2016 Full Year Results

RNS Number : 1500A

Ferrexpo PLC

22 March 2017

Ferrexpo plc

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

2016 Full Year Results: strong cash generation, strengthened balance sheet and reinstatement of dividends

Ferrexpo plc today announces its financial results for the year ended 31 December 2016.

Steve Lucas, Non-Executive Chairman, said:

"In 2016, Ferrexpo demonstrated the strength of its business model and management team. In very challenging market conditions, where the iron ore price traded at eight year lows, the Group increased its net cash flows from operations by over 1.5 times to US$332 million compared to 2015. This allowed it to significantly reduce its financial leverage and strengthen its balance sheet. Net debt to EBITDA for the last 12 months was 1.57x compared to 2.78x as of 31 December 2015. Due to the Group's strong financial performance together with a positive outlook for 2017, I am pleased to announce a return to dividends.

The iron ore pellet industry continues to have high barriers to entry given the capital intensity of new investment while demand for high grade ore, including pellet, remains strong. Ferrexpo is one of the largest iron ore pellet exporters in the world by volume and benefits from a well-invested asset base, a competitive cost position and a diversified high quality customer portfolio.

The average 62% Fe iron ore fines price in 1Q 2017 (as of 20 March 2017) was approximately US$86 per tonne compared to the average of US$58 per tonne in 2016, while Ferrexpo's average pellet premium for 2017 is expected to be in line with the PLATTS Atlantic long-term contract pellet premium less adjustments for quality. The pellet premium has steadily recovered from lows seen in 1Q 2016 and now reflects tight market conditions. Costs remain subject to commodity prices, the Hryvnia exchange rate and inflation levels in Ukraine. Cash generation to date in 2017, has been strong and we expect the Group's net debt to EBITDA to improve further during the year. On the whole, these factors underpin a positive outlook for 2017."

Extract of 2016 Financial Performance:

US$ million (unless otherwise stated)	Year ended 31.12.16	Year ended 31.12.15	Change
Total pellet production (kt)	11,200	11,662	-4%
Sales volumes^A (kt)	11,697	11,330	3%
Average CFR 62% iron ore fines price^A (US$/t)	58.3	55.6	5%
Revenue	986	961	3%
C1 cash cost^A (per tonne)	27.7	31.9	-13%
EBITDA^A	375	313	20%
EBITDA margin	38.0%	32.5%	17%
Profit for the year from continuing operations after special items	189	32	491%
Special items after tax	(9)	(110)	-92%
Diluted EPS before special items (US cents)	33.51	23.86	40%
Dividend per share (US cents)	6.6	3.3	100%
Net cash flow from operating activities	332	128	159%
Capital investment^A	48	65	-26%
Net debt^A	589	868	-32%
Cash	145	35	314%
Net debt to EBITDA ^A	1.57x	2.78x	-44%

Summary of 2016 Operational and Financial Results:

· We regret to report two work related fatalities in 2016 (2015: nil). The Group continues to work towards zero harm in its operations.

Financial

· EBITDA up 20% to US$375M (2015: US$313M) on higher revenues and lower costs

· Operating profit, excluding foreign exchange gains, up 36% to US$307M (2015 US$225M)

· Profit before tax up US$206M to US$231M (2015: US$25M)

· Net cash flows from operating activities up 159%, or US$204M, to US$332M (2015: US$128M)

· Balance sheet significantly strengthened

· Net debt reduced 32% to US$589M as of 31 December 2016 (31 December 2015: US$868M)

· Net debt to EBITDA^A 1.57x as of 31 December 2016 (as of 31 December 2015: 2.78x)

· Cash balance increased by US$110M to US$145M as of 31 December 2016 (31 December 2015: US$35M)

· Dividend reinstated - final ordinary dividend of 3.3 US cents per share proposed (2015: nil) and special dividend of 3.3 US cents per share (2015: nil) payable on the 11 April 2017

Operational

· Record production of 65% Fe pellets^A to 10.5 MT, approximately 94% of total production volumes (2015 65% Fe pellet production: 10.4 MT)

· Record sales volumes^A increasing 3% to 11.7 MT (2015: 11.3 MT) reflecting higher sales to Western Europe and North East Asia

· Average realised pellet premium below 2015 levels, however, have now recovered strongly in 1Q 2017

· C1 cash cost of production^A reduced 13% to US$27.7 per tonne, a ten year low (1H 2015: US$33.4 per tonne)

Growth Projects

· Capital expenditure^A limited to sustaining capex of US$48M (2015: US$65M) reflecting low iron ore price environment and focus on debt reduction

· Development capex increasing in 2017 to expand concentrate output

· Other modest growth projects under review

Alternative Performance Measures

Words with the symbol ^A are defined in the Alternative Performance Measures section on page 51.

For further information contact:

Ferrexpo:
Ingrid McMahon	+44 207 389 8304
Maitland:
James Isola	+44 207 379 5151

There is an analyst and investor meeting at 09.00 GMT today at the offices of J.P. Morgan at 60 Victoria Embankment London EC4Y 0JP (1 John Carpenter Street entrance). A live video webcast and slide presentation of this event will be available on www.ferrexpo.com. It is recommended that participants register at 08.45. The presentation will be hosted by Steve Lucas (Chairman), Kostyantin Zhevago (CEO) and Chris Mawe (CFO).

Webcast link: http://edge.media-server.com/m/p/zf8fupq4

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 40 years. Ferrexpo's resource base is one of the largest iron ore deposits in the world. The Group is currently the 3^rd largest exporter of pellets to the global steel industry and the largest exporter of pellets from the Former Soviet Union. In 2016, it produced 11.2 million tonnes of pellets reflecting a 2% increase in production of the Group's highest quality pellets to a record 10.5 million tonnes. Ferrexpo has a diversified customer base supplying steel mills in Austria, Slovakia, the Czech Republic, Germany and other European states, as well as in China, India, Japan, Taiwan and South Korea. Ferrexpo is listed on the main market of the London Stock Exchange under the ticker FXPO. For further information, please visit www.ferrexpo.com

CHAIRMAN'S STATEMENT

Steve Lucas, Non-executive Chairman

In 2016, Ferrexpo demonstrated the strength of its business model and management team.

Introduction

In very challenging market conditions, where the iron ore price traded at eight year lows, the Group was able to increase its net cash flows from operations by over 1.5 times compared to 2015 to US$332 million allowing it to significantly reduce its financial leverage and strengthen its balance sheet.

Ferrexpo's strategy is founded on reliably producing and selling a high quality iron ore product to the best steel mills in the world while remaining competitively placed on the cost curve.

I joined the Ferrexpo Board in May 2016 and was appointed Chairman on 28 November 2016. I am very positive about the future of this Group as I have been most impressed with the quality and depth of the executive team as well as the talent and enthusiasm of all the Group's employees, most notably in Ukraine, together with the high quality of the Group's assets. The Group has an enviable track record of achieving its stated targets and delivering strong operational performance over decades despite operating in a challenging emerging market and a volatile commodity industry. Testimony to this is the high quality of the customer base who rely on Ferrexpo to supply a premium input into their production process. These customers are significant economic contributors to their respective countries of operations and produce a top quality product with relatively inelastic demand which, in turn, provides Ferrexpo with a high degree of reliability regarding its sales volumes.

I would like to thank all of Ferrexpo's employees for contributing to a successful 2016 through their dedication and hard work. We can look back with pride at what we have achieved during the year.

Health and Safety

Most regrettably there were two fatalities at the operations in 2016 (2015: nil). These deaths have been investigated in detail and Ferrexpo's goal remains firmly focused on achieving zero fatalities or injuries.

For further information on health and safety performance see page 15.

Financial Results

2016 can be characterised as a year of two halves. The first half followed a weak ending to 2015 and the average PLATTS 62% Fe iron ore fines price was US$51.87 per tonne for the six months ending 30 June 2016. This was the lowest first half average in ten years (1H 2015: US$60.49 per tonne) while the second half of 2016 saw a recovery in the iron ore price with an average for the period of US$64.64 per tonne (2H 2015: US$50.83 per tonne). Overall the average iron ore price in 2016 was in line with 2015 at US$58.26 per tonne (2015: US$55.66 per tonne).

The pellet premium that the Group received, in addition to the 62% Fe iron ore fines price, improved throughout the year, recovering from lows seen at the start of the year to finish the year strongly. In China, the spot pellet premium published by PLATTS fell to a low of US$11 per tonne in January 2016 before recovering to US$23 per tonne by year end. While the PLATTS Atlantic long-term contract pellet premium improved from US$26 per tonne in January 2016 to US$35 per tonne in December 2016.

Record production of Ferrexpo's premium 65% Fe pellet, record sales volumes of 11.7 million tonnes (2015: 11.3 million tonnes) and a 13% reduction in the Group's C1 cash cost of production^A to US$27.7 per tonne (2015: US$31.9 per tonne) underpinned a strong financial result for the Group.

Revenue increased 3% to US$986 million (2015: US$961 million) while EBITDA^A increased 20% to US$375 million (2015: US$313 million). Although 2016 was characterised in general by a weak iron ore price environment, this was also reflected in the Group's lower cost base due to a fall in the price of commodity inputs and a depreciation of the Hryvnia against the US Dollar. Diluted earnings per share was 31.91 US cents compared to 5.63 US cents in 2015.

Significantly, net cash flows from operating activities increased by US$204 million, or 159%, to US$332 million (2015: US$128 million). The Group repaid US$196 million of debt and increased its cash balance by US$110 million to US$145 million (2015: US$35 million). As a result, net debt decreased by US$279 million, or by 32%, to US$589 million as of 31 December 2016 (31 December 2015: US$868 million). Ferrexpo's net debt to EBITDA^A was 1.57 times as of 31 December 2016 compared to 2.78 times as of 31 December 2015.

Financial Management

Ferrexpo's balance sheet strengthened materially in 2016 as the Group reduced its debt levels and increased its cash balance. Ferrexpo routinely assess various funding options, including the bank debt and Eurobond markets, against its expected cash flow generation and debt repayment obligations as well as capital investment priorities. The Board believes an average net debt to EBITDA^A target of around 1.0 times with a debt amortisation profile repayable through own generated cash flows is appropriate. This will provide a strong platform for the Group going forward while continuing to make cash available for investment and facilitating cash returns to shareholders.

With continued strong cash generation in 2017 to date, the Group's net debt to EBITDA^A is set to improve further from 2016 levels.

Returns to shareholders

The strength of the Company's performance in 2016, together with the strong demand outlook for pellets in 2017, gives the Board confidence to announce a return to paying dividends to shareholders. A final ordinary dividend of 3.3 US cents per share is being proposed which amounts to approximately US$19 million (2015 final ordinary dividend: nil). The Board will also be paying a special dividend of 3.3 US cents per share or approximately US$19 million (2015 special dividend: nil).

If the final dividend is approved by shareholders, the dividend pay-out relating to the financial performance of 2016 will total US$38 million (2015: US$20 million) in line with the full year ordinary dividend of previous years prior to the suspension of the dividend at the end of 2015.

The special dividend will be paid on 11 April 2017 to shareholders on the register at the close of business on 31 March 2017. Subject to approval at the Group's AGM, payment of the final ordinary dividend will be made on 31 May 2017 to shareholders on the register at the close of business on 5 May 2017. The dividend will be paid in UK Pounds Sterling with an election to receive US Dollars.

Ferrexpo's dividend policy is to pay a base level of sustainable dividends through the commodities cycle of approximately US$40 million per annum (or 6.6 US cents per year). The dividend will be split equally between an interim dividend and a final dividend payable normally in October and May following the Company's interim results and Annual General Meeting.

Special dividends will be paid from cash flows in excess of the Group's needs taking into account debt repayments and development capital expenditure. If appropriate, the Group will target special dividends of around US$40 million per financial year (or 6.6 US cents per share) to be paid at an appropriate time in its reporting cycle.

The Board's strategy is to maintain a balance between sustainable and attractive shareholder returns, investment into growth opportunities and balance sheet strength.

Capital investment

Ferrexpo is one of the lowest cost pellet producers in the world, positioned in the bottom quartile of the global pellet cost curve. Underpinning its cost position is over US$2 billion of capital investment to modernise and expand the mining, production and logistics operations since its IPO on the Main Market of the London Stock Exchange in 2007.

Given the lower iron ore price environment in 2016 and the Group's priority to reduce debt, capital investment focused on maintenance capital during the year. Total capital expenditure decreased to US$48 million (2015: US$65 million).

Ferrexpo has considerable flexibility to increase its pellet production up to 20 million tonnes per year, and plans to increase output incrementally towards that target. If projects meet strict payback criteria, Ferrexpo would not expect to spend more than US$150 million in any one year. Ferrexpo currently has one approved project to increase concentrate output by approximately 1.5 million tonnes at an additional cost of US$50 million, which will be incurred in 2017 and 2018. This project was slowed down in 2016 and has been accelerated again in 2017.

For further details see Performance Review - Capital Investment on page 19.

Board Changes

In 2016, as part of the Board's refreshment programme, Michael Abrahams, Mike Salamon, Wolfram Kuoni and Ihor Mitiukov retired as Non-executive Directors. The Board is grateful to all of them for their considerable contribution and commitment to the Company over many years. In addition, David Frauman, who was appointed to the Board on a short-term basis at the end of 2015, stepped down from the Board.

I would like to record my particular gratitude to Michael Abrahams, my predecessor, for all his years of dedicated service to the Group. He leaves behind a strong company which is able to look to the future with confidence.

During the year the Board was delighted to welcome Sir Malcolm Field (as of March 2016) and Vitalii Lisovenko (as of November 2016) as Independent Directors. Sir Malcolm has extensive experience, gained over many years in the private and public sectors in Britain and abroad, while Vitalii has deep knowledge of Ukraine, given his long experience of working in the Ukrainian financial sector and public administration.

It is planned that the Senior Independent Director, Oliver Baring, who has served nine years on the Board but who remains independent in character and judgement, will retire and be replaced during 2017.

I believe these changes have delivered a Board whose Non-executive Directors have the appropriate skills, stature and experience to oversee the Group and ensure strong corporate governance.

Bank F&C Review

In September 2015, Bank F&C (a related party) was declared insolvent by the National Bank of Ukraine. At the time, Ferrexpo held the equivalent of US$175 million on deposit with Bank F&C, which was provided for in 2015.

Sir Malcolm Field was appointed to the Board on 10 March 2016 to chair a sub-committee responsible for reviewing matters relating to Bank F&C ("the Sub-Committee").

As part of its work the Sub-Committee has considered the corporate governance procedures within Ferrexpo. While the Sub-Committee has noted some areas where there is scope for improvement or refinement, and has put forward some corporate governance recommendations to the Board for its consideration, the Sub-Committee did not consider that there were significant shortcomings in the corporate governance structures. Responsibility for overseeing the implementation of these corporate governance recommendations will now sit with myself and the Committee of Independent Directors, a permanent sub-committee of the Board chaired by the Senior Independent Director.

Ferrexpo is pursuing recovery of its funds held at Bank F&C although this process could take many years and there is no certainty that any funds will be recovered (for more information see Note 17 of the Financial Statements). Oversight for this and any other possible claims or other actions will also now sit with the Committee of Independent Directors.

Social responsibility

For the year ended 2016, it is expected that Ferrexpo's pellet exports will be approximately 1.9% of Ukraine's total export revenue[1].

The Board believes it is important to ensure that Ferrexpo makes a meaningful contribution to the society in which it operates, assisting with the long- term development of Ukraine and creating a stable operating environment for the Group. Ferrexpo undertakes a broad array of social programmes in the towns and villages surrounding the mines. Examples in 2016 included the upgrade of school infrastructure and the modernisation of classrooms, development and maintenance of sporting facilities, purchase of state of the art equipment for hospitals, provision of medical care for the elderly and the vulnerable and financial support for the arts and other cultural events. These programmes underpin Ferrexpo's licence to operate and ensure that the community is supported in times when state funding is under strain.

Importantly, there have been no significant industrial actions or labour disputes at Ferrexpo Poltava Mining ("FPM") since its privatisation in 1995, or at Ferrexpo Yeristovo Mining ("FYM") since its inception in 2008.

^1.www.ukrstat.gov.ua

Outlook

The pellet industry has high barriers to entry given the capital intensity of new investment while the demand for high grade ore, including pellet, remains strong.

Ferrexpo is currently the third largest exporter of blast furnace pellets in the world by volume, and benefits from a well invested asset base, a competitive cost position and a diversified high quality customer portfolio.

The average 62% Fe iron ore fines price in 1Q 2017 (as of 20 March 2017) has been approximately US$86 per tonne while Ferrexpo's average pellet premium for the full year is expected to be in line with the PLATTS Atlantic long-term contract pellet premium less adjustments for quality. Costs remain subject to commodity prices, the Hryvnia exchange rate and inflation levels in Ukraine.

Taken together, these factors deliver a positive outlook for 2017.

PERFORMANCE REVIEW

FINANCIAL RESULTS

Group revenue increased 2.6% in 2016 to US$986 million (2015: US$961 million) principally reflecting higher sales volumes.

Revenue

Ferrexpo increased its sales volumes by 3% to 11.7 million tonnes (2015: 11.3 million tonnes) while the Group's net realised DAP/FOB price increased marginally compared to 2015 reflecting a weak market in the first half of the year before prices recovered (driven by improved demand for iron ore and lower pellet availability). Turnover from international freight services decreased to US$66 million during the year compared to US$75 million in 2015 reflecting lower freight rates of US$9.0 per tonne compared to US$11.2 per tonne in 2015.

Costs

C1 Cost of Production^A

The Group's C1 cost of production reduced by 13% to US$27.7 per tonne compared to US$31.9 per tonne in 2015. Of this US$4.2 per tonne cost reduction, approximately US$1.5 per tonne reflected the weaker local currency compared to the US Dollar, US$1.6 per tonne related to lower oil and gas prices, and US$1.1 per tonne was due to cost reduction initiatives.

For further information see Production Costs on page 17.

Please see Note 3 on of the accounts for the definition of C1 cost and a reconciliation to cost of sales.

Selling and Distribution Costs

Selling and distribution costs decreased by 7% to US$210 million (2015: US$226 million). Reduced freight costs were as a result of the depreciation of the Hryvnia against the US Dollar together with lower international freight rates.

Currency

Ferrexpo prepares its accounts in US Dollars. The functional currency of the Ukrainian operations is the Hryvnia.

During 2016 the Hryvnia devalued from UAH24.00 per US Dollar as of 1 January 2016 to UAH27.19 per US Dollar as of 31 December 2016. Over half of the Group's total cost base, including inland logistics costs, are denominated in Hryvnia.

Ukrainian Hryvnia vs. US Dollar

	1 January 2016	31 December 2016	Average 2016	Average 2015
UAH per US$	24.00	27.19	25.55	21.86

Source: National Bank of Ukraine.

Balances at 31 December 2016 are converted at the prevailing rate. The devaluation of the currency since 31 December 2015 has resulted in a US$125 million reduction in the net assets of the Group and has been reflected in the translation reserve.

EBITDA^A

EBITDA^A for the year ended 31 December 2016 was US$375 million compared to US$313 million in 2015, an increase of 20% reflecting increased turnover and lower costs.

Operating foreign exchange gains of US$14 million benefitted EBITDA^A, reflecting the 13% devaluation of the Hryvnia against the US Dollar during the year. In 2015 operating foreign exchange gains were US$26 million, reflecting the 52% devaluation of the Hryvnia against the US Dollar.

Interest and Debt

As of 31 December 2016 gross debt was US$734 million, a US$170 million reduction compared to gross debt at 31 December 2015 of US$904 million. This reflected repayment of US$196 million of debt over the period and a US$19 million increase in trade finance facilities.

Finance expense was US$67 million during the period (2015: US$72 million). The average cost of debt for the period ended 31 December 2016 was 6.7% (average 2015: 5.5%). The increased average rate reflected amortisation of the Group's pre-export banking facilities which have a lower cost compared to the Group's outstanding US$346 million Eurobond.

Tax

In 2016, the Group's tax charge before special items was US$44 million, resulting in an effective tax rate of 18.0% compared to 13.7% in 2015, or US$22 million.

The Group has recorded a tax expense of US$42 million for the year after special items compared to a US$6 million tax credit in 2015.

The balance of prepaid corporate profit tax in Ukraine decreased to US$16 million as of 31 December 2016, compared to US$54 million as of 31 December 2015. The reduction in the balance reflected a refund of corporate profit tax of US$27 million, the devaluation of the Hryvnia against the US Dollar amounting to US$5 million and the utilisation of US$6 million against FPM's profits for the period.

For further details see Note 15 of the financial statements.

Profit for the year from continuing operations

Profit for the year increased to US$189 million from US$31 million in 2015. This was driven by a strong EBITDA performance as well as a significant reduction in write-offs and allowances (recorded as special items) compared to 2015.

For further information on special items see Note 17 and Note 10 respectively of the financial statements.

Profit for the year from continuing operations before special items increased by US$57 million in 2016 to US$199 million (2015: US$142 million).

Cash Flows

Net cash flows from operating activities increased by US$204 million, or 159%, to US$332 million in 2016 compared to US$128 million in 2015. This reflected the strong EBITDA performance as well as a US$9 million working capital inflow during the period (2015: US$77 million working capital outflow) due to the sale of 373 thousand tonnes of pellets held on stock at the end of 2015, a reduction in trade receivables and the recovery of overdue VAT and prepaid corporate profit tax. Included in working capital is an outflow of US$42 million related to the increase in stocks of lower grade iron ore. This ore is expected to be processed once the Group has additional beneficiation capacity in place (for further information see Note 14 of the financial statements). The Group secured new trade finance arrangements during the year, of which US$19 million was utilised as of 31 December 2016, and received a US$17 million prepayment for pellets shipped in March 2017.

Capital Investment^A

Capital expenditure in 2016 of US$48 million focused primarily on sustaining capital (2015: US$65 million). The Group slowed its investment programme in 2016 and is accelerating it again in 2017. For further information see Capital Investment in the Chairman's Statement on page 6 and Capital Investment in the Operations Review on page 19.

Debt Maturity Profile and Liquidity

Net debt^A declined by US$279 million to US$589 million as of 31 December 2016 (US$868 million as of 31 December 2015).

Net debt to EBITDA^A for the last 12 months was 1.57x compared to 2.78x as of 31 December 2015. As of 31 December 2016, Ferrexpo's cash and cash equivalents balance increased by US$110 million to US$145 million compared to US$35 million at the end of December 2015.

During the year the Group repaid US$196 million of debt. This included US$123 million of amortisations relating to a US$420 million pre-export finance facility (repaid in full as of July 2016), the first of eight quarterly instalments of US$44 million under the US$350 million pre-export finance and US$30 million of debt under Export Credit Agency funding lines.

In 2017, the Group has US$201 million of debt amortisations.

As of 31 December 2016 the debt facilities outstanding were US$306 million under bank facilities with a further seven quarterly instalments due; a US$346 million Eurobond maturing in equal parts in April 2018 and April 2019, and US$65 million of Export Credit Agency funding maturing over the next five years.[2]

For Ukrainian borrowers the bank and debt capital markets have been closed since late 2013, initially as a result of political uncertainty and more recently as a result of low iron ore prices. These markets reopened in late 2016 following a recovery in commodities and a more certain outlook in Ukraine. During 2016 Ferrexpo considerably strengthened its balance sheet and improved its liquidity to target levels. Ferrexpo currently holds a long-term credit rating of B- with a stable outlook with S&P and Fitch, in line with the Ukraine sovereign rating, and plans to access the bank or debt capital markets as required.

^2.Ferrexpo may from time to time seek to actively manage its debt portfolio. This process may include retiring or purchasing outstanding debt through cash purchases by means of open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, Ferrexpo's liquidity requirements, contractual restrictions and other factors. In addition, Ferrexpo may contemplate new issuances of debt securities

Market review

Iron ore industry in 2016

A Chinese credit stimulus towards the end of 1Q 2016 as well as curtailment of Chinese domestic iron ore production, increased demand for steel and hence seaborne iron ore throughout the year. By December 2016 the PLATTS CFR 62% Fe iron ore fines price^A had recovered to US$80 per tonne compared to an average price in January 2016 of US$42 per tonne, an eight year low.

Overall in 2016, the World Steel Organisation reports that Chinese steel production increased 1.2% to 808 million tonnes while steel production in the rest of the world remained broadly stable (see table below).

The 1.2% increase in Chinese steel production implies an increase in demand of approximately 20 million tonnes of iron ore. Trade data, however, shows that imports of iron ore rose by 7.5%, or by approximately 70 million tonnes, in 2016 similar to growth rates last seen in 2012.

According to CRU, the increase in imports reflected lower Chinese domestic production due to environmental restrictions on output. In addition, supply side structural reforms in the Chinese steel industry supported demand for higher quality seaborne ore as incumbent steel mills looked to increase output.

In total CRU believe that production of domestic Chinese iron ore was reduced by approximately 30 million tonnes in 2016 while approximately 20 million tonnes of seaborne imports were used to restock inventories given weak iron ore price levels. Together with the increase in Chinese steel output, these factors absorbed the incremental supply of seaborne iron ore of approximately 60 million tonnes in 2016.

Steel and iron ore statistics 2016 vs. 2015

Million tonnes	2016	2015	Change
World steel production	1,628.5	1,615.4	0.8%
China steel production	808.4	798.8	1.2%
Rest of the world	820.1	816.6	0.4%
Chinese imports of iron ore	1,025	953	7.5%

Source: World Steel Association, Chinese Customs data.

Iron ore pellets

The pellet premium that the Group received in 2016 improved throughout the year, recovering from lows seen at the start of the year to finish the year more strongly. In China, the spot pellet premium published by PLATTS fell to a low of US$11 per tonne in January 2016 before recovering to US$23 per tonne by year end. While the PLATTS long-term contract Atlantic pellet premium improved from US$26 per tonne in January 2016 to US$35 per tonne in December 2016. This recovery reflected an increasingly tight market for pellets following the production stoppage at Samarco, which represented approximately 20% of the seaborne pellet market in 2015, and an increase in pellet utilisation rates as steel mill profitability recovered from lows seen in recent years. Demand for pellet was also supported by a significant rise in coking coal prices in the second half of the year as an increase in pellet consumption allows for lower coke usage in the blast furnace. As such, by the end of 2016 the pellet market was in deficit, which was reflected in the strong recovery of pellet premiums.

Pellets are the most efficient source of iron for a blast furnace, reducing energy requirements in the iron making process and emitting the lowest levels of waste and emissions compared to sinter fines or lump. Due to the high iron content of pellets (on average between 62% Fe and 66% Fe) and their lower level of impurities, they help to improve the quality of the final steel product.

Given their superior performance characteristics and no need for further processing before being charged to the blast furnace, pellets receive a price premium over sinter fines and lump. CRU believe the historic average annual long-term contact pellet premium to non-Chinese markets has been approximately US$34 per tonne since 2011 to 2016.

The following table shows that historically there has been limited supply growth in pellets, with exports increasing by only five million tonnes since 2000. This compares to an increase of approximately 840 million tonnes since 2000 in the iron ore fines market. The limited availability of pellets reflects the highly capital intensive nature of installing beneficiation and pelletising operations.

Limited growth in pellet capacity due to high barriers to entry

Exports of iron ore million tonnes	2000	2016	Increase	% of total increase
Pellet feed	18	71	53	5.0%
Pellets	106	111	5	0.5%
Lump	79	247	168	15.8%
Sinter fines	265	1,105	840	78.7%
Total	468	1,534	1,066	228%

Source: CRU iron ore market outlook January 2017 statistical review.

Apart from the pelletising facilities at Samarco, which are currently not in operation and where a restart date is uncertain, there is around seven to ten million tonnes of idled high cost pellet capacity within the industry that could re-enter the market if pellet premiums provide an acceptable return. Total pelletising capacity, however, is not expected to increase significantly in the coming years due to the high capital barriers to entry.

Looking forward, strong pellet consumption should be underpinned by a rationalisation in Chinese steel capacity with a bias toward larger and more environmentally efficient blast furnace operations. These blast furnaces typically consume higher levels of pellets to support high productivities. Furthermore, continued environmental controls in China should limit the output of local low grade iron ore production supporting demand for high grade imports of iron ore, including pellets. Meanwhile in the rest of the world, demand for pellets should continue to be supported by the production of high quality steels requiring premium inputs.

The Group's investment strategy of improving the quality of its product, supplying the top steel mills in the world under long-term volume contract together with its low cost base have maintained strong and improving EBITDA margins through the low points of the commodity cycle.

The table below shows that demand for pellets is expected to show the strongest growth for the period to 2021 of 4.7% while consumption of sinter fines is expected to decline marginally.

Pellet demand to show strongest growth in iron ore

Consumption million tonnes	2016	2021	Change	CAGR
Pellets	416	523	107	4.7%
Lump	310	352	42	2.6%
Sinter fines	1,347	1,320	-27	-0.4%
Total	2,074	2,195	122	1.1%

Source: CRU iron ore market outlook January 2017 statistical review.

Global pellet exporters

Million tonnes	2016
Vale (Brazil + Oman)	38.0
LKAB (Sweden)	18.5
Ferrexpo (Ukraine)	11.7
Rio Tinto (IOC, Canada)	9.8
ArcelorMittal (QCM Canada)	5.8
Severstal (Russia)	4.9
Metalloinvest (Russia)	4.0
Metinvest (Ukraine)	3.1
Bahrain Steel (Bahrain)	3.0
Grange (Australia)	2.6
Cliffs (USA)	2.5
CMP (Chile)	2.4
Total pellet export market (direct reduction and blast furnace)	120.5
Ferrexpo's market share	10%

Source: CRU, government statistics, Bloomberg, Ferrexpo analysis.

OPERATIONAL REVIEW

Marketing

In 2016 Ferrexpo increased sales volumes to a record level of 11.7 million tonnes compared to 11.3 million tonnes in 2015, reflecting strong global demand for the Group's pellets. The table below shows the breakdown of sales by key market regions. Sales to Western Europe increased to 17% of total sales volumes in 2016 compared to 11% in 2015 while sales to North East Asia increased to 16% compared to 12% in 2015. The increase in sales to targeted customers in these regions was offset by a nine percentage point decline in sales to China and South East Asia.

Sales Volume^A by Market Regions

2016

2015

Central Europe

Western Europe

North East Asia

China and South East Asia

Turkey, Middle East, India

48%

17%

16%

13%

49%

11%

12%

22%

Total sales volume (million tonnes)

11,697

11,330

Of total sales volumes, 94% represented Ferrexpo Premium Pellets of 65% Fe compared to 88% in 2015, while 6% represented Ferrexpo Basic Pellets of 62% Fe (2015: 12%) and 1% represented Ferrexpo Pellet Feed (2015: 0.4%) sold together with Ferrexpo's Premium Pellets as part of a customer development programme.

The additional premium received for selling pellets compared to iron ore fines ensured the Group's average received price in 2016 outperformed the Platts 62% Fe iron ore fines CFR index by 26% compared to a 30% outperformance in 2015. The price performance in 2016 reflected a weak 1Q followed by a strong recovery, particularly in 4Q 2016 (as described above). Overall the average premium that the Group received in 2016 was 15% lower than 2015.

The Group's long-term contracts are all based on a spot index iron ore fines price using various reference periods and takes into account the cost of international freight, typically the C3 index. Pellet premiums are typically negotiated annually, half-yearly or quarterly.

Logistics

Selling and distribution costs decreased by 7% to US$210 million (2015: US$226 million) as a result of the devaluation of the local currency and lower international freight rates.

Production

Health and Safety

Most regrettably there were two fatalities at the mining operations during the year. Independent investigations were undertaken of each incident, with remedial action taken and findings from the investigations shared across the Group. In 2015, there were no work-related fatalities at the Group's operations, a goal that Ferrexpo will continue to work towards.

There were a total of 22 Lost Time Injuries ("LTIs") across the Group in 2016 (2015: 19), equating to a LTI frequency rate ("LTIFR")^A of 1.17 (2015: 0.96). The table below details the LTIFR as per million man hours worked across the Company's mining and processing operations in Ukraine and its barging subsidiary on the River Danube for 2016 and 2015.

Lost Time Injury Frequency Rate^A

LTIFR	2016	2015
- FPM - FYM - FBM Ukraine	1.14 0.38 0.00 1.01	0.75 0.74 0.00 0.75
Barging	3.70	4.55
Group	1.17	0.96

Most of the accidents reported have been traced back to non-compliance with internal safety procedures. The Group is focused on implementing risk mitigation programmes to improve the understanding of safety protocols and adherence to standards which is being combined with training to ensure better awareness of the consequences of risk taking in the operational environment.

Pellet Production

Pellet production from own ore in 2016 was 11.1 million tonnes compared to 11.3 million tonnes in 2015. Production from own ore included a 45% increase in output of the Group's higher performance^A FPP+ [3] pellets to 3.3 million tonnes (2015: 2.3 million tonnes). Total production of 11.2 million tonnes for the year compared to 11.7 million tonnes in 2015 reflects a large decrease in production of pellets from low margin third party concentrate. Approximately 94% of total production volumes were pellets of 65% Fe, compared to 89% in 2015.

³.Ferrexpo Premium Pellets plus ("FPP+") contain 65% Fe with enhanced basicity and low temperature disintegration properties compared to FPP pellets

The table below summarises production in 2016 and 2015.

Production statistics

(000't unless otherwise stated)	2016	2015	Change
Iron ore processed from FPM & FYM	29,335	30,168	-2.8%
Average Fe content	33.74%	33.65%	0.3%
Concentrate produced ("WMS")	14,006	14,378	-2.6%
Weighted average Fe content	62.78%	62.35%	0.7%
Pellets produced from FPM & FYM	11,071	11,258	-1.7%
FPP	7,070	7,662	-7.7%
Average Fe content	64.88%	64.90%	-0.03%
FPP+	3,336	2,307	44.6%
Average Fe content	3,336	2,307	44.6%
FBP	666	1,289	-48.3%
Average Fe content	62.44%	62.45%	-0.0%
Purchased concentrate	149	466	-68.0%
Average Fe content	66.66%	66.33%	0.5%
Pellets produced from purchased concentrate	129	403	-67.9%
FPP	129	397	-67.5%
Average Fe content	64.80%	64.85%	-0.08%
FBP	-	6	-
Average Fe content	-	62.36%	-
Total pellet production	11,201	11,662	-4.0%
Total production of pellet feed for sale	123	40	208%
Average Fe content	67.49%	67.00%	0.8%
Pellet sales volume	11,697	11,290	3.2%
Pellet feed sales volume	123	40	208%
Gravel output	2,156	1,757	22.7%
Total Group stripping volume (million m3)	22,623	26,933	-16.0%

Note: Ferrexpo Basic Pellets ("FBP"), Ferrexpo Premium Pellets ("FPP") and Ferrexpo Premium Pellets plus ("FPP+").

Production Costs

The Group's C1 cost of production^A reduced by 13% to US$27.7 per tonne compared to US$31.9 per tonne in 2015. Of this US$4.2 per tonne cost reduction, approximately US$1.6 per tonne was driven by lower oil and gas prices, US$1.5 per tonne by the depreciation of the Hryvnia against the US Dollar, and US$1.1 per tonne was due to cost reduction initiatives.

The graph below shows how the Group's C1 cash cost of production ^A has moved relative to the iron ore fines price since 2007. Approximately 60% of Ferrexpo's C1 cash cost of production is commodity related, including fuel, electricity, gas, explosives and steel grinding media. In times of high iron ore prices the cost of production tends to increase due to commodity cost inflation; however, during periods of low commodity prices the cash cost is reduced.

C1 cash cost per tonne^A through the commodities cycle (US$ per tonne)

http://www.rns-pdf.londonstockexchange.com/rns/1500A_-2017-3-21.pdf

The chart table breaks down the Group's C1 cash cost ^A by category and highlights local currency costs.

Breakdown of C1 cash cost per tonne (2016)	UAH	US Dollar
Electricity	31%
Fuel		7%
Gas		12%
Materials		16%
Spare parts		6%
Maintenance	6%
Personnel	6%
Grinding bodies		8%
Royalties	5%
Explosives		3%
	48%	52%

In 2016, the average Hryvnia per US Dollar was 25.6 compared to 21.9 in 2015, a 17% depreciation. The higher rate in 2016 reduced the C1 cash cost by 5% as approximately 48% of the Group's cost to produce a pellet is in Hryvnia.

Local inflation during the period was primarily driven by electricity price increases (+11% vs. average 2015) following the devaluation of the Hryvnia against the US Dollar. Year-on-year Ukrainian CPI was 14% in 2016. Inflation peaked in January 2016 at 40% and thereafter the rate of increase slowed to 12% by December. Source: ukrstat.gov.ua

As part of Ferrexpo's efforts to reduce its reliance on natural gas to pelletise its iron ore concentrate, it has continued to progress its Sunflower Husks Project (as previously announced in 2015). In 2016, FPM partially substituted natural gas with sunflower husks in the heating of the kilns in its pelletiser. This initiative helped reduce natural gas consumption by 35.7 million m³, or 19%, during the year. FPM continues to pursue this biofuel initiative for its cost savings and the associated reduction in emissions, with the long-term goal of 30% gas substitution.

Ferrexpo is a low cost and efficient pellet producer which has allowed the Group to remain profitable even in a low iron ore price environment.

The graph below shows the cost of pellet production on an ex-works basis for most pellet producers. Ferrexpo remains competitively placed on the curve while some of the larger producers are placed at the top end of the cost curve.

2016 pellet conversion cost (US$ per tonne)

http://www.rns-pdf.londonstockexchange.com/rns/1500A_-2017-3-21.pdf

Note: ex-works costs include mining, processing and pelletising costs only and excludes royalties.

Source: CRU March 2017, Ferrexpo internal analysis

Mining and Production efficiencies

The Group has several projects underway which are contributing to cost savings and efficiency improvements. These include improved drilling and blasting techniques which yield better ore fragmentation and improved excavator dig rates. FPM is also looking at increasing its concentrate yield by optimising the amount of reagent used and varying the blend ratios of ore.

CO₂ Emissions

The table below shows the Group's CO₂ intensity ratio was 0.232 emissions per tonne in 2016 compared to 0.229 emissions per tonne in 2015. While actual consumption of CO₂ reduced by 3% during the year, the intensity ratio was impacted a by a 4% decline in production.

Emissions in tonnes

2016

2015

Change

CO2 emissions

Pellets produced (kt)

2,599,838

11,201

2,675,215

11,661

-3%

-4%

Intensity ratio

0.232

0.229

Note: 2015 emissions data has been reduced by 53,098 tonnes and the intensity ratio reduced accordingly. This was due to an incorrect factor applied to the conversion of natural gas from cubic metres into tonnes.

CO₂ emissions directly generated by the operations were 0.55 million tonnes in 2016 compared to 0.63 million tonnes in 2015. The reduction in direct emissions is as a result of a 19% reduction in the volume of natural gas consumed, due to the substitution of gas in the pelletiser with sunflower husks, and a 5% reduction in diesel consumption. Collectively, diesel and natural gas represent 82% of direct CO₂ emissions. Emissions generated from indirect sources, such as electricity purchased from Ukraine's national grid, were 2.05 million tonnes in 2016 in line with 2015.

Capital Investment^A

Ferrexpo currently has one approved project to add approximately 1.5 million tonnes of concentrate at a cost of around US$50 million (including associated infrastructure). The Group is now accelerating this project following a slowdown in 2016 due to low iron ore prices.

Ferrexpo plans to develop its production capabilities and output via investments evaluated on strict financial parameters. This is not expected to involve investment of more than US$150 million in any one year on expansion projects.

Ukraine

After a challenging macro-economic and political period, Ukraine is showing positive signs of economic recovery.

GDP growth accelerated by 4.7% in 4Q 2016 (compared to 4Q 2015) and was 2.2% for the year. In January 2017 GDP accelerated to 5.1%. This compares to a contraction of -9.9% in 2015 and -6.6% in 2014.

In November 2016, Fitch upgraded Ukraine's credit rating from CCC to B- with a stable outlook. The rating reflected easing external financing pressures with an increase in international reserves to around 3.5 months of imports as well as greater domestic confidence, easing inflation and increased exchange rate flexibility.

Continued structural reforms, however, are necessary to turn the current economic stabilisation into strong and sustainable growth so that Ukraine can catch up with its regional peers. The IMF estimate that per capita GDP in Ukraine is still very low at approximately 20% of the EU average, the second lowest level of all Central and Eastern European countries.

PRINCIPAL RISKS

The list of the principal risks and uncertainties facing Ferrexpo's business that follows below is based on the Board's current understanding. Due to the very nature of risk it cannot be expected to be completely exhaustive. New risks may emerge and the severity or probability associated with known risks may change over time.

1. RISKS RELATED TO THE IRON ORE MARKET

1.1 GLOBAL ECONOMIC GROWTH, IRON ORE PRICES AND PELLET PREMIUMS

Possible Impact

The demand for steel, and hence iron ore, is driven by global economic growth trends, which in the recent past has been largely determined by Chinese economic growth, and for the past eight years China has produced more than 45% of the world's steel output. A reduction in world or Chinese GDP growth could impact demand for steel and iron ore. Conversely, the supply of iron ore requires long periods of large scale, capital intensive investment. A mismatch between increasing supply of iron ore and lower demand can lead to iron ore price weakness.

Fluctuations in the iron ore price as well as in demand can negatively impact the financial results of the Group. The Platts 62% Fe iron ore fines CFR China price has declined from a peak of US$193 per tonne in 2011 to a low of US$39 per tonne in 2015. In 2016 the price stabilised at an average of US$58 per tonne for the year compared to an average of US$56 per tonne in 2015. The average price YTD (as of 20 March 2017) has been US$86 per tonne.

Ferrexpo receives a pellet premium from its customers in addition to the iron ore fines price. Currently, a portion of the Group's profit is due to this premium. The historic average annual Atlantic long-term contract pellet premium has been approximately US$30 per tonne since 2011. Spot market pellet premiums in China have been more volatile, reaching a low of approximately US$11 per tonne in January 2016 before recovering to finish 2016 at approximately US$23 per tonne.

Overall, the pellet premium currently represents a high proportion of the underlying iron ore fines price.

Mitigation

· The pellet market is a niche market and according to CRU is forecast to grow at a faster rate than the underlying iron ore fines market.

· Ferrexpo has invested to increase production and is now the third largest producer of pellets for the seaborne market.

· Ferrexpo is a low cost producer and invests to maintain its low position on the global cost curve.

· Ferrexpo sells under long-term contracts to established steel mills who produce premium steel products through the commodities cycle.

· Through the economic cycle pellet premiums have historically been more stable than the iron ore fines price.

· Ferrexpo has its own logistics infrastructure and a diversified customer base. It is in close proximity to its European customers and has port access to seaborne markets. This provides flexibility should a particular region experience a decline in demand.

1.2 COMPETITIVE ENVIRONMENT

Possible Impact

The international iron ore market for all types of iron is highly competitive, with four large producers dominating the export market and several mid-tier producers operating in selected markets. The principal factors affecting competition are price, quality, range of products offered, reliability and logistics costs.

In the pellet market, Ferrexpo considers that its principal pellet competitors are Vale, Luossavaara Kiirunavaara AB ("LKAB"), Iron Ore Company of Canada ("IOC"), Samarco, Lebedinsky GOK, Mikhailovsky GOK and Severny GOK. Samarco's operations are currently idled following a tailings dam accident in November 2015. Prior to the accident, Samarco was the second largest supplier to the global pellet market, exporting approximately 30 million tonnes of pellets per annum, or around 20% of total pellet exports.

The pellet market is currently in supply deficit, which could encourage idled capacity or new supply to enter the market. In addition, Samarco has indicated that it intends to return to the market in the second half of 2017. The increase in supply of pellets could reduce the pellet premium. Furthermore, the current level of pellet premiums could encourage competing products and processes to be developed.

Mitigation

· Iron ore pellets have high capital costs barriers to entry.

· Iron ore pellet projects require several years to implement.

· Pellet feed is typically more expensive to produce than iron ore fines and requires a higher capital intensity. New entrants are likely to be at higher cost than the current participants in the market.

1.3 SEABORNE FREIGHT RATES

Possible Impact

As iron ore is a bulk commodity, seaborne freight rates are an important component of the cost to deliver product to a customer. An increase in freight rates will reduce the net price received from a customer (all else equal) while a reduction in freight rates will increase the net price received from a customer.

Seaborne freight rates, such as C3, are published by the Baltic Exchange and represents the cost for ocean transportation of iron ore from the Brazilian port of Tubarao (where the largest seaborne suppliers of pellets are based) to Qingdao, China (the largest steel producer in the world).

As Ferrexpo sells to international customers the price it receives includes reference to C3 or other global benchmarks.

Mitigation

· Ferrexpo has its own in-house freight and distribution specialists who procure freight competitively on behalf of the Group.

· Ferrexpo's geographic proximity to its European customers is a competitive advantage compared to other iron ore producers.

· Ferrexpo can access the seaborne market competitively via its own port infrastructure.

· Ferrexpo invests in its own infrastructure to ensure that its total cost of transportation remains competitive.

2. RISKS RELATING TO UKRAINE

2.1 POLITICAL

Possible Impact

Ongoing conflict in Eastern Ukraine, the annexation of Crimea and political instability have negatively impacted the Ukrainian economy.

Any continuing or escalating conflict in Eastern Ukraine could have further adverse effects. This could include a material impact on the availability of critical production inputs such as electricity, gas or other products including diesel fuel, as well as availability of rail and port services.

Economic deterioration impacts the government's ability to fund usual social services and could lead to social upheaval and political tension within local communities. It can also impact the government's ability to meet its payment obligations to exporters, such as VAT refunds; or it could impact Ferrexpo's ability to use its cash held in Ukraine; or Ferrexpo's ability to obtain financing from international capital markets.

Mitigation (also see Ukrainian VAT and Tax risk and Reliance on State Monopolies risk)

· The Group manages liquidity to ensure smooth operations should the economic weakness of the country disrupt the financial system.

· Ferrexpo makes meaningful contributions to the local communities and towns surrounding its operations.

· Ferrexpo invests heavily in energy efficiency, including alternative fuels to augment gas consumption, and maintains close contact with electricity suppliers.

· Ferrexpo has established several sources of suppliers for key products as well as several supply routes.

· Ferrexpo's operations are remote from the conflict zone.

2.2 LEGAL SYSTEM AND COMPLIANCE AND CORRUPTION

Possible Impact

Since Ukraine's change in government in 2014, the government has undertaken to implement a number of reforms to strengthen the rule of law in the country, supported by the IMF. The Ukrainian legal system has been developing to support this transformation; however, it is subject to greater risks and uncertainties than more mature legal systems. Risks include a weak judicial system that is susceptible to outside influence, and can take an extended period of time for the courts to reach final judgment. For further information see Note 19 of the financial statements.

Transparency International ranks Ukraine as 131st out of 176 countries in terms of the level of perceived corruption. There is a risk that counterparties are involved in activities that are not in compliance with relevant international standards. Also see Counterparty risk on page 24.

Mitigation

· Ferrexpo prioritises a strong internal control framework and operates to the highest international standards of compliance and ethics.

· Ferrexpo continues to pursue relevant matters through the court system.

2.3 ukrainian banking sector

Possible Impact

The Ukrainian banking sector is regarded as weak. In December 2016 PrivatBank, the country's largest bank with 37% of the country's retail deposits and one fifth of the banking assets, was nationalised.

Mitigation

· Ferrexpo manages its liquidity to ensure it can continue to operate in the event of disruptions to the local banking sector.

· Ferrexpo spreads its funds amongst international and, if available, at least two local banks.

2.4 UKRAINIAN CURRENCY AND LOCAL INFLATION

Possible Impact

Fluctuations in the Hryvnia / US Dollar exchange rate impacts Ferrexpo's profitability and the book value of its assets.

In 2016 the Hryvnia devalued from UAH24.0 per US Dollar as of 31 December 2015 to UAH27.2 per US Dollar as of 31 December 2016. The average rate during the year was UAH25.6 per US Dollar (2015 average rate: UAH21.9 per US Dollar). Balances at the yearend are converted at the prevailing rate.

As a result of the devaluation of the Hryvnia against the US Dollar since 2014 (as of 1 January 2014 the rate was UAH7.9 per US Dollar) local inflation has been around 90% over the past three years.

If the Hryvnia were to strengthen against the US Dollar this could increase the Group's cost base and impact its ability to remain a low cost operator.

Mitigation

· 100% of Ferrexpo's sales are in US Dollars.

· Ferrexpo invests to reduce its costs of production as well as increase its output and quality.

· Ferrexpo has a long established Business Improvement Programme aimed at reducing costs in constant currency by 2% per year.

· While Ferrexpo's revenue is received in US Dollars, actual costs expressed in US Dollars have historically been linked to international commodity prices rather than local inflation rates.

· Ferrexpo can revalue its assets to reflect current replacement prices in the event of a substantial devaluation of the Hryvnia against the US Dollar or in the event of hyperinflation.

2.5 UKRAINIAN TAXATION AND VAT

Possible Impact

Ferrexpo is a large taxpayer in Ukraine. It also operates internationally and is subject to transfer pricing regulations both locally and internationally. The Group has experienced times where the taxation it has paid in Ukraine has been in excess of the amounts due, leading to increases in working capital and exposure to devaluation of the local currency.

Ferrexpo incurs VAT on purchases of goods and services, which as an exporter, it cannot offset on amounts charged on local sales. As a result, Ferrexpo is exposed to the risk that the Ukrainian government either delays or does not repay the VAT incurred. This can be up to 20% of the costs of local operations.

For further information see Political and Legal risk and Note 19 to the financial statements.

The late repayment of VAT results in increased working capital which must be funded from operating cash flows and debt. As Ukrainian VAT balances are in local currency the balances in US Dollar terms are exposed to the devaluation of the Hryvnia.

Mitigation

· The Group operates its taxation affairs in an open and transparent manner and maintains a close dialogue with the government and operates to best international standards including OECD guidelines, including the recent Base Erosion and Profit Shifting ("BEPS") guidelines.

· Ferrexpo can reduce its working capital requirements via trade finance or similar to mitigate temporary delays and holds sufficient operational liquidity to provide a buffer.

2.6 COUNTERPARTY RISK
Possible Impact

Financial instability of Ferrexpo's counterparties, including its customers, suppliers, the government and local banks, could absorb high amounts of working capital, impact production levels and lead to material financial loss.

Ferrexpo has counterparty exposure through ongoing trading relationships as well as with the Ukrainian government in terms of taxes payable and receivable (see Ukrainian taxation and VAT) and in terms of required licences and other permits.

Ukraine has a weak credit profile as defined by international credit rating agencies. Also see Legal system and compliance and corruption risk on page 22.

Mitigation

· Ferrexpo deals with well-established steel producers with sound credit profiles.

· Ferrexpo's counterparties are subject to regular and thorough review. The results of these reviews are used to determine appropriate levels of exposure, and available alternatives, in order to reduce the potential risk of financial loss.

· The Group develops its supplier base in order to avoid excessive dependence on any supplier, actively encouraging a diversity of supply where reasonable and practical.

· In March 2015, Ukraine received a new four-year US$17.5 billion rescue package from the IMF to help stabilise the country's weak financial position.

3. Risks Relating to the group's operations

3.1 MINING AND PROCESSING RISKS AND HAZARDS

Possible Impact

Mining risks and hazards may result in employee and contractor fatalities as well as material mine or plant shutdowns or periods of reduced production. Such events could damage the Group's customer relationships, its financial performance and balance sheet strength.

Mitigation

· Ferrexpo has significant volumes of iron ore in stock to smooth mining variations and holds pellet stocks to mitigate disruption in the processing facilities.

· Safety, environmental and operational performance is regularly and rigorously reviewed throughout the organisation, including by the Chief Operating Officer, the Executive Committee and the Board.

· Ferrexpo has modernised its mining and production facilities, improving safety, environmental, operational and financial performance.

· All accidents are fully investigated and, where appropriate, improvements are made to minimise the risk of re-occurrence.

· Appropriate safety training is regularly provided to employees.

· Employee remuneration is linked to safety performance.

· Active management of the operational risk register is undertaken to ensure predictable volumes and quality of output.

3.2 ENERGY COSTS

Possible Impact

Energy represented 47% of Ferrexpo's C1 cost in 2016. An increase in oil prices and other energy related costs will increase the Group's operating costs. Oil prices also heavily influence international freight rates, which is likely to impact the net price the Group receives for its pellets (for further information see C3 freight rates).

In 2016, the European Brent spot price increased 49% to US$54 per barrel.

Mitigation

· Energy costs are either directly or indirectly linked to international markets.

· Ferrexpo is low on the pellet cost curve. Competitors producing pellets will also experience similar cost increases.

· Ferrexpo's Business Improvement Programme focuses on energy reduction, including the replacement of gas with alternative fuels and the optimisation of its mining fleet.

3.3 RELIANCE ON STATE MONOPOLIES (also see Political and Legal risks on page 22 and Energy Costs on page 25)

Possible Impact

The Group purchases electricity and transport services from state-owned enterprises and the supply of gas is heavily regulated. Changes in the related tariffs can be politically motivated and affect the Group's cost base. Availability of services can also be limited, which could affect the Group's ability to produce and deliver pellets.

Mitigation

· Effective lobbying at local and national level to ensure tariffs are appropriate for industry.

· Ferrexpo manages and owns its own rail wagons to reduce reliance on state-owned rail cars.

· Recent reforms to the Ukrainian gas sector have increased competition and improved pricing transparency. As such, Ferrexpo is diversifying its natural gas supplier base.

· To date, the Group has not experienced any material supply disruption of key inputs since its IPO in 2007.

· Ferrexpo looks to reduce its reliance, where possible, on state monopolies.

3.4 LOGISTICS

Possible Impact

Ferrexpo's logistics capability is dependent on services provided by third parties and state-owned organisations within Ukraine.

The Group operates a barging company on the Danube/Rhine River corridor. River barging can be impacted by low water levels and ice, which at times can limit its ability to operate.

Logistical bottlenecks on rail or at the port may affect Ferrexpo's ability to distribute its products on time, impacting customer relationships.

Mitigation

· The Group maintains and invests in its logistics capabilities to ensure available capacity to better service its customers, lower costs and reduce reliance on third-party providers. Ferrexpo currently owns 2,252 rail cars, which reduce reliance on state rail cars for transportation of pellets to border points, 150 barges for transportation of pellets into Central Europe and a 49.4% interest in the port of TIS Ruda on the Black Sea which guarantees the Group independent access to the seaborne markets, avoiding reliance on the state port.

4. RISKS RELATING TO THE GROUP'S STRATEGY

4.1 DEBT MATURITY PROFILE

Possible Impact

From 2013 until 2016 the debt capital markets and bank debt markets have been closed, firstly due to geopolitical factors in Ukraine and in the last year due to low iron ore prices.

As debt falls due Ferrexpo may need to make repayments at a time when refinancing is not possible and will therefore have to temporarily change its business plan.

Mitigation

· Ferrexpo targets an amortisation profile to match its cash flows with cash held in excess of immediate requirements.

· Ferrexpo targets strong credit metrics. As of 31 December 2016, net debt to EBITDA was 1.57x compared to 2.78x as of 31 December 2015.

· Ferrexpo maintains short-term trade finance lines.

4.2 INTEREST RATE RISK
Possible Impact

A portion of the Group's debt facilities are linked to US Dollar LIBOR rates. An increase in interest rates will increase the Group's funding costs. Any new debt facilities could also result in higher interest rates.

The average cost of debt for the period ended 31 December 2016 was 6.7% (average 2015: 5.5%). The increased average rate reflected amortisation of the Group's pre-export banking facilities, which have a lower cost compared to the Group's outstanding US$346 million Eurobond.

Mitigation

· Ferrexpo maintains a high level of interest cover. As of 31 December 2016, this amounted to 6.9x. The Group has a mix of debt facilities at fixed and floating interest rates. As of 31 December 2016, the debt facilities subject to fixed interest rates represented approximately 54% of the Group's outstanding debt.

4.3 SUSTAINING AND EXPANSION CAPITAL INVESTMENT

Possible Impact

The Company's facilities require continual sustaining capital expenditure to maintain productive efficiency. The Group's growth depends on its ability to upgrade existing facilities and develop its iron ore resource base. For any major capital project there is a risk of insufficient controls, cost overruns, shortage of required skills, and unexpected technical problems affecting the time taken to complete the project and the return on the capital invested.

Mitigation

· The Group has invested over US$2 billion into its operations since its IPO in 2007. This has included modernisation of existing equipment.

· The Group has established strict procedures to control, monitor and manage capital expenditure which is regularly reviewed by the Investment and Executive Committee and the Board.

4.4 MINING LICENCES AND GOVERNMENT APPROVALS FOR EXPANSION

Possible Impact

Ferrexpo holds mining licences and the other permits required to carry out mining operations. If mining licences were to be revoked or not renewed, the Group's ability to continue to produce pellets and meet customer demand would be at risk.

The mining licences for the Gorishne-Plavninskoye and Lavrikovskoye deposit, exploited by FPM, expires in July 2017. Ferrexpo expects that this licence will be renewed as a matter of due course.

The Group does not yet have all the governmental approvals required to develop future deposits. Although all approvals that have been applied for have been granted, there is no guarantee that others will be granted in the future.

Mitigation

· Ferrexpo maintains an open and proactive relationship with various governmental authorities and is fully aware of the importance of compliance with local legislation and standards.

· Ferrexpo monitors and reviews its commitments under its various mining licences in order to ensure that the conditions contained within the licences are fulfilled or the appropriate waivers obtained. Ferrexpo maintains strict compliance with the Ukrainian mining code and execution of work in accordance with the project design through active engagement of Ukrainian and international legal advisers.

Statement of Directors' Responsibilities

Statement by the Directors under the UK Corporate Governance Code

The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Parent Company and of their profit or loss for that period. In preparing those financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable and prudent;

· state whether applicable IFRS have been followed, subject to any material departures disclosed and explained in the financial statements; and

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Board considers that the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

Responsibility Statement of the Directors in Respect of the Annual Report and Accounts

We confirm on behalf of the Board that to the best of our knowledge:

(a) the financial statements, prepared in accordance with IFRS as adopted in the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and

(b) the Strategic Report and the Directors' Report includes a fair review of the development and performance of the undertakings included in the consolidation as a whole, and the principal risks and uncertainties that they face.

For and on behalf of the Board

Steve Lucas

Chairman

Christopher Mawe

Chief Financial Officer

21 March 2017

Consolidated Income Statement

US$000	Notes	Before special items	Special items	Year ended 31.12.16	Before special items	Special items	Year ended 31.12.15
Revenue	4	986,325	-	986,325	961,003	-	961,003
Cost of sales	3/5	(400,333)	-	(400,333)	(446,756)	-	(446,756)
Gross profit		585,992	-	585,992	514,247	-	514,247
Selling and distribution expenses	6	(209,529)	-	(209,529)	(226,222)	-	(226,222)
General and administrative expenses	7	(38,645)	-	(38,645)	(37,103)	-	(37,103)
Other income		2,914	-	2,914	6,852	-	6,852
Other expenses	8	(34,107)	-	(34,107)	(32,726)	-	(32,726)
Operating foreign exchange gains	9	13,832	-	13,832	26,025	-	26,025
Operating profit from continuing operations before adjusted items		320,457	-	320,457	251,073	-	251,073
Allowance for restricted cash and deposits	17	-	(8,525)	(8,525)	-	(174,579)	(174,579)
Write-offs and impairment losses	10	-	(2,501)	(2,501)	-	(5,555)	(5,555)
Gain on disposal of available-for-sale investment		-	-	-	-	41,385	41,385
Share of profit from associates		3,726	-	3,726	4,620	-	4,620
Losses on disposal of property, plant and equipment		(4,446)	-	(4,446)	(4,541)	-	(4,541)
Profit/(loss) before tax and finance from continuing operations		319,737	(11,026)	308,711	251,152	(138,749)	112,403
Finance income	11	175	-	175	2,494	-	2,494
Finance expense	11	(67,177)	-	(67,177)	(71,797)	-	(71,797)
Non-operating foreign exchange losses	9	(10,311)	-	(10,311)	(17,750)	-	(17,750)
Profit/(loss) before tax		242,424	(11,026)	231,398	164,099	(138,749)	25,350
Income tax (expense)/credit	12	(43,733)	1,535	(42,198)	(22,312)	28,420	6,108
Profit/(loss) for the year from continuing operations		198,691	(9,491)	189,200	141,787	(110,329)	31,458

Profit/(loss) attributable to:
Equity shareholders of Ferrexpo plc		196,770	(9,416)	187,354	140,030	(106,993)	33,037
Non-controlling interests		1,921	(75)	1,846	1,757	(3,336)	(1,579)
Profit/(loss) for the year from continuing operations		198,691	(9,491)	189,200	141,787	(110,329)	31,458

Earnings/(loss) per share:
Basic (US cents)	13	33.60	(1.60)	32.00	23.92	(18.27)	5.65
Diluted (US cents)	13	33.51	(1.60)	31.91	23.86	(18.23)	5.63

Consolidated Statement of Comprehensive Income

US$000	Year ended 31.12.16	Year ended 31.12.15
Profit for the year	189,200	31,458
Items that may subsequently be reclassified to profit or loss:
Exchange differences on translating foreign operations	(126,365)	(472,492)
Current income tax effect	26,966	28,811
Deferred income tax effect	(10,359)	12,167
Net gains on available-for-sale investments	-	41,767
Net other comprehensive loss before reclassification of items to profit and loss	(109,758) 10505,835,742)	(389,747)
Reclassification to profit or loss relating to available-for-sale investments sold or impaired	-	(41,767)
Net other comprehensive loss to be reclassified to profit or loss in subsequent periods	(109,758)	(431,514)
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gains on defined benefit pension liability	1,075	3,878
Income tax effect	(246)	(722)
Net other comprehensive income not being reclassified to profit or loss in subsequent periods	829	3,156
Other comprehensive loss for the year, net of tax	(108,929)	(428,358)
Total comprehensive income/(loss) for the year, net of tax	80,271	(396,900)

Total comprehensive income/(loss) attributable to:
Equity shareholders of Ferrexpo plc	79,650	(387,958)
Non-controlling interests	621	(8,942)
	80,271	(396,900)

Consolidated Statement of Financial Position

US$000	Notes	As at 31.12.16	As at 31.12.15
Assets
Property, plant and equipment		574,839	654,392
Goodwill and other intangible assets		35,220	40,024
Investments in associates		2,165	5,801
Inventories	14	130,357	98,802
Other non-current assets		2,984	4,661
Income taxes recoverable and prepaid	12	5,630	54,482
Deferred tax assets		52,818	71,096
Total non-current assets		804,013	929,258
Inventories	14	78,935	96,021
Trade and other receivables		81,745	83,379
Prepayments and other current assets		21,387	18,970
Income taxes recoverable and prepaid	12	10,757	2,829
Other taxes recoverable and prepaid	15	21,389	50,482
Cash and cash equivalents	16	144,751	35,330
Restricted cash and deposits	17	-	9,308
Total current assets		358,964	296,319
Total assets		1,162,977	1,225,577

Equity and liabilities
Issued capital		121,628	121,628
Share premium		185,112	185,112
Other reserves		(1,984,758)	(1,876,624)
Retained earnings		2,002,153	1,814,598
Equity attributable to equity shareholders of Ferrexpo plc		324,135	244,714
Non-controlling interests		(847)	(783)
Total equity		323,288	243,931
Interest-bearing loans and borrowings	3/18	505,641	700,351
Defined benefit pension liability		15,489	17,034
Provision for site restoration		1,071	975
Deferred tax liabilities		586	382
Total non-current liabilities		522,787	718,742
Interest-bearing loans and borrowings	3/18	228,061	203,299
Trade and other payables		28,807	27,566
Accrued liabilities and deferred income		42,584	16,188
Income taxes payable	12	11,780	8,161
Other taxes payable		5,670	7,690
Total current liabilities		316,902	262,904
Total liabilities		839,689	981,646
Total equity and liabilities		1,162,977	1,225,577

The financial statements were approved by the Board of Directors on 21 March 2017.

Kostyantin Zhevago Christopher Mawe

Chief Executive Officer Chief Financial Officer

Consolidated Statement of Cash Flows

US$000	Notes	Year ended 31.12.16	Year ended 31.12.15
Profit before tax		231,398	25,350
Adjustments for:
Depreciation of property, plant and equipment and amortisation of intangible assets		50,671	56,596
Interest expense	11	64,975	68,917
Interest income	11	(175)	(2,494)
Share of profit from associates		(3,726)	(4,620)
Movement in allowance for doubtful receivables		252	114
Allowance for restricted cash and deposits	17	8,525	174,579
Loss on disposal of property, plant and equipment		4,446	4,541
Gain on disposal of available-for-sale investment		-	(41,385)
Write-offs and impairment losses	10	2,501	5,555
Site restoration provision		(308)	(634)
Employee benefits		3,192	3,543
Share-based payments		389	515
Operating foreign exchange gains	9	(13,832)	(26,025)
Non-operating foreign exchange losses	9	10,311	17,750
Operating cash flow before working capital changes		358,619	282,302
Changes in working capital:
(Increase)/decrease in trade and other receivables		(3,578)	2,341
Increase in inventories		(41,540)	(63,965)
Increase/(decrease) in trade and other accounts payable		30,066	(14,787)
Decrease/(increase) in other taxes recoverable and payable (including VAT)	15	24,345	(113)
Cash generated from operating activities		367,912	205,778
Interest paid		(58,793)	(65,080)
Income tax refunds/(paid)	12	24,438	(11,054)
Post-employment benefits paid		(1,466)	(1,778)
Net cash flows from operating activities		332,091	127,866
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets		(48,176)	(65,384)
Proceeds from sale of property, plant and equipment and intangible assets		47	242
Proceeds from sale of available-for-sale investment		-	41,767
Reclassification to restricted cash and deposits	17	-	(184,523)
Interest received		168	2,056
Dividends from associates		4,203	1,716
Net cash flows used in investing activities		(43,758)	(204,126)
Cash flows from financing activities
Proceeds from borrowings and finance	18	19,115	-
Repayment of borrowings and finance	18	(195,918)	(393,876)
Arrangement fees paid		-	(15,308)
Dividends paid to equity shareholders of Ferrexpo plc		-	(77,548)
Net cash flows from financing activities		(176,803)	(486,732)
Net increase/(decrease) in cash and cash equivalents		111,530	(562,992)
Cash and cash equivalents at the beginning of the year		35,330	626,509
Currency translation differences		(2,109)	(28,187)
Cash and cash equivalents at the end of the year	16	144,751	35,330

Consolidated Statement of Changes in Equity

		Attributable to equity shareholders of Ferrexpo plc
US$000	Issued capital	Share premium	Uniting of interest reserve	Treasury share reserve	Employee benefit trust reserve	Translation reserve	Retained earnings	Total capital and reserves	Non-controlling interests	Total equity
At 1 January 2015	121,628	185,112	31,780	(77,260)	(6,012)	(1,401,496)	1,855,690	709,442	8,159	717,601
Profit for the year	-	-	-	-	-	-	33,037	33,037	(1,579)	31,458
Other comprehensive (loss)/income	-	-	-	-	-	(424,151)	3,156	(420,995)	(7,363)	(428,358)
Total comprehensive (loss)/income	-	-	-	-	-	(424,151)	36,193	(387,958)	(8,942)	(396,900)
Equity dividends paid to shareholders of Ferrexpo plc	-	-	-	-	-	-	(77,285)	(77,285)	-	(77,285)
Share-based payments	-	-	-	-	515	-	-	515	-	515
At 31 December 2015	121,628	185,112	31,780	(77,260)	(5,497)	(1,825,647)	1,814,598	244,714	(783)	243,931
Profit for the year	-	-	-	-	-	-	187,354	187,354	1,846	189,200
Other comprehensive (loss)/income	-	-	-	-	-	(108,523)	819	(107,704)	(1,225)	(108,929)
Total comprehensive loss for the year	-	-	-	-	-	(108,523)	188,173	79,650	621	80,271
Effect from increase of shareholding in subsidiary	-	-	-	-	-	-	(618)	(618)	(685)	(1,303)
Share-based payments	-	-	-	-	389	-	-	389	-	389
At 31 December 2016	121,628	185,112	31,780	(77,260)	(5,108)	(1,934,170)	2,002,153	324,135	(847)	323,288

Notes to the Consolidated Financial Statements

Note 1: Corporate information

This statement of financial results was approved by the Board on 21 March 2017. The financial information set out in this statement does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for 2015 is based on the statutory accounts for the financial year ended 31 December 2015. Those accounts, upon which the auditors issued an unqualified opinion with emphasis of matter paragraph in relation to going concern and which did not contain a statement under 498(2) or 498(3) of the Companies Act 2006, have been delivered to the Registrar of Companies. The financial information for the year ended 31 December 2016 has been extracted from the statutory accounts of Ferrexpo plc which will be delivered to the Registrar of Companies in due course. The auditors' report on the 2016 statutory accounts was (i) unqualified, (ii) did not include references to any matters to which the auditor drew attention by way of emphasis without qualifying its reports and (iii) did not contain statements under section S498(2) or S498(3) of the Companies Act 2006.

Ferrexpo plc will publish on or around 21 April 2017 its Annual Report and Accounts for the year ended 31 December 2016 on its corporate website www.ferrexpo.com.

Organisation and operation

Ferrexpo plc (the "Company") is incorporated and registered in England, which is considered to be the country of domicile, with its registered office at 55 St James's Street, London SW1A 1LA, UK. Ferrexpo plc and its subsidiaries (the "Group") operate two mines and a processing plant near Kremenchug in Ukraine, an interest in a port in Odessa and sales and marketing activities around the world including offices in Switzerland, Dubai, Japan, China, Singapore and Ukraine. The Group also owns logistics assets in Austria which operate a fleet of vessels operating on the Rhine and Danube waterways and an ocean going vessel which provides top off services and operates on international sea routes. The Group's operations are vertically integrated from iron ore mining through to iron ore concentrate and pellet production and subsequent logistics. The Group's mineral properties lie within the Kremenchug Magnetic Anomaly and are currently being extracted at the Gorishne-Plavninskoye and Lavrikovskoye ("GPL") and Yeristovskoye deposits.

The majority shareholder of the Group is Fevamotinico S.a.r.l. ("Fevamotinico"), a company incorporated in Luxembourg and ultimately owned by The Minco Trust, of which Kostyantin Zhevago, the Group's Chief Executive Officer, is a beneficiary. At the time this report was published, Fevamotinico held 50.3% (2015: 50.3%) of Ferrexpo plc's issued share capital.

Note 2: Basis of preparation

Whilst the preliminary announcement has been prepared in accordance with International Financial Reporting Standards ('IFRS') and International Financial Reporting Interpretation Committee ("IFRIC") interpretations adopted for use by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The Board approved the full financial statements that comply with IFRS on Tuesday, 21 March 2017. The financial statements have been prepared under the historical cost convention as modified by the recording of pension assets and liabilities and the revaluation of certain financial instruments.

The Group's principal risks likely to affect its future development, performance and position are set out on pages 20 to 28. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Performance Review on pages 8 to 10.

Changes in accounting policies

The accounting policies and methods of computation adopted in the preparation of the consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2015 except for the adoption of new amendments and improvements to IFRSs effective as of 1 January 2016. These new standards and interpretations had no effect on reported results, financial position or disclosure in the financial statements:

IAS 1 Presentation of Financial Statements - disclosure initiative

Amendments to IFRS 11: Joint arrangements: Accounting for acquisitions of interests

Amendments to IAS 16 and IAS 38: Clarification of acceptable methods of depreciation and amortisation

Annual Improvements to IFRSs - 2012-2014 Cycle

New standards and interpretations not yet adopted

The Group has elected not to early adopt any revised and amended standards, which are not yet mandatory in the EU.

The standards below could have an impact on the consolidated financial statements of the Group.

IFRS 9 Financial instruments

The complete standard has been issued in July 2014 including the requirements previously issued and additional amendments. The new standard replaces IAS 39 and includes a new expected loss impairment model, changes to the classification and measurement requirements of financial assets as well as to hedge accounting. The new standard becomes effective for financial years beginning on or after 1 January 2018. The Group has begun the impact assessment on the new standard and expects that the classification and measurement of its financial instruments under the new standard will remain largely unchanged. The Group does not intend to early adopt this standard.

IFRS 15 Revenue from contracts with customers

The new standard was issued in May 2014 and outlines a single comprehensive model of accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. The new standard also establishes the principles for the disclosure of relevant information in the financial statements about the nature, amount, timing and uncertainties of revenue and cash flows arising from contracts with customers. The new standard becomes mandatory for financial years beginning on or after 1 January 2018. The Group expects that there will be an impact in terms of the recognition of transport related revenue. The Group has begun the impact assessment on this new standard and does not intend to early adopt this standard.

IFRS 16 Leases

The new standard was issued in January 2016 replacing the previous leases standard, IAS 17 Leases, and related Interpretations. IFRS 16 establishes the principles for the recognition, measurement, presentation and disclosure of leases for the customer ("lessee") and the supplier ("lessor"). IFRS 16 eliminates the classification of leases as either operating or finance as is required by IAS 17 and, instead, introduces a single lessee accounting model requiring a lessee to recognise assets and liabilities for all leases unless the underlying asset has a low value or the lease term is 12 months or less. This new standard applies to annual reporting periods beginning on or after 1 January 2019 subject to EU endorsement. The Group expects that the new standard will result in the recognition of right-of-use assets and lease liabilities in respect of some of the Group's contractual lease arrangements in place that are currently accounted for as operating lease. The Company does not intend to early adopt this standard.

The Group does not expect an impact on its consolidated financial statements from all other standards, interpretations and amendments issued at the reporting date, but not yet to be adopted for these financial statements.

Note 3: Segment information

The Group is managed as a single entity, which produces, develops and markets its principal product, iron ore pellets, for sale to the metallurgical industry. While the revenue generated by the Group is monitored at a more detailed level, there are no separate measures of profit reported to the Group's Chief Operating Decision-Maker ("CODM"). In accordance with IFRS 8 Operating segments, the Group presents its results in a single segment, which are disclosed in the income statement for the Group.

Management monitors the operating result of the Group based on a number of measures including EBITDA, "C1" costs and the net financial indebtedness.

EBITDA

The Group presents EBITDA because it believes that EBITDA is a useful measure for evaluating its ability to generate cash and its operating performance. The Group's full definition of EBITDA is disclosed in the section on Alternative Performance Measures on page 51.

US$000	Notes	Year ended 31.12.16	Year ended 31.12.15
Profit before tax and finance		308,711	112,403
Allowance for restricted cash and deposits	17	8,525	174,579
Write-offs and impairment losses	10	2,501	5,555
Gain on disposal of available-for-sale investment		-	(41,385)
Share-based payments		389	515
Losses on disposal of property, plant and equipment		4,446	4,541
Depreciation and amortisation		50,671	56,596
EBITDA		375,243	312,804

"C1" cash costs

"C1" cash costs represents the cash costs of production of iron pellets from own ore divided by production volume of own ore. Non-C1 cost components include non-cash costs such as depreciation, inventory movements and costs of purchased ore and concentrate.

US$000	Notes	Year ended 31.12.16	Year ended 31.12.15
Cost of sales - pellet production	5	360,495	405,863
Non-C1 cost components		(53,884)	(46,268)
C1 cash cost		306,611	359,595
Own ore produced (tonnes)		11,071,404	11,258,446
C1 cash cost per tonne (US$)		27.7	31.9

Net financial indebtedness

Net financial indebtedness as defined by the Group comprises cash and cash equivalents less interest-bearing loans and borrowings.

US$000	Notes	As at 31.12.16	As at 31.12.15
Cash and cash equivalents	16	144,751	35,330
Current borrowings	18	(228,061)	(203,299)
Non-current borrowings	18	(505,641)	(700,351)
Net financial indebtedness		(588,951)	(868,320)

The Group made debt repayments of US$195,918 thousand during the year ended 31 December 2016 (2015: US$393,876 thousand).

The Group's net financial indebtedness was increased in the second half of the financial year 2015 by the insolvency of the Group's transactional bank in Ukraine resulting in a reduction of the balance of cash and cash equivalents available in Ukraine (see Note 17).

Disclosure of revenue and non-current assets

The Group does not generate significant revenues from external customers attributable to the United Kingdom, the Company's country of domicile. The information on the revenues from external customers attributed to the individual foreign countries is given in Note 4. The Group does not have any significant non-current assets that are located in the country of domicile of the Company. The vast majority of the non-current assets are located in Ukraine.

Note 4: Revenue

Revenue for the year ended 31 December 2016 consisted of the following:

US$000	Year ended 31.12.16	Year ended 31.12.15
Revenue from sales of iron ore pellets and concentrate:
Export	921,861	895,520
Total revenue from sale of iron ore pellets and concentrate	921,861	895,520
Revenue from logistics and bunker business	61,207	61,247
Revenue from other sales and services provided	3,257	4,236
Total revenue	986,325	961,003

Export sales of iron ore pellets and concentrate by geographical destination showing separately countries that individually represented more than 10% of export sales in either current or prior year were as follows:

US$000	Year ended 31.12.16	Year ended 31.12.15
Central Europe	425,079	431,429
Austria	215,479	188,284
Slovakia	48,397	96,211
Others	161,203	146,934
Western Europe	153,932	105,858
Germany	143,281	102,985
Others	10,651	2,873
North East Asia	155,443	119,170
Japan	96,257	86,343
Others	59,186	32,827
China and South East Asia	129,391	193,566
China	125,788	193,566
Others	3,603	-
Turkey, Middle East and India	58,016	45,497
Turkey	58,016	45,497
Total exports	921,861	895,520

The Group markets its products across various regions. The sales segmentation data was previously disclosed by Traditional Markets, Natural Markets and Growth Markets and the disclosure of this segmentation has been changed during the financial year 2016 to better reflect how the Group now makes its business decisions and monitors its sales. Information about the composition of the regions is provided in the Glossary.

During the year ended 31 December 2016 sales made to three customers accounted for 40.0% of the revenues from export sales of ore pellets and concentrate (2015: 41.7%).

Sales to customers that individually represented more than 10% of total sales in either current or prior year are as follows:

US$000	Year ended 31.12.16	Year ended 31.12.15
Customer A	215,479	188,284
Customer B	48,397	96,211

Note 5: Cost of sales

Cost of sales for the year ended 31 December 2016 consisted of the following:

US$000	Year ended 31.12.16	Year ended 31.12.15
Energy	155,831	186,312
Personnel	21,934	28,773
Materials	63,911	72,653
Repairs and maintenance	35,357	37,388
Depreciation and amortisation	36,151	42,750
Royalties and levies	15,294	19,653
Purchased concentrate and other items for resale	6,384	21,142
Inventory movements	11,311	(20,163)
Logistics and bunker business	39,838	40,893
Other	14,322	17,355
Total cost of sales	400,333	446,756
Thereof for pellet production	360,495	405,863
Thereof for logistics and bunker business	39,838	40,893

Note 6: Selling and distribution expenses

Selling and distribution expenses for the year ended 31 December 2016 consisted of the following:

US$000	Year ended 31.12.16	Year ended 31.12.15
Pellet transportation	165,897	178,902
Personnel	4,104	4,472
Logistics business	15,525	18,793
Advertising	11,176	11,269
Depreciation	9,849	10,352
Other	2,978	2,434
Total selling and distribution expenses	209,529	226,222

Note 7: General and administrative expenses

General and administrative expenses for the year ended 31 December 2016 consisted of the following:

US$000	Year ended 31.12.16	Year ended 31.12.15
Personnel	21,246	22,123
Office, maintenance and security	4,881	4,788
Professional fees	8,596	5,697
Audit and non-audit fees	1,651	1,587
Depreciation and amortisation	1,506	1,540
Other	765	1,368
Total general and administrative expenses	38,677	37,103

Auditor remuneration

Auditor remuneration paid in respect of the audit of the financial statements of the Group and its subsidiary companies and for the provision of other services not in connection with the audit is disclosed below:

US$000	Year ended 31.12.16	Year ended 31.12.15
Audit services
Ferrexpo plc Annual Report	1,048	1,106
Subsidiary entities	379	302
Total audit services	1,427	1,408
Audit-related assurance services	154	156
Total audit and audit-related assurance services	1,581	1,564
Non-audit services
Tax advisory	60	22
Tax compliance	5	-
Other services	5	1
Total non-audit services	70	23
Total auditor remuneration	1,651	1,587

During the financial year 2016, non-audit services totalling US$32 thousand provided for debt management activities of the Group are included in other finance costs and not included in the table above.

During the comparative period ended 31 December 2015, non-audit services totalling US$681 thousand have been capitalised as prepaid arrangement fees and are not included in the table above.

Note 8: Other expenses

Other expenses for the year ended 31 December 2016 consisted of the following:

US$000	Year ended 31.12.16	Year ended 31.12.15
Community support donations	27,519	25,820
Movements in allowance for doubtful receivables and prepayments made	252	114
Other personnel costs	847	1,261
Other	5,489	5,531
Total other expenses	34,107	32,726

Information on the Group's community support donations is provided in the social responsibility paragraph in the Chairman's Statement on page 7.

Note 9: Foreign exchange gains and losses

Foreign exchange gains and losses for the year ended 31 December 2016 consisted of the following:

US$000	Year ended 31.12.16	Year ended 31.12.15
Operating foreign exchange gains/(losses)
Revaluation of trade receivables	14,240	25,943
Revaluation of trade payables	(388)	118
Other	(20)	(36)
Total operating foreign exchange gains	13,832	26,025
Non-operating foreign exchange (losses)/gains
Revaluation of interest-bearing loans	(11,577)	(39,858)
Conversion of cash and cash equivalents	(578)	26,368
Other	1,844	(4,260)
Total non-operating foreign exchange (losses)/gains	(10,311)	(17,750)
Total foreign exchange gains	3,521	8,275

During the financial year 2016, the Ukrainian Hryvnia has devalued by approximately 13% (2015: 52%) compared to the US Dollar from 24.001 as at 31 December 2015 to 27.191 as at the end of this reporting period.

Note 10: Write-offs and impairment losses

Write-offs and impairment losses for the year ended 31 December 2016 consisted of the following:

US$000	Year ended 31.12.16	Year ended 31.12.15
Write-off of receivables and prepayments	634	4,598
Write-off/(write-back) of inventories	33	(59)
Write-off of property, plant and equipment	1,822	992
Impairment of available-for-sale investments	12	24
Total write-offs and impairment losses	2,501	5,555

The write-off of receivables and prepayments during the comparative period ended 31 December 2015 is predominantly related to the cancellation of a contract for equipment ordered and partially prepaid in line with the terms of the contract.

Note 11: Finance income and expense

Finance income and expense for the year ended 31 December 2016 consisted of the following:

US$000	Year ended 31.12.16	Year ended 31.12.15
Finance income
Interest income	175	1,268
Other finance income	-	1,226
Total finance income	175	2,494
Finance expense
Interest expense on financial liabilities measured at amortised cost	(54,255)	(61,505)
Effect from capitalised borrowing costs	5,269	5,440
Interest on defined benefit plans	(2,197)	(2,880)
Bank charges	(11,372)	(12,282)
Other finance costs	(4,622)	(570)
Total finance expense	(67,177)	(71,797)
Net finance expense	(67,002)	(69,303)

Fees for liability management activities of the Group for the amount of US$4,554 thousand (2015: nil) are included in other finance costs.

Note 12: Taxation

The weighted average statutory corporate income tax rate is calculated as the average of the statutory tax rates applicable in the countries in which the Group operates, weighted by the profits and losses before tax of the subsidiaries in the respective countries, as included in the consolidated financial information. The weighted average statutory corporate income tax rate before special items was 8.9% for the financial year 2016 (2015: 12.4%). The rate for the comparative period ended 31 December 2015 excludes the tax effect of the non-recurring charge related to the restricted cash and deposits balances (see Note 17), which, if included, would have resulted in a negative weighted averaged statutory corporate income tax rate. The income tax credit of US$6,108 thousand for the comparative period ended 31 December 2015 results from a deferred tax credit of US$28,420 thousand relating to the recognition of a deferred tax asset in respect of the allowance for the restricted cash and deposits for which the Group expects that it will become tax deductible in a future period.

A reconciliation between the income tax charged in the accompanying financial information and income before taxes multiplied by the weighted average statutory tax rate for the year ended 31 December 2016 is as follows:

US$000	Year ended 31.12.16	Year ended 31.12.15
Profit before tax	231,398	25,350
Notional tax charge computed at the weighted average statutory tax rate of 8.9% (2015: 12.4%)	20,594	3,142
Effect of higher local tax rate on special items	(1,003)	(11,987)
Reassessment of prior year temporary differences	1,148	(657)
Effect from utilisation of non-recognised deferred tax assets	-	(2,165)
Expenses not deductible for local tax purposes ¹	7,828	7,383
Income exempted for local tax purposes	(1,588)	(5,168)
Income for local tax purposes ²	7,767	-
Non-recognition of deferred taxes on current year losses ³	4,552	3,634
Tax related to prior years ⁴	1,440	(189)
Other (including translation differences) ⁵	1,460	(101)
Total income tax expense/(credit)	42,198	(6,108)
Reconciliation of tax effect on special items:
Loss before tax on special items	(11,026)	(138,749)
Notional tax credit computed at the weighted average statutory tax rate of 8.9% (2015: 12.4%)	(981)	(17,197)
Effect of higher local tax rate on special items	(1,003)	(11,987)
Effect from utilisation of non-recognised deferred tax assets	-	(2,165)
Effect from change in permanent differences	449	688
Non-recognition of deferred tax asset	-	2,241
Tax credit on special items	(1,535)	(28,420)

¹ Predominantly related to Ukraine where certain operating expenses are historically not deductible for tax purposes according to the enacted local tax legislation.

² Reconciling item relates to an adjustment made in Ukraine in respect of sales of pellets to subsidiaries of the Group abroad in order to address the changes in the local transfer pricing law.

³ Non-recognition of deferred taxes on current year losses due to the uncertainty in respect of the timing of the subsidiaries becoming profitable for local tax purposes.

⁴ Predominantly in relation to an allowance on an income tax receivable balance of US$2,115 thousand that was recognised during the comparative period ended 31 December 2015 and fully provided for following the assessment made by the relevant tax authorities.

⁵ Increase during the financial year 2016 related to an increase of the tax expense in Ukraine.

The net balance of income tax receivable changed as follows during the financial year 2016:

US$000	Year ended 31.12.16	Year ended 31.12.15
Opening balance	49,150	67,884
Income statement charge	(41,982)	(33,991)
Charge through other comprehensive income	26,966	28,811
Tax (refund)/paid	(24,438)	11,054
Translation difference	(5,089)	(24,608)
Closing balance	4,607	49,150

US$000	As at 31.12.16	As at 31.12.15
Income tax receivable balance - current	10,757	2,829
Income tax receivable balance - non-current	5,630	54,482
Income tax payable balance	(11,780)	(8,161)
Net income tax receivable	4,607	49,150

During the financial years 2013, 2014 and 2015, current VAT receivable balances in Ukraine were mainly recovered in exchange for prepayments of corporate profit tax. As at 31 December 2016, these prepayments totalled US$16,246 thousand (2015: US$54,482 thousand) and it is management's view that this balance will be offset with future profits or will be refunded in cash. The Group received refunds of prepaid corporate profit tax totalling US$26,926 thousand in July and December 2016 in respect of Ferrexpo Poltava Mining ('FPM'). As a result, the remaining balance of FPM of US$10,616 thousand as at 31 December 2016 is classified as current whereas US$5,630 thousand related to two other Ukrainian subsidiaries are classified as non-current due to the uncertainty in respect of the timing of the recovery.

Note 13: Earnings per share and dividends paid and proposed

	Before special items	Special items	Year ended 31.12.16	Before special items	Special items	Year ended 31.12.15
Earnings/(loss) for the year attributable to equity shareholders per share
Basic (US cents)	33.60	(1.60)	32.00	23.92	(18.27)	5.65
Diluted (US cents)	33.51	(1.60)	31.91	23.86	(18.23)	5.63

The calculation of the basic and diluted earnings per share is based on the following data:

Thousand	Year ended 31.12.16	Year ended 31.12.15
Weighted average number of shares
Basic number of Ordinary Shares outstanding	585,503	585,462
Effect of dilutive potential Ordinary Shares	1,713	1,422
Diluted number of Ordinary Shares outstanding	587,216	586,884

Dividends paid and proposed

US$000

Year ended 31.12.16

Dividends proposed during the year
Final dividend for 2016: 3.3 US cents per Ordinary Share	19,325
Special dividend for 2016: 3.3 US cents per Ordinary Share	19,325
Total dividends proposed	38,650

No final dividend was proposed for the financial year 2015 and no dividends were paid during the financial year 2016.

US$000	Year ended 31.12.15
Dividends paid during the year
Interim dividend for 2015: 3.3 US cents per Ordinary Share	19,364
Final dividend for 2014: 3.3 US cents per Ordinary Share	19,517
Special dividend for 2014: 6.6 US cents per Ordinary Share	38,667
Total dividends paid	77,548

Note 14: Inventories

As at 31 December 2016 inventories comprised:

US$000	Year ended 31.12.16	Year ended 31.12.15
Raw materials and consumables	62,450	65,883
Finished ore pellets	12,408)	25,112)
Work in progress	2,522	3,468
Other	1,555)	1,558)
Total inventories - current	78,935	96,021
Raw materials and consumables	130,357)	98,802
Total inventories - non-current	130,357	98,802
Total inventories	209,292	194,823

Inventory is held at the lower of cost or net recoverable amount.

Inventories classified as non-current comprise lean and weathered ore stockpiles that are, based on the Group's current processing plans, not planned to be processed within the next year. It is the Group's intention to process this ore at a later point of time and it is expected that it will take more than one year to process this stockpile, depending on the Group's future mining activities, processing capabilities and anticipated market conditions.

Note 15: Other taxes recoverable and payable

As at 31 December 2016 other taxes recoverable comprised:

US$000	As at 31.12.16	As at 31.12.15
VAT receivable	21,303	50,395
Other taxes prepaid	86	87
Total other taxes recoverable and prepaid	21,389	50,482

As at 31 December 2016, US$20,565 thousand of the VAT receivable before allowance relates to the Group's Ukrainian business operations (2015: US$49,339 thousand).

As at 31 December 2016, US$427 thousand (2015: US$30,613 thousand) was overdue and US$595 thousand is in the process of being considered by the Ukrainian court system as at 31 December 2016 (2015: US$1,147 thousand). Management is of the opinion that the overdue balances and those in the court system will be recovered during the next 12 months in full.

The total VAT receivable balance shown in the table above is net of an allowance of US$891 thousand (2015: US$1,059 thousand) to reflect the uncertainties in terms of the recovery of VAT receivable balances related to one of the Ukrainian subsidiaries with its mine still being developed.

The table below provides a reconciliation of the VAT receivable balance in Ukraine:

US$000	Year ended 31.12.16	Year ended 31.12.15
Opening balance, gross	49,339	72,837
Net VAT incurred	84,555	91,149
VAT received in cash	(109,756)	(89,034)
Translation differences	(3,573)	(25,613)
Closing balance, gross	20,565	49,339
Allowance	(891)	(1,059)
Closing balance, net	19,674	48,280

Further information on VAT is provided in the Update on Risks section on page 23.  

As at 31 December 2016 other taxes payable comprised:

US$000	As at 31.12.16	As at 31.12.15
Environmental tax	571	583
Royalties	2,309	4,189
VAT payable	173	157
Other taxes	2,617	2,761
Total other taxes payable	5,670	7,690

See Note 19 for information in respect of a withholding tax claim in Ukraine.

Note 16: Cash and cash equivalents

As at 31 December 2016 cash and cash equivalents comprised:

US$000	As at 31.12.16	As at 31.12.15
Cash at bank and on hand	144,751	35,330
Short-term deposit	-	-
Total cash and cash equivalents	144,751	35,330

The available cash and cash equivalents balance was reduced during the second half of the financial year 2015 by the insolvency of the Group's transactional bank in Ukraine (see Note 17 below). The debt repayments during the financial year ended 31 December 2016 totalled US$195,918 thousand (2015: US$393,876 thousand) affecting the balance of cash and cash equivalents. Further information on the Group's gross debt is provided in Note 18.

The balance of cash and cash equivalents held in Ukraine amounts to US$40,787 thousand as at 31 December 2016 (2015: US$13,896 thousand).

Note 17: Restricted cash and deposits

As at 31 December 2016 restricted funds held at Bank F&C are shown in the table below:

US$000	Notes	As at 31.12.16	As at 31.12.15
Cash balance with Bank F&C subject to liquidation process		148,650	168,575
Cash balance subject to ongoing court proceedings	19	8,216	9,308
Allowance on cash and deposits currently not available		(156,866)	(168,575)
Total restricted cash and deposits		-	9,308

An allowance of the balance not available to the Group was recorded as at the end of the comparative period ended of 31 December 2015, excluding an amount of US$9,308 thousand claimed by the Group in the court. As a result of the court proceedings during the financial year 2016, the Group decided to increase the allowance for the amount being still heard in the court, resulting in a charge of US$8,525 thousand (at the average exchange rate for December 2016) recognised in the income statement as at 31 December 2016 (2015: US$174,579 thousand). See Note 19 for further information.

Note 18: Interest-bearing loans and borrowings

US$000		As at 31.12.15
Current
Syndicated bank loans - secured	175,000	166,250
Other bank loans - secured	18,309	21,504
Other bank loans - unsecured	1,495	1,431
Obligations under finance leases	3,684	3,444
Trade finance facilities	19,025	-
Interest accrued	10,548	10,670
Total current interest-bearing loans and borrowings	228,061	203,299
Non-current
Eurobond issued	337,685	333,536
Syndicated bank loans - secured	131,250	306,250
Other bank loans - secured	25,434	43,867
Other bank loans - unsecured	5,246	6,939
Obligations under finance leases	6,026	9,759
Total non-current interest-bearing loans and borrowings	505,641	700,351
Total interest-bearing loans and borrowings	733,702	903,650

As at 31 December 2016, the Group has a revolving syndicated US$350 million pre-export finance facility, which is fully drawn. The amortisation of the US$350 million facility commenced in November 2016 with eight quarterly instalments of US$43,750 thousand to the final maturity date of 8 August 2018.

In July 2016, the Group made the final payment of its syndicated US$420 million revolving pre-export finance facility. As at the end of the comparative period ended 31 December 2015, US$123 million was drawn by the Group.

As at 31 December 2016 the major bank debt facilities were guaranteed and secured as follows:

· Ferrexpo AG assigned the rights to revenue from certain sales contracts;

· PJSC Ferrexpo Poltava Mining assigned all of its rights of certain export contracts for the sale of pellets to Ferrexpo AG; and

· the Group pledged bank accounts of Ferrexpo AG and Ferrexpo Middle East FZE into which sales proceeds from certain assigned sales contracts are exclusively received.

In addition to the Group's major bank debt facilities listed above, an unsecured US$500 million Eurobond was issued on 7 April 2011, which the Group exchanged and cancelled through the issuance of new notes at par value totalling US$346,385 thousand and the repayment of US$153,615 thousand in cash. The exchange was completed in two transactions on 24 February 2015 and 6 July 2015. As a result of the two exchanges completed, the tenor of the notes outstanding was extended from April 2016 to April 2019 with two equal instalments of US$173,193 thousand falling due on 7 April 2018 and 2019, respectively. The new notes have a 10.375% interest coupon payable semi-annually, compared to 7.875% for the initially issued notes in April 2011.

As at 31 December 2016, the Group has open trade finance facilities in the amount of US$19,025 thousand (31 December 2015: nil), which are secured against receivables related to these specific trades.

Note 19: Commitments, contingencies and legal disputes

Commitments

US$000	As at 31.12.16	As at 31.12.15
Capital commitments on purchase of property, plant and equipment	24,665	32,591

US$000

As at

31.12.16

As at

31.12.15

Capital commitments on purchase of property, plant and equipment

24,665

32,591

Legal

In the ordinary course of business, the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Group.

Deposit Guarantee Fund and Liquidator of Bank F&C

The Group recorded a full allowance for the cash balance held in Bank F&C ('BFC') in September 2015 following it was declared insolvent and put under temporary administration (see also Note 17). It is expected that the liquidation of the bank which commenced in December 2016, will take several years and the level of potential recoverability of the remaining balance of restricted cash and deposits is still uncertain as at 31 December 2016. As at 31 December 2016, the balance of restricted cash and deposits which is denominated in Ukrainian Hryvnia with a full allowance amounts to US$156,866 thousand (2015: US$168,575 thousand).

The Group's principal subsidiary, PJSC Ferrexpo Poltava Mining ('FPM'), received a credit of US$9,984 thousand to its account with BFC following the introduction of the temporary administration on 18 September 2015. FPM filed a claim against BFC under the management of the Administrator, as appointed by the Deposit Guarantee Fund ('DGF'), on 30 October 2015 in the Kyiv City Commercial Court for the release of this amount in accordance with applicable legislation. Following the hearing held on 4 December 2015, the Kyiv City Commercial Court ruled in favour of FPM. This court ruling was subsequently appealed. During the hearing on 25 May 2016, the initial decision in favour of FPM was upheld by the Kyiv Appellate Commercial Court and on 10 June 2016, the decision was further appealed by BFC under the management of the Liquidator. On 5 September 2016, the Highest Commercial Court of Ukraine cancelled both previous judgements of the lower court instances and returned the case to the Kyiv City Commercial Court. FPM subsequently appealed the decision of the Highest Commercial Court of Ukraine to the Supreme Court of Ukraine. On the 17 October 2016, the highest court instance in Ukraine, the Supreme Court of Ukraine, rejected FPM's application to review the decision of the Highest Commercial Court of Ukraine.

On 31 January 2017, FPM brought the new application to the Supreme Court of Ukraine against the decision of the Highest Commercial Court of Ukraine. On 6 February 2017 the Supreme Court of Ukraine refused to commence the review proceedings in respect of this decision. As a consequence, the case was heard again by the Kyiv City Commercial Court on 14 March 2017 and this court instance dismissed FPM's claim in full. Taking into account the latest court decision, the allowance recorded in respect of the restricted cash and deposits was increased by US$ 8,525 thousand (at the average rate for December 2016), although FPM is going to appeal against this court decision.

Following commencement of the liquidation of BFC and in accordance with the applicable legislation, FPM, Ferrexpo Yeristovo Mining ('FYM') and Ferrexpo Belanovo Mining ('FBM'), collectively referred to as 'Ukrainian subsidiaries' submitted on 21 January 2016 their claims for UAH4,262 million. This represents the total amount of cash held with the bank on the date of introduction of temporary administration after translating in accordance with applicable law all foreign currency amounts into local currency equivalents.  On 22 April 2016, the liquidator of BFC issued certificates recognising UAH540 million of these claims. These recognised claims had been included in the 9th rank on the basis that subsidiaries were considered as related parties. The Ukrainian subsidiaries are currently engaged in court proceedings challenging both the under recognition of claims and the ranking of the appropriate claims in the local courts.

On 26 October 2016, FPM brought the lawsuit before the Kyiv Commercial Court against the Liquidator of BFC and the DGF challenging under-recognition and ranking of the claims in the liquidation of BFC. On 26 December 2016, the court stayed the proceedings in the FPM litigation and ordered expert examination of the banking records and other documents in the case file by an accounting expert. This order on stay of the proceedings has been appealed by PJSC Ukrainian International Airlines, which seeks to join the proceedings as an interested party. On 1 February 2017, the Kyiv Appellate Commercial Court has dismissed the appeal of PJSC Ukrainian International Airlines.

On 13 October 2016, FYM brought the lawsuit before the Kyiv Commercial Court against the Liquidator and the DGF challenging under-recognition and ranking of the claims in the liquidation of BFC. On 17 October 2016, the Kyiv Commercial Court terminated the proceeding. On 20 December 2016, the Kyiv Appellate Commercial Court returned the case for consideration to the local court. The next hearing before the Kyiv Commercial Court has been scheduled for 15 March 2017.

On 26 October 2016, FBM brought the lawsuit before the Kyiv Commercial Court against the Liquidator and the DGF challenging under-recognition and ranking of the claims in the liquidation of BFC. On 27 December 2016, the Kyiv Commercial Court rejected the claims of FBM in full. FBM filed an appeal on 26 January 2017. The hearing before the Kyiv Appellate Commercial Court has been scheduled for 1 March 2017.

An allowance has been recorded in the comparative period ended 31 December 2015 in respect of cash and deposits held at BFC at the time of temporary administration. It is not expected that the successful determination of these cases results in either a full or partial release of the allowance for restricted cash and deposits at this point of time. See also Note 17 for further information.

Salvage of grounded vessel

The Group was involved in arbitration proceedings in respect of the costs incurred for the salvage of a grounded vessel off the coast of Singapore carrying the Group's iron ore pellets to China. Although the Group's customer was at risk in respect of the insurance cover for the pellets shipped, the Group received a claim from the salvage operator as the Group still had the title to the goods during the vessel's period of salvage. The final award from the Arbitrator was received in August 2016. The decision was in favour of the opposing party, however no payment was due from the Group as the liability was settled by the Group's insurance company under the existing insurance cover.

Share dispute

The Group was involved in a share dispute which commenced in 2005 and has been disclosed in its various public documents since IPO in 2007. On 20 October 2014, the Kyiv City Commercial Court dismissed the claim of the opposing party in full. This judgment was confirmed by the Kyiv Appeal Commercial Court and the Higher Commercial Court of Ukraine on 28 January 2015 and 14 April 2015, respectively. No further court proceedings have been initiated by the opposing party.

Tax and other regulatory compliance

Ukrainian legislation and regulations regarding taxation and customs continue to evolve. Legislation and regulations are not always clearly written and are subject to varying interpretations and inconsistent enforcement by local, regional and national authorities, and other governmental bodies. Instances of inconsistent interpretations are not unusual. The uncertainty of application and the evolution of Ukrainian tax laws, including those affecting cross-border transactions, create a risk of additional tax payments having to be made by the Group, which could have a material effect on the Group's financial position and results of operations. This includes the transfer pricing law, which continues to evolve to increase the power of the tax authorities. The Group does not believe that these risks are any more significant than those of similar enterprises in Ukraine.

Ukrainian VAT

Recoverable VAT amounting to US$595 thousand outstanding at 31 December 2016 (2015: US$4,549 thousand) is currently in the process of being considered by the Ukrainian court system. As the VAT is fully recoverable under the relevant Ukrainian legislation, the Group expects to receive positive court decisions for these cases and that the amount is recovered in full. Consequently, no provision has been made for the VAT in dispute and associated fines and penalties.

Ukrainian withholding tax claims

Following a tax audit at Ferrexpo Poltava Mining ('FPM') claims were made by the Ukrainian tax authorities in relation to allegedly unpaid withholding tax totalling US$6,296 thousand (UAH170 million) and associated fines and penalties of US$1,555 thousand (UAH42 million) in respect of interest paid to a subsidiary of the Group in the United Kingdom in 2013 and 2014.

The management of the Group is of the opinion that the arguments of the tax office in respect of the current claim or any future withholding tax claims that may arise in respect of more recent periods are not well founded and applicable relevant tax treaties between the United Kingdom and Ukraine are applicable which would mitigate any claim.

After having taken legal advice, the management of the Group expects to successfully defend any claims made by the tax authorities in the Ukrainian courts. Consequently, no provision has been made for the withholding tax and associated fines and penalties.

Note 20: Related party disclosure

During the periods presented, the Group entered into arm's length transactions with entities under the common control of the majority owner of the Group, Kostyantin Zhevago, with associated companies and with other related parties. Management considers that the Group has appropriate procedures in place to identify, control, properly disclose and obtain independent confirmation, when relevant, for transactions with the related parties.

Entities under common control are those under the control of Kostyantin Zhevago. Associated companies refer to TIS Ruda LLC, in which the Group holds an interest of 49.4%. This is the only associated company of the Group. Other related parties are principally those entities controlled partially by Anatoly Trefilov. Anatoly Trefilov is a member of the supervisory board of FPM.

Related party transactions entered into by the Group during the periods presented are summarised in the following tables:

Revenue, expenses, finance income and expense

	Year ended 31.12.16			Year ended 31.12.15
US$000	Entities under common control	Associated companies	Other related parties	Entities under common control	Associated companies	Other related parties
Sales of pellets ^a	1,975	-	-	2,871	-	-
Other sales ^b	234	-	143	334	-	496
Total related party transactions within revenue	2,209	-	143	3,205	-	496
Materials ^c	6,954	-	8	6,909	-	12
Purchased concentrate and other items for resale ^d	-	-	-	277	-	-
Spare parts and consumables ^e	1,251	-	-	1,298	-	2
Gas ^f	4,297	-	-	45,869	-	-
Total related party transactions within cost of sales	12,502	-	8	54,353	-	14
Selling and distribution expenses ^g	10,766	19,803	1,507	10,896	22,248	5,023
General and administration expenses ^h	673	-	92	849	-	382
Allowance for restricted cash and deposits ⁱ	8,524	-	-	174,579	-	-
Total related party transactions within expenses	32,465	19,803	1,607	240,677	22,248	5,419
Finance income ^j	-	-	-	2,039	-	-
Finance expenses ^j	(38)	-	-	(58)	-	-
Net related party finance income	(38)	-	-	1,981	-	-

A description of the most material transactions which are in aggregate over US$200 thousand in the current or comparative period is given below.

Entities under common control

The Group entered into various related party transactions with entities under common control. All transactions were carried out on an arm's length basis in the normal course of business.

a Spot sales of pellets in the amount of US$1,975 thousand (2015: US$2,871 thousand) to VA Intertrading AG.

b Sales of power, steam and water and other materials for US$37 thousand (2015: US$78 thousand) and income from premises leased to Kislorod PCC of US$135 thousand (2015: US$147 thousand).

c Purchases of compressed air and oxygen and metal scrap from Kislorod PCC for US$3,587 thousand (2015: US$3,918 thousand);

c Purchases of cast iron balls from AutoKraZ Holding Co. for US$1,269 thousand (2015: US$1,063 thousand); and

c Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas for US$2,063 thousand (2015: US$1,787 thousand).

d Purchases of concentrate and other items for resale from Vostok Ruda Ltd. amounting to US$277 thousand during the comparative period. No such purchases during the period ended 31 December 2016.

e Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship Repair Plant ("KSRSSZ") in the amount of US$410 thousand (2015: US$338 thousand);

e Purchases of spare parts from Valsa GTV of US$486 thousand (2015: US$273 thousand); and

e Purchases of ferromanganese from Raw and Refined Commodities AG for US$102 thousand (2015: US$484 thousand).

f Procurement of gas for US$4,297 thousand (2015: US$45,869 thousand) from OJSC Ukrzakordongeologia.

g Purchases of advertisement, marketing and general public relations services from FC Vorskla of US$10,766 thousand (2015: US$10,855 thousand).

h Insurance premiums of US$385 thousand (2015: US$429 thousand) paid to ASK Omega for workmen's insurance and other insurances; and

h Fees of US$273 thousand paid to Bank F&C for bank services during the comparative period. No such fees paid during the period ended 31 December 2016.

i The Group recorded during the financial year 2016 an additional allowance for its cash and deposits held at Bank F&C resulting in a charge of US$8,525 thousand (2015: US$174,579 thousand) as a result of the latest developments of the ongoing court case. See Note 17 for further information.

Associated companies

The Group entered into related party transactions with its associated company TIS Ruda LLC, which were carried out on an arm's length basis in the normal course of business for the members of the Group.

g Purchases of logistics services in the amount of US$19,803 thousand (2015: US$22,248 thousand) relating to port operations, including port charges, handling costs, agent commissions and storage costs.

Other related parties

The Group entered into various transactions with related parties other than those under the control of the majority owner of the Group. All transactions were carried out on an arm's length basis in the normal course of business.

b Sales of material and services to Slavutich Ruda Ltd. for US$131 thousand (2015: US$481 thousand).

g Purchases of logistics management services from Slavutich Ruda Ltd. relating to customs clearance services and the coordination of rail transit totalling US$1,502 thousand (2015: US$5,023 thousand).

h Consulting fees paid to Nage Capital Management AG of US$92 thousand (2015: US$382 thousand) controlled by a former member of the Board of Directors of Ferrexpo plc who resigned in August 2014. The Group entered into this transaction within one year of his resignation and therefore considered it to be transaction with a related party. The agreement has been terminated as of 30 September 2016.

Purchases of property, plant and equipment

The table below details the transactions of a capital nature which were undertaken between Group companies and entities under common control, associated companies and other related parties during the periods presented.

	Year ended 31.12.16			Year ended 31.12.15
US$000	Entities under common control	Associated companies	Other related parties	Entities under common control	Associated companies	Other related parties
Purchases with shareholder approval	-	-	-	842	-	-
Purchases in the ordinary course of business	37	-	1	1,257	-	10
Total purchase of property, plant and equipment^k	37	-	1	2,099	-	10

Individual transactions of a capital nature which exceeded US$200 thousand are described below.

Entities under common control

Current year

k During the financial year 2016, the Group entered in various transactions of a capital nature with related parties totalling US$38 thousand. These transactions were in the ordinary course of business.

Prior year

k During the financial year 2015, the Group entered into various transactions of a capital nature with related parties totalling to US$1,267 thousand, which were in the ordinary course of business:

· the Group procured a filter in the amount of US$958 thousand from OJSC Berdichev Machine-Building Plant Progress for the quality upgrade of the pelletising plant at Ferrexpo Poltava Mining; and

· the Group procured design documentation services from OJSC DIOS totalling US$288 thousand.

In April 2015 the Group received 27 rail cars totalling US$1,431 thousand (US$842 thousand at the prevailing exchange rate at delivery) in addition to 25 rail cars received in 2014. A total of 300 rail cars were ordered in February 2014 under the authority of a shareholder approval obtained on 24 May 2012. As a consequence of the conflict in the Eastern part of Ukraine, the producer of the rail cars was not in the position to produce and deliver all rail cars ordered and prepaid. The remaining balance of the prepayment was fully written-off as of 31 December 2015, after having provided for it already as of 31 December 2014.

Balances with related parties

The outstanding balances, as a result of transactions with related parties, for the periods presented are shown in the table below:

	As at 31.12.16			As at 31.12.15
US$000	Entities under common control	Associated companies	Other related parties	Entities under common control	Associated companies	Other related parties
Investments available-for-sale	-	-	-	9	-	-
Prepayments for property, plant and equipment	-	-	-	24	-	-
Total non-current assets	-	-	-	33	-	-
Trade and other receivables ^l	257	4,576	48	688	2,273	8
Prepayments and other current assets ^m	282	-	201	680	-	-
Total current assets	539	4,576	249	1,368	2,273	8
Trade and other payables ⁿ	456	1,331	267	902	2,625	91
Current liabilities	456	1,331	267	902	2,625	91

A description of the balances over US$200 thousand in the current or comparative period is given below.

Entities under common control

l As of 31 December 2016, trade and other receivables included outstanding amounts due from Kislorod PCC of US$20 thousand (2015: US$404 thousand) for the sale of power, steam and water.

m The balances as at the end of the comparative period ended 31 December 2015 include prepayments of US$577 thousand made to Vostok Ruda Ltd. for purchases of concentrate. An allowance for the full amount prepaid was recorded during 2016 as a result of the bankruptcy filed by the related party.

n Trade and other payables include US$133 thousand for compressed air and oxygen purchased from Kislorod PCC (2015: US$475 thousand).

Associated companies

l As at 31 December 2016, trade and other receivables included US$4,576 thousand (2015: US$2,273 thousand) related to dividends declared by TIS Ruda LLC.

n As at 31 December 2016, trade and other payables included US$1,331 thousand (2015: US$2,625 thousand) related to purchases of logistics services from TIS Ruda LLC.

Other related parties

m Prepayments and other current assets totalling US$201 thousand (2015: nil) relate to prepayments made to Slavutich Ruda Ltd. for distribution services.

n Trade and other payables of US$267 thousand (2015: US$38 thousand) were in respect of distribution services provided by Slavutich Ruda Ltd.

Transactional banking arrangements

Prior to 17 September 2015, the Group had transactional banking arrangements with Bank F&C in Ukraine which was under common control of Kostyantin Zhevago. See Note 17 and Note 19 for further information.

The NBU announced on 17 September 2015 that it had adopted a decision to declare Bank F&C insolvent and the bank was put into temporary administration by the Deposit Guarantee Fund. The bank licence of Bank F&C was revoked by the NBU on 17 December 2015 and the liquidation was initiated by the Deposit Guarantee Fund. See Note 16, Note 17 and Note 19 for further information in respect of Bank F&C.

Note 21: Events after the reporting period

No material adjusting or non-adjusting events have occurred subsequent to the year-end other than the proposed dividend disclosed in Note 13.

ALTERNATIVE PERFORMANCE MEASURES

When assessing and discussing the Group's reported financial performance, financial position and cash flows, management may make reference to Alternative Performance Measures (APMs) that are not defined or specified under International Financial Reporting Standards (IFRS).

The APMs used by the Group fall into two categories:
Financial APMs: These financial measures are usually derived from the financial statements, prepared in accordance with IFRS.

Non-financial APMs: These measures incorporate certain non-financial information which management believes is useful when assessing the performance of the Group.

APMs are not uniformly defined by all companies, including those in the Group's industry. Accordingly, the APMs used by the Group may not be comparable with similarly titled measures and disclosures made by other companies. APMs should be considered in addition to, and not as a substitute for or as superior to, measures of financial performance, financial position or cash flows reported in accordance with IFRS.

Non-financial:

Iron ore price
The PLATTS 62% Fe CFR China price for iron ore fines is an important industry indicator of the overall level of demand for iron ore.

Production of premium pellets
The Group reports production of its premium pellets which includes Ferrexpo Premium Pellets ("FPP"), containing 65% Fe, and Ferrexpo premium pellets plus (FPP+), containing 65% Fe with enhanced basicity and low temperature disintegration properties. Ferrexpo's strategy is to sell high quality pellets to its customer base. Thus the level of production of premium pellets is an important indicator of whether the Group is adhering to its strategy.

Sales volumes
Indicate the level of demand for the Group's products.

LTIFR
Lost time injuries frequency rate (LTIFR) per million man hours worked across the Company's mining and processing operations in Ukraine and its barging subsidiary on the Danube River. The Group presents LTIFR because it believes that it is an important indicator of how safe the work environment is.

Financial:

C1 cash cost of production
Represents the cash costs of production of iron pellets from own ore divided by production volume of own ore. Non-C1 cost components include non-cash costs such as depreciation, inventory movements and costs of purchased ore and concentrate. The Group presents the C1 cash cost of production because it believes it is a useful measure of its cost competitiveness compared to its peer group.

EBITDA
The Group calculates EBITDA as profit from continuing operations before tax and finance plus depreciation and amortisation and non-recurring exceptional items included in other income and other expenses, share-based payment expenses and the net of gains and losses from disposal of investments and property, plant and equipment. The Group presents EBITDA because it believes it is a useful measure for evaluating its ability to generate cash and its operating performance.

Net debt
Net financial indebtedness as defined by the Group comprises cash and cash equivalents less interest bearing loans and borrowings. It provides an indication of the degree of indebtedness of the Group.

Net debt to EBITDA
Net financial indebtedness divided by EBITDA (both as described above). The ratio is a measurement of the Group's leverage, calculated as a company's interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA.

Capital Expenditure
Capital expenditure is defined as sustaining and development cash expenditure on property, plant and (capex) equipment as shown in the Group's statement of cash flows. It indicates the level of investment into the Group's asset base to maintain and develop its businesses.

[1] www.ukrstat.gov.ua

[2] Ferrexpo may from time to time seek to actively manage its debt portfolio. This process may include retiring or purchasing outstanding debt through cash purchases by means of open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, Ferrexpo's liquidity requirements, contractual restrictions and other factors. In addition, Ferrexpo may contemplate new issuances of debt securities.

[3] Ferrexpo Premium Pellets plus ("FPP+") contain 65% Fe with enhanced basicity and low temperature disintegration properties compared to FPP pellets.

This information is provided by RNS

The company news service from the London Stock Exchange

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