, at least on paper, hundreds of millions of dollars in free cash flow will be generated, but that is of no use if Zelenskyy’s associates drive the company into the ground before then and force-sell the assets to themselves at a bargain price or nationalize the mines.

[Rokka]

Good find and an unnervingly small chance to make a lot of money; unfortunately, a redistribution of assets is underway in Ukraine among new oligarchs and the risk of losing your own is very high, as you suspected yourself. At the very least, I would wait to see how the upcoming trial goes and whether the panel of judges resigns again before the case.

[Pohjolan_Eka]

It can be difficult for Westerners to understand, as a result of the current war fanaticism, how corrupt a country Ukraine is, even though things are slowly moving in a better direction. Ferrexpo’s executives have, of course, paid bribes to judges and greased the palms of officials, because it has been a mandatory part of the system. If you don’t bribe, you lose.

Even when researching the situations of mining companies in African countries, one hasn’t encountered such madness as the judiciary freezing a company’s bank account so that taxes or salaries cannot be paid. Or freezing all the trains and railway sections owned by the company.

Usually, however, it is in the state’s interest to try to keep companies operational so that they can afford to pay fines and taxes. This logic naturally doesn’t apply if there is a conscious attempt to drive the company into the ground.

Gradually, more of that top management is ending up in prison as corruption cases come to light. The most interesting question is what will happen to Kostyantyn Zhevago’s massive stake, as he is unlikely to return to Ukraine from exile for a long time.

The Ukrainian judiciary has, after all, tried to illegally bypass Ferrexpo’s listed company structure and directly seize the holdings of its Ukrainian subsidiaries, since their authority does not reach the Swiss parent company and Zhevago’s holdings cannot therefore be taken and redistributed from there. Because Ukraine is not a state governed by the rule of law and the war gives Zelensky practically free rein to attack the old oligarchs, the outright theft of assets cannot be completely ruled out at this stage. However, this concerns one of Ukraine’s most important companies and the largest iron mine in Europe.

[Divinesia]

I’ve been following Ferrexpo for a few years now. The hope, especially at the start, was that Zelensky wouldn’t be unreasonable, given that the company is registered in Switzerland and listed on the UK stock exchange. There are many European investors involved, but so far that hasn’t seemed to matter. The Ukrainian authorities are coming down hard.

Probably one of the “best” scenarios would be if Kostyantyn Zhevago’s stake were simply transferred to the Ukrainian state without others suffering, but well, who knows. It’s mostly pure guesswork as to how it will turn out. The feeling, however, is that the Ukrainian authorities’ intentions aren’t entirely pure, while it’s clear that Ferrexpo’s (at least former) management is definitely not clean. The court allegations are ugly, at least to Finnish eyes, but one must remember that in Ukraine, corruption is (or has been) business as usual and more the rule than the exception.

If I remember correctly, you have to be careful with Ferrexpo regarding dividends. Switzerland takes its withholding tax (15%?) and then potentially the UK stock exchange another 15%… You end up having to claw back the dividends from the Swiss tax authorities.

Other news to get a sense of the situation:

Client Challenge

Ferrexpo hit with corporate rights restrictions for Ukraine subsidiaries

So there are at least three uncertainties: Ukraine wants the former oligarch out/prosecuted, there’s a legal dispute over the ownership of the subsidiary, and then there are the various corruption charges, which an outsider can’t possibly fully grasp.

And these uncertainties span a long time; for instance, in 2019 the auditing firm “Deloitte” resigned due to discrepancies in charity fund allocations, and in court, the whole tangle covers at least a decade. Zhevago was also apparently involved in some banking crisis where everyone got their fingers burned, except for Zhevago’s inner circle…

Deloitte quits as Ferrexpo auditor after charity inquiry, shares plunge

Hotel? Trivago
Problem? Zhevago

[Divinesia]

Ferrexpo is performing excellently even during the war.

Ferrexpo H1 Production Surges 75%

LONDON (dpa-AFX) - Ferrexpo PLC (FXPO.L), a producer of iron ore pellets, Monday said its production for the first half increased 75 percent year-on-year to 3.73 million tonnes

The company produced 3.3 million tonnes of pellets and 429,865 tonnes of concentrate during the first six months period.

On a quarter-over-quarter basis, production declined 19 percent to 1.67 billion tonnes, comprising 1.48 million tonnes of pellets and 189,038 tonnes of concentrate.

‘Although we have taken the opportunity to produce, export and sell more, the higher iron ore prices which we benefited from in the first quarter have not extended into the second quarter. This, combined with higher electricity prices has seen margins reduce as we moved into the end of the second quarter.’ said Lucio Genovese, Interim Executive Chair.

[Pohjolan_Eka]

Production was good (expected), although margins dropped specifically due to the high price of electricity (this was also expected). Sadly, four employees serving on the front died in the war against Russia. Unfortunately, there is no news at all regarding the critically important court cases, so one must assume they have gone poorly. The share price wants to start surging now, but we’ll see if a “nice surprise” comes in the form of a press release at some point later this year

[Pohjolan_Eka]

An interesting half-year from Ferrexpo. Iron pellet production rose significantly, as was previously known:

Large companies now have to buy their electricity from neighboring countries. This will presumably increase costs a hell of a lot in the second half of the year if it’s a cold winter.

Towards the end of the period, the authorities in Ukraine mandated that large enterprises including Ferrexpo to import 80% of their electricity needs from neighbouring European countries. This policy was established in response to Russian attacks on Ukrainian power generation and transmission infrastructure, estimated to have reduced domestic electricity supply capacity by 50%

At the current time, we are sourcing electricity from our European neighbours, however, the costs are higher and indeed quite volatile. For the month of June, this added approximately US$11 a tonne to our C1 costs compared to the previous month, meaning, we expect this to have a greater impact for the remainder of the summer due to continued high prices, until domestic nuclear power comes back on line in the autumn.

ESG goals are not forgotten even in the middle of a war

Even during a time of war, the Group has not lost sight of its ESG goals, publishing two significant projects: a ‘Life Cycle assessment’ for its FDP pellets and a ‘Double Materiality assessment’.\n• Later in the year, the Group intends to release its annual ‘Responsible Business Report’ for 2024, which will be defined by the material topics identified in its the Double Materiality Assessment, and an updated Climate Change report, which will assess scenarios for the Group’s carbon targets in light of the war in Ukraine.

A few smaller court cases have been resolved, but the most important ones are still lingering. The amount is also quite outrageous relative to the company’s cash reserves, especially since the company currently has no access to financial markets:

The Group recorded as at 31 December 2024 a provision in the amount of UAH4,727 million (approximately US$124 million as at 31 December 2023) in respect of a contested sureties claim made against the Group’s major subsidiary in Ukraine. As the legal proceedings in relation to this claim have not yet been concluded at the time of approval of these interim condensed consolidated financial statements, this provision is still recognised in full as at 30 June 2024 (US$117 million as at 30 June 2024)

No financial debt, other than lease liabilities, due to absence of available\nfinancial markets to the Group

No major development is expected for the price of iron ore:

Press filtration technology was purchased from Metso

Capital investment during 1H 2024
While certain capital expenditure plans have been suspended to conserve cash, the Group continues to invest in programmes that can deliver shorter-term efficiency and productivity benefits. For example, in the first half of 2024, the Group installed and started the commissioning of the second stage of its modern press filtration technology at the Pellets Production Workshop at FPM. Manufactured by Metso Corporation, this technology lowers the moisture content in the iron ore concentrate before pellet beneficiation, thereby significantly improving the quality of iron ore pellets by strengthening finished products. The technology also helps to reduce the consumption of natural gas in the process furnace, where raw pellets are heated and dried until they solidify. By optimising gas consumption, the technology allows Ferrexpo to save costs and further reduce Scope 1 emissions.

The court cases are a total mess, as is typical in a corrupt country like Ukraine. At the moment, it’s not really known when these will be resolved:

On 26 January 2024 a Ukrainian court of appeal confirmed the claim against FPM in the amount of UAH4,727 million (30 June 2024: US$116,608 thousand; 31 December 2024: US$124,450 thousand; 30 June 2023: nil). On 30 January 2024, FPM filed a cassation appeal to the Supreme Court of Ukraine and the first hearing was scheduled for 20 March 2024, but the hearing did not take place as the presiding judge recused himself. Following the appointment of a new panel of judges, on 1 April 2024 the Supreme Court suspended the possible enforcement of the decision of the court of appeal. A Supreme Court hearing on 17 April 2024 considered primarily procedural matters and a hearing scheduled for 27 May 2024 was postponed to 17 June 2024. On 17 June 2024, the panel of three judges decided to transfer the consideration of the case to another bigger joint panel of judges. The new panel consists of six judges and the date of the next hearing is unknown.

As part of this September 2023 resolution, the State Bailiff imposed an order to arrest (freeze) 50.3% of the issued share capital of Ferrexpo Yeristovo Mining (“FYM”) and Ferrexpo Bellanovo Mining (“FBM”), owned by Ferrexpo AG (“FAG”), based on the incorrect assumption that these corporate rights are owned by Mr. Zhevago. In reaching this decision to arrest these corporate rights, the State Bailiff relied on conclusions made by the Northern Commercial Court of Appeal in the DGF case described above that Mr. Zhevago is the ultimate beneficial owner of the Ukrainian subsidiaries and that all companies in the Group are just nominal owners of the assets ultimately owned by Mr. Zhevago. FAG filed a civil claim in October 2023 seeking to cancel the order and to block the enforcement procedure initiated by the State Bailiff. On 30 November 2023, the Komsomolskyi Town Court of Poltava Region, a court of first instance, suspended the enforcement procedure, prohibiting the State Bailiff from taking any further actions to forcefully sell FAG’s corporate rights in FYM and FBM. The State Bailiff filed an appeal. On 1 July 2024, the Poltava Court of Appeal cancelled the Komsomolskyi Town Court of Poltava Region’s ruling of 30 November 2023 and, therefore, lifted the interim measures which suspended the actions on potential auction. As a result, the State Bailiff may shortly revert to FYM and FBM with its enquiries to collect data on the value of FYM and FBM, which were previously made in September 2023, in order to prepare the 50.3% of shares in FYM and FBM for the forceful sale (auction). FYM and FBM plan to file cassation appeals to the Supreme Court. In parallel, on 30 May 2024, the court of first instance ruled to resume the proceedings in the case and scheduled a hearing for 16 July 2024. The hearing at the Komsomolskyi Town Court of Poltava region was postponed and the next hearing is scheduled for 17 September 2024. If the enforcement process pursuant to which the September 2023 resolution has been issued is not interrupted, this could ultimately lead to a potential sale of shares representing 50.3% of the issued shares in each of FYM and FBM

The majority owner has apparently received a ruling for bribing a judge in connection with a previous court case:

Media in Ukraine reported on 10 July 2024 that the High Anti-Corruption Court (“HACC”) in Ukraine apparently issued a ruling on 10 July 2024 to place the Group’s controlling shareholder into custody in absentia in connection with the suspicion of bribing Ukrainian Supreme Court judges.

Further reading:

https://www.ferrexpo.com/investors/results-reports-and-presentations/

[Gunman]

I own a tiny little slice of the company.
I’m wondering about the recent share price performance, because I personally haven’t found any significant news about the company.
The stock has risen nearly 80% over the past month; I wonder what could be the reason for this?

Edit: Of course, this could be related to Trump’s promises to end the war in Ukraine, but whether there is any meat on the bones of those claims remains for everyone to guess for themselves.

[Divinesia]

-36% on the board today caught my attention.

Ferrexpo had impressively risen over 200% from its lows from September to December, and I just watched the train leave the station from the sidelines…

(Reuters) -London-listed miner Ferrexpo said on Tuesday a civil claim worth 157 billion hryvnias ($3.77 billion) was filed against its Ukrainian unit, Ferrexpo Poltava Mining (FPM), in relation to alleged illegal mining and a sale of waste products.

Ferrexpo's Ukrainian unit faces $3.77 billion civil claim; shares fall

[Hoitopoika]

Currently, the future of the company apparently looks uncertain. Ukrainian authorities have already taken steps to nationalize Ferrexpo’s assets, and the largest shareholder, Kostyantyn Zhevago, has become the subject of an investigation by Ukrainian authorities and has been sanctioned.
Ferrexpo is fighting back to protect its investments by invoking investment protection agreements between Ukraine and the UK, and Ukraine and Switzerland. But it is very possible that Ferrexpo’s operations in Ukraine could change significantly after the war ends.

[Pohjolan_Eka]

Authorities continue to heavily pressure the company:

[Hoitopoika]

The situation between Ferrexpo and the state is very tense. Apparently, Ferrexpo has initiated official dispute resolution proceedings against Ukraine based on investment protection agreements and considers Ukraine’s actions unfounded and unlawful.