2018 Half Year Results

RNS Number : 5955W
Ferrexpo PLC
02 August 2018
 

2 August 2018

Ferrexpo plc

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

2018 Half Year Results

Ferrexpo plc today announces its financial results for the six months ended 30 June 2018.

 

Steve Lucas, Non-Executive Chairman, said:

"Our high quality product is in strong demand reflected in the record price premiums realised during the first half. This has helped offset a lower underlying iron ore price and higher costs driven primarily by rising commodity prices and local inflation. Despite these costs, which are expected to show a further modest increase in the second half of the year, our cash generation has allowed us to increase capex, pay down debt and retain very low leverage while dividends payments made in the first half of 2018 were US$74 million compared to US$39 million in 1H 2017.

We remain committed to increasing our output which in the near term is on track to increase by 1.5MT to 12MT by 2020. Thereafter, Ferrexpo is one of the few pellet producers globally which is able to increase output significantly on a low risk basis. This will ensure the Group's long-term future as one of the world's leading, premium pellet producers."  

 

1H 2018 Financial Summary:

US$ million (unless otherwise stated)

6 months ended 30.06.18

6 months ended 30.06.17

Change

%

Year ended 31.12.17

Total pellet production (kt)

5,096

5,160

-1.2

10,444

Sales volumes(kt)

4,798

5,065

-5.3

10,467

Avg PLATTS CFR 62% Fe iron ore fines price (US$/t)

69.8

74.4

-6.2

71.3

Revenue

617

591

4.4

1,197

Averge C1 cash costA (per tonne)

41.6

31.7

31.2

32.3

Underlying EBITDAA

234

287

-18.5

551

Profit for the period after special items

152

216

-29.6

394

Diluted EPS after special items (US cents)

25.79

36.60

-29.5

66.85

Interim dividend per share declared (US cents)

3.3

3.3

-

16.5

Net cash flow from operating activities

156

194

-19.6

353

Capital investmentA

56

45

24.4

103

Net debt1

369

4721

-21.8

3941

Cash

82

93

-11.8

98

Net debt to last twelve months' EBITDA A

0.74x

0.96x

-22.9

0.73x

 

1Note: accrued interest has been re-classified from borrowings to accrued liabilities and re-presented for comparative periods. This has reduced net debt from $403M as of 31 December 2017 to $394M and from $481M as of 30 June 2017 to $472M.

Health and Safety

·    No work related fatalities (1H 2017: one)

·    Group Lost Time Injury Frequency Rate 0.97 per million man hours (1H 2017: 0.95)

·    FYM Lost Time Injury free for 7 months

 

Market Environment

·    Strong market environment for high grade iron ore products including pellets

·    Increase in pellet premiums reflected strong demand for high grade product

·    Average realised FOB price increased 5% compared to 1H 2017

·    Strong customer demand from the Group's long term customers

 

Operational

·    1H 2018 pellet production 5.1MT (1H 2017: 5.2MT) reflects planned refurbishment of a pelletiser line

·    Sales volumes 4.8 MT reflects 300kt increase in stocks

·    Rail shipments below normal levels in May and June due to temporary capacity constraints. Stocks expected to reduce by year end.

·    Industry cost inflation, local inflation, an appreciation of the Hryvnia against the Dollar during the period and higher repair and mining costs led to an increase in the C1 cash cost to US$41.60 per tonne (1H 2017: US$31.7 per tonne)

·    Higher capex A of US$56 million (1H 2017: US$45 million) reflects modernisation of the processing facilities and near term organic growth opportunities to increase production by 1.5MT to 12MTPA

 

Financial

·    Revenue up 4.4% to US$617 million (1H 2017: US$591 million) on higher pellet premiums offset by lower iron ore prices, higher freight and lower sales volumes

·    Underlying EBITDA A of US$234 million (1H 2017: US$287 million) reflected a higher received price and higher costs

·    Profit after tax of US$152 million (1H 2017: US$216 million) reflecting lower EBITDA

·    Net cash flows from operating activities of  US$156 million (1H 2017: US$194 million) reflecting higher stocks

·    US$74 million of dividends paid out in 1H 2018 (1H 2017: US$39 million)

·    Cash as of 30 June 2018 US$82 million (31 December 2017: US$98 million; 30 June 2017: US$93 million)

·    Net debt A of US$369 million (31 December 2017: US$394 million; 30 June 2017: US$472 million)

·    2018 interim dividend of 3.3 US cents declared (1H 2017: 3.3 US cents)

 

Outlook

·    Demand for high quality iron ore, especially pellet, is expected to remain strong through 2H 2018 and 2019.

·    2H 2018 EBITDA to reflect higher sales volumes while cost inflation is expected to persist, though at a lower rate, reflecting the full impact of rising oil and energy prices as well as higher mining costs

·    Ferrexpo is investing to increase its processing plant capacity while completing a large maintenance programme at its pelletising facilities. Once these programmes are complete in 2020 the Group expects production to increase by approximately 1.5 million tonnes to 12 million tonnes per annum compared to 10.4 million tonnes in 2017.

 

Alternative Performance Measures

Words with the symbol A are defined in the Alternative Performance Measures section below.

 

There is an analyst and investor meeting at 09.00 GMT today at the offices of Deutsche Bank at Winchester House, 75 London Wall, London EC2N 2DB. 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:  https://edge.media-server.com/m6/p/3mk2vpog

For further information contact:

Ferrexpo:

Ingrid McMahon

+44 207 389 8304

Maitland:

Neil Bennett / Mads Neumann

+44 207 379 5151

 

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. In 2017, the Group sold 10.5 million tonnes of pellets ranking it as the 3rd largest exporter of pellets to the global steel industry with a market share of approximately 8.5%. Ferrexpo has a diversified customer base supplying steel mills in Austria, Germany, Japan, South Korea, Taiwan, China, Slovakia, the Czech Republic, Turkey and Vietnam. Ferrexpo has a premium listing on the main market of the London Stock Exchange under the ticker FXPO. For further information, please visit www.ferrexpo.com

 

Introduction

 

The iron ore market in 1H 2018 was notable to previous periods for a number of reasons. The benchmark 62% iron ore fines price was relatively stable, trading in a US$17 per tonne range averaging US$69.7 per tonne, which was 6% lower than 1H 2017, while premiums and discounts for higher and lower quality iron ore material expanded. The most significant increase in pricing was for iron ore pellets, with the Platts Atlantic pellet premium rising 28% to US$58 per tonne compared to 1H 2017, representing a record 83% of the average benchmark iron ore fines price. Prices for low quality ore with high levels of alumina and phosphorus were heavily discounted.  

 

There was also a dislocation in the relationship with the 62% iron ore fines price and the oil price, which increased 37% in 1H 2018. The higher oil price led to significantly higher freight rates, thereby reducing the received price for suppliers as well as leading to cost inflation for Ferrexpo and the industry. Due to the higher freight rates, at some points during the period, lower quality producers were realising prices similar to levels of 2016.

 

As a producer of high quality iron ore pellets, Ferrexpo was well placed to benefit from the above price dynamics.

 

In line with the rest of the industry, the Group experienced commodity cost inflation. Together with a stronger local currency which appreciated by 7% against the Dollar. Local PPI inflation was 18% during the period. C1 cost per tonne growth should moderate along with local inflation, assuming the Hryvnia remains broadly stable against the Dollar. Approximately half of the Group's operating costs are in local currency which are related to the Hryvnia exchange rate and local inflation rates.

 

In 2Q 2018, Ferrexpo successfully completed a major refurbishment of one of its four pellet lines. The Group's production rate is expected to increase in 2H 2018, with further significant improvement expected once the final pellet line has been refurbished in 2H 2019 and the Group has completed its investment to expand pellet feed production by 2020. This will allow the Group to increase production by approximately 1.5 million tonnes to 12 million tonnes per annum compared to 10.4 million tonnes in 2017.

 

Ferrexpo is one of the few pellet producers globally with the capacity to increase production significantly on a brownfield basis within its existing infrastructure. The Group has initiated engineering studies to expand its pelletising capacity from its currently planned 12 million tonnes to over 20 million tonnes per annum. It expects engineering studies to be complete by the end of 2019.

 

The Group's capital allocation strategy remains to keep an appropriate balance between a strong balance sheet, attractive shareholder returns (in the form of dividends) and investment in volume growth. This strategy has been designed to reduce the risks inherent in growing output in an emerging market (where it can from time to time experience constraints on the availability of debt) while selling its product in a volatile commodities market.

 

Dividends

The Directors have declared an interim dividend of 3.3 US cents per Ordinary Share (1H 2017: 3.3 US cents per Ordinary Share) for payment on 26 September 2018 to shareholders on the register at the close of business on 24 August 2018.  The ex-dividend date will be 23 August 2018. The dividend will be paid in UK Pounds Sterling, with an election to receive in 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 respectively the Company's interim results and Annual General Meeting.

 

The Board will assess the merits of paying additional returns to shareholders via special dividends, to be paid from cash flows in excess of the Group's needs when taking into account debt repayments and development capital expenditure A. If appropriate, the Group will pay special dividends at an appropriate time in its reporting cycle.

 

Health and Safety

In 1H 2018, there were no fatalities at the Group's operations (FY 2017: one fatality).

 

The Group's Lost Time Injury Frequency Rate ("LTIFR") in 1H 2018 was 0.97 per million man hours compared to 1.38 per million man hours in 2H 2017 and in line with 1H 2017* at 0.95 per million man hours.

 

The 1H 2018 result included an improvement at FYM which has now operated without lost-time injuries ("LTIs") for seven months. At the Group's barging operations, one LTI occurred during the period compared to nil in 1H 2017 and 5 in 2H 2017.

 

Lost Time Injury Frequency Rate

LTIFR

1H 2018

1H 2017

2H 2017

2017

- FPM

1.09

1.19

0.87

1.03

- FYM

0.00

0.00

1.44

0.74

- FBM

0.00

0.00

0.00

0.00

Ukraine

0.92

1.01

0.95

0.98

Barging

1.86

0.00

8.33

4.32

Group

0.97

0.95*

1.38

1.17

 

(*Figure restated due to amended hours worked during 1H 2017.)

 

Financial Review

 

Revenue

Group revenue increased by 4% to US$617 million (1H 2017: US$591 million). This was driven by a 5% increase in Ferrexpo's realised FOB price.  

 

The Group's received FOB price is calculated by taking the average Platts 62% iron ore fines price, adjusting for iron content and impurities, adding a pellet premium (which is typically negotiated annually, half-yearly or quarterly) and deducting the cost of freight, which is typically the C3 index2.

 

In 1H 2018, the Platts 62% iron ore fines index fell 6% to an average of US$69.7 per tonne from US$74.2 per tonne in 1H 2017. Net pellet premiums increased 32% in 1H 2018. For further information see Market Review on page 9.

In line with higher oil prices, C3 freight costs increased approximately 37% from US$13 per tonne to US$18 per tonne in 1H 2018, reducing the increase in the Group's overall realised FOB netback price.

For further information see Introduction, Market Review and Update on Risks.

Sales volumes for the period of 4.8 million tonnes (1H 2017: 5.1 million tonnes) were impacted by delayed rail shipments on national railways due to "go slow" industrial action in May and June. Shipments have returned to normal levels and it is expected that the increase in pellet stocks of approximately 300 thousand tonnes will be sold in 2H 2018.

 

2C3 freight is the benchmark freight index from Tubarao, Brazil to Qingdao, China and used as reference in the pellet industry for pricing contracts.

 

Costs

C1 Cost of Production

The Group's average C1 cash cost of production A was US$41.6 per tonne in 1H 2018 compared to US$31.7 per tonne in 1H 2017.

 

The increase in costs was primarily due to commodity and local cost inflation with commodity linked costs increasing US$3.3 per tonne and local inflation related costs increasing approximately US$1.9 per tonne. Together these increases amounted to approximately US$4.9 per tonne or half of the cost increase. This included a 15% increase in electricity tariffs which are linked to the ARA coal price, while higher gas and fuel costs reflected a US$19 per barrel, or 37%, increase in the European Brent spot price in 1H 2018 compared to 1H 2017. Higher grinding media costs reflected higher steel prices.

 

Local PPI was 18% in 1H 2018 compared to 1H 2017, and wages increased by US$1 per tonne or 20% in 1H 2018. The Hryvnia appreciated by 7% against the Dollar from 1 January 2018 to 30 June 2018.  Approximately half of the Group's operating costs are in local currency and are impacted by the Hryvnia exchange rate and inflation.  For further information see Currency below.

 

Repair and maintenance costs increased by US$2.6 per tonne due to higher levels of maintenance activities in 1H 2018.

At FPM, higher levels of stripping increased mining costs by approximately US$2.6 per tonne reflecting increased delivery of high grade material to support higher quality pellet production.

 

Improved consumption norms reduced costs by US$0.23 per tonne.

 

The table below breaks down the Group's C1 cash cost by input, approximately 60% of costs are commodity related.

 

US$ per tonne

% of C1 cost

Electricity

24%

Gas

10%

Fuel

10%

Materials

14%

Spare parts

9%

Personnel

9%

Maintenance and repairs

8%

Grinding media

8%

Royalties

6%

Explosives

2%

 

The Group's C1 cost represents the cash costs of production of iron pellets from own ore, divided by production volume from own ore, and excludes non-cash costs such as depreciation, pension costs and inventory movements, also the costs of purchased ore, concentrate and gravel.

Selling and Distribution Costs

Total selling and distribution costs of US$122 million (1H 2017: US$100 million) included higher international freight costs arising from CFR sales of US$45 million (1H 2017: US$33 million), also the full impact of a 15% increase in rail tariffs in November 2017 and higher bunker costs at the Group's barging business which were substantially offset by higher revenue.

 

Currency

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

 

In 1H 2018, the Hryvnia appreciated from UAH28.067 per Dollar on 1 January to UAH26.189 per Dollar as of 30 June 2018. This resulted in a non-cash operating forex loss of US$16 million (1H 2017: US$5 million).

 

Ukrainian Hryvnia vs. US Dollar


Spot (1.8.17)

Opening rate 1.1.18

Closing rate 30.6.18

Average 1H 2018

Average 1H 2017

UAH per US$

26.233

28.067

26.189

26.747

26.762

Source: National Bank of Ukraine

 

Underlying EBITDA A

Underlying EBITDA A for the period was US$234 million compared to US$287 million in 1H 2017. This reflected a higher received price compared to 1H 2017 due to record pellet premiums offset by an increase in the C1 cash cost per tonne and increased rail tariffs. On a net basis these factors reduced EBITDA by approximately US$25 million. An increase in stocks of approximately 300 thousand tonnes reduced EBITDA by circa US$14 million while slightly lower production volumes, reflecting a pellet line refurbishment, impacted EBITDA by US$3 million. Non-cash operating forex losses, reflected the appreciation of the Hryvnia against the Dollar, lowered EBITDA by approximately US$10 million. 

 

Interest

Interest expense declined 14% to US$24 million compared to US$28 million for 1H 2017 due to a lower outstanding debt balance. The average cost of debt for the period ended 30 June 2018 was 8.1% (average 30 June 2017: 7.7%). The increased average rate reflected amortisation of the Group's pre-export finance facility which has a lower cost than the Group's outstanding US$173 million Eurobond.

 

Further details on finance expense are disclosed in Note 8 of the accounts.

 

Tax

The income tax expense for 1H 2018 was US$27 million (1H 2017: US$25 million) based on an expected weighted average tax rate of 15% for the full year. 

 

Further details on taxation are disclosed in Note 9 of the accounts.

 

Profit for the Period

Profit for the period was US$152 million compared to US$216 million in 1H 2017 reflecting lower profit before tax and finance of US$59 million, as described above.

 

Cash Flows

Net cash flow from operating activities was US$156 million (1H 2017: US$194 million). Working capital included an outflow of US$24 million related to the increase in stocks of ore for processing (1H 2017: US$27 million). This ore is of lower grade and is expected to be processed once the Group has additional beneficiation capacity in place. Inventories also included a US$14 million increase in pellet stocks due to the temporary delay in rail shipments in May and June, while spare parts increased by US$12 million due to a higher level of repair and maintenance activity.

 

During 1H 2018,  the Group paid out US$74 million of dividends related to dividends declared in December 2017 and March 2018 (1H 2017: US$39 million).

 

Capital Investment A

Capital expenditure A in 1H 2018 was US$56 million compared to US$45 million in 1H 2017. Of this, approximately US$28 million was spent on sustaining capital, including a substantial refurbishment of one of the Group's four pellet lines during the period as well as reconstruction of two grinding sections in the concentrator.

 

As part of the Group's concentrator expansion programme to increase production by 1.5 million tonnes of pellets per annum, the Group is near completion of a new medium fine crushing unit which is expected to commence operation in 3Q 2018. This will improve equipment reliability and increase the amount of ore crushed by up to 6 million tonnes per annum. This additional capacity will be fully utilised once the remaining sections to increase concentrator capacity to the equivalent of 12 million tonnes of pellets per annum are completed in 2020.

 

Debt

Ferrexpo has low leverage with net debt to EBITDA A for the last 12 months of 0.74x in line with 31 December 2017 at 0.73x. In 1H 2018 gross debt reduced to US$451 million and net debt, as of 30 June 2018, was US$369 million reflecting a cash balance of US$82 million. On 27 July 2018, the Group made the final amortisation of its 2013 US$350 million PXF of US$44 million. The Group's remaining debt maturing in 2H 2018 is US$11 million of ECA funding, with no other debt repayments until March 2019.

 

The Group's debt facilities consist of US$195 million outstanding on its 2017 PXF facility which will commence quarterly amortisation of US$24 million in 1Q 2019, US$173 million of Eurobonds which are due for repayment in April 2019 and US$26 million of export credit agency funding amortising monthly over the next 48 months (including the US$11 million mentioned above).

 

The Group has trade finance facilities of US$70 million which can be used to finance certain shipments, of which US$16 million was utilised at the end of June 2018.

 

Related Party Transactions

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

 

Iron Ore Market Review

 

Iron Ore Pricing

In 1H 2018, the benchmark 62% Fe iron ore fines price was notable for being relatively stable compared to previous periods, while high grade ore prices showed steadily increasing premiums over mid and lower grade iron ore prices. Of all iron ore market segments, pellet premiums saw the largest increase in pricing during the period reflecting strong demand and a continued supply deficit.

 

The average benchmark 62% Fe iron ore fines price in 1H 2018 was US$69.7 per tonne, 6% lower than the US$74.2 per tonne average of 1H 2017. The price traded in a US$17 per tonne range between US$63 and US$80 per tonne, including 15 successive weeks when the price traded between US$63 and US$68 per tonne.  By contrast, in 1H 2017 the price traded in a US$41 per tonne range between US$54 and a high of US$95 per tonne. 

 

High and low grade iron ore prices are diverging

The average price premium of 65% Fe fines over 62% Fe fines in 1H 2018 was US$19 per tonne (1H 2017: US$13 per tonne), increasing to an average of US$24 per tonne in June 2018. This reflected value being ascribed to low alumina, low phosphorus and high iron content ore.

 

See Figure 1 at this link

http://www.rns-pdf.londonstockexchange.com/rns/5955W_1-2018-8-2.pdf

 

Premiums and discounts are widening reflecting iron content and impurities

 

See Figure 2 at this link
http://www.rns-pdf.londonstockexchange.com/rns/5955W_1-2018-8-2.pdf

 

Pellet premiums increased significantly during the period. The Platts Atlantic pellet premium increased by 28% from US$45 per tonne in 1H 2017 to US$58 per tonne in 1H 2018, while the Chinese blast furnace spot pellet premium was trading at close to US$60 per tonne as of 30 June 2018.

 

In general terms, pellet prices are currently based on the average benchmark 62% Fe fines price together with a pellet premium, less freight costs.

 

Part of the increase in pellet premiums during the period reflected the value being assigned to higher quality 65% Fe material in the market compared to 62% Fe fines.

 

Freight rates increased in line with the oil price in 1H 2018, reducing the overall received price.

 

Demand environment

According to the World Steel Association, global crude steel production increased 4.6% in the 1H of 2018 compared to 1H 2017 to 881 million tonnes with growth seen across all major regions. China increased steel production by 6.0% while the key pellet markets of Europe (including Turkey) and North East Asia (South Korea and Japan) increased production by 2.1% and 2.2% respectively. Encouragingly, other emerging economies in South Asia, South East Asia, Middle East and North Africa continued to increase their steel production at impressive rates which, if sustained, will mitigate the impact on the global iron ore market of a potential slowdown in Chinese steel production in the years ahead.

 

Higher steel production, continued positive profit margins for steel mills and further rationalisation of the Chinese steel industry led to an increase in global utilisation rates which partly underpinned demand for higher grade ores, including pellets. Macquarie believe global capacity utilisation in 1H 2018 was in the region of 84% while Chinese crude steel capacity utilisation was approximately 94%, as can be seen from the graph below.

 

Crude steel capacity utilisation

 

See Figure 3 at this link

http://www.rns-pdf.londonstockexchange.com/rns/5955W_1-2018-8-2.pdf

 

Since 2016, China has embarked on supply side reforms and implementation of environmental standards in the steel sector in order to eliminate excess capacity, improve the financial performance of state owned enterprises and significantly improve air quality. This has resulted in record profit margins for steel mills, which increasingly require imported high grade raw materials to reduce their environmental impact and to maximise their steel production. 

 

In 2017, around 50 million tonnes of steel capacity was closed in China and in 2018 a further 30 million tonnes of steel capacity is expected to be shut.

 

Ongoing environmental reforms require steel mills to significantly reduce their emissions of sulphur dioxide, nitrogen oxide and carbon dioxide over the next three years to 2020. This encourages mills to demand high-quality raw materials, especially those that do not require sintering, and to install desulphurisation equipment to capture sulphur dioxide released in the sintering process.  Failure to comply with the regulation can potentially result in the forced suspension of iron making operations.

 

The response of Chinese steel makers to this new operating environment and the impact of a maturing steel market (following many years of high growth peaking in 2014) mean that the requirements of Chinese mills are converging with steel mills in developed countries where lower grade iron ore is no longer as demanded.

 

In Europe, expected consolidation of the steel industry should underpin profitability and continue to support global capacity utilisation over the long term.

 

Steel mills look to use pellets to maximise output and increase efficiencies, to lower emissions and to increase the quality of their final product as they look to move up the value chain.

 

As a pellet exporter with established operations relatively close to major import markets, Ferrexpo stands to benefit from increasing demand for pellets.  Incumbent pellet producers benefit from high barriers to entry, while Ferrexpo maintains a competitive cost relative to the majority of its peers.  

 

Pellet supply

In 1H 2018, the supply of pellets to the global export market remained in deficit. Supply was impacted by a ten-week strike at the fourth largest exporter of pellets (whose 2017 market share was approximately 8% of the global export market). Production and shipments from this pellet exporter recommenced in June 2018 but it is estimated that approximately two million tonnes of production were lost during the strike. There was also a reduction in Russian exports during the period (of around 2.5 million tonnes) compared to 1H 2017 as a supplier opted to sell to the domestic market instead. 

 

The largest exporter of pellets increased its supply of pellets by approximately 1 million tonnes in 1H 2018 as it re-introduced higher-cost marginal capacity. It is expected to add a further 3 million tonnes of high-cost supply in 2H 2018. CRU expects that these restarts could add approximately 12 million tonnes a year to the seaborne market once in full operation.

 

The pellet feed market in 1H 2018 was also impacted by suspension of operations at a major supplier in Brazil, reducing pellet feed supply by approximately 12 million tonnes on an annualised basis. This has negatively impacted pellet production in Bahrain and China. Currently the operation is expect to restart at the end of 2018.

 

The overall size of the supply-constrained pellet export market in 2018 is expect to be in line with 2017 at around 124 million tonnes. The restart of further seaborne supply from Brazil, which has been out of the market since 2016, remains uncertain in terms of timing and the volume to be produced, while the high capital intensity associated with developing greenfield pellet supply is unlikely to lead to any significant new supply in coming years.

 

Higher structural capacity utilisations in the steel sector should continue to support demand for higher quality iron ore inputs and Ferrexpo believes pellet demand will remain strong for the foreseeable future.

 

Operational Review

Marketing

Ferrexpo's sales volumes for 1H 2018 totalled 4.8 million tonnes (1H 2017: 5.1 million tonnes), reflecting delays in rail shipments during May and June 2018. Pellets tied up in the supply chain between production and customers, as of 30 June 2018, were approximately 700 thousand tonnes. Given the strong demand environment, the Group plans to reduce this stock to normal levels of around 400 to 450 thousand tonnes in 2H 2018.

 

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

 

Sales Volume by Market Regions:

6 months ended 30.06.18

6 months ended 30.06.17

12 months ended 31.12.2017

Central Europe

50%

52%

49%

North East Asia

16%

20%

16%

Western Europe

16%

17%

15%

China and South East Asia

12%

4%

12%

Turkey, Middle East, India

6%

7%

8%

Total sales volume  (million tonnes)

4,798

5,065

10,467

 

Ferrexpo benefits from a diversified sales portfolio with leading steel mills, while its logistics routes to customers provide a competitive advantage given Ukraine's central geographical location. Ferrexpo's average shipping duration to Asia is 30 days compared to its main pellet-producing competitors in Brazil (40 days shipping time), Canada (55 days) and Norway (50 days).

 

Ferrexpo's realised price for its 65% Fe iron ore pellets is calculated by taking the average PLATTS 62% Fe CFR China iron ore fines index for an agreed time period (see sales volume by pricing terms), adjusted for quality and adding a pellet premium. For sales to the Far East, delivery is made on CFR terms with the resulting FOB netback determined by the actual cost of freight. For sales to European and regional markets, delivery is generally made on FOB/DAP terms which is determined by deducting a transparent freight market index such as C3. The current average length of the Group's sales contracts is approximately three years.

 

The table below shows the split of sales volume priced according to agreed reference periods for the 62% Fe fines spot price. Most sales (around 62%) are priced on the current month average 62% Fe fines price. No volume during the period was sold on a spot basis given the strong demand from the Group's long-term target customers.

 

Sales Volume by Pricing Terms:

6 months ended 30.06.18

6 months ended 30.06.17

12 months ended 31.12.2017

Current month

63%

63%

61%

Current quarter

21%

20%

20%

One month forward

9%

3%

8%

Lagging 3 month spot index

7%

14%

9%

Spot sales fixed on day

0%

0%

2%

Total sales volume  (million tonnes)

4,798

5,065

10,467

 

For further information on iron ore prices and freight see Market Review and Revenue.

 

Pellet Production

1H 2018, pellet production was similar to 1H 2017 at 5.1 million tonnes (1H 2017: 5.2 million tonnes). Production during the period was impacted by a planned 65 day pellet line refurbishment in 2Q. The Group has now refurbished 3 out of its 4 pellet lines. The final pellet line refurbishment is currently expected to take place in 2H 2019.

The Group continues to maintain a high proportion of 65% Fe pellets within its production mix. The ratio of Ferrexpo Premium Pellets of the total was 94% compared to 95% in 1H 2017.  The table below summarises production in the first half of 2017 compared to the first half of 2016.

Pellet Production 1H 2018 and 1H 2017 ('000)

1H 2018

1H 2017

%

Pellet production from own ore

5,081.7

5,138.6

-1.1

  - 62% Fe pellets

317.1

257.9

23.0

  - 65% Fe pellets

4,764.6

4,880.7

-2.4

Production from third party materials

14.5

21.6

-32.9

  - 62% Fe pellets

0.0

0.0


  - 65% Fe pellets

14.5

21.6

-32.9

Total Pellets Produced

5,096.2

5,160.1

-1.2

  - 62% Fe pellets

317.1

257.9

23.0

  - 65% Fe pellets

4,779.1

4,902.2

-2.5

 

Capital Investment for Future Growth

Ferrexpo has initiated engineering studies to expand its pelletising capacity from the currently planned 12 million tonnes up to 20 million tonnes. This would be achieved by increasing the capacity of each of the four pelletising lines together with the required increases in processing capacity (either by further expanding the existing FPM beneficiation plant, or by installing primary crushing and concentrate capacity at FYM). The Group expects to start this development programme in 2020, once the current investment to increase production to 12 million tonnes of pellets per annum, is complete.

 

For information on capital investment in 1H 2018 see Capital Investment under Financial review.

 

Update on Risks 

The Group considers that the risks facing the business, as highlighted on pages 34 to 39 of the 2017 Annual Report and Accounts published in March 2018, remain relevant.  An update is provided below on material developments of key risks during the first half of 2018.

 

Realised Price

Ferrexpo continues to be exposed to international freight rates, as all of its long term contracts are priced with reference to transparent freight indices such as the Baltic Exchange C3 freight price3.  In 1H 2018, the C3 index increased by 37% to US$18.2 per tonne compared to 1H 2017.  Freight rates are largely influenced by the price of oil. In 1H 2018, the Brent price increased by US$19 per tonne, or 37%, compared to 1H 2017. A further increase in oil prices and / or freight rates could reduce the Group's received price.

 

3  Seaborne freight rates, such as C3, are published by the Baltic Exchange and represent the cost for ocean transportation of iron ore from the Brazilian port of Tubarão (where the largest seaborne suppliers of pellets are based) to Qingdao, China (the largest steel producing country in the world). As Ferrexpo sells to international customers, the price it receives includes reference to C3 or other global benchmarks.

 

Operating Risks

The Group continues to be subject to fluctuations in commodity prices, particularly to changes in energy prices including oil. The Group's cost base is also subject to fluctuations in the Hryvnia/Dollar exchange rate as approximately half of operating costs are in local currency. In 1H 2018, the Hryvnia was broadly stable against the Dollar.

 

The Group looks to partly offset cost inflation through increases in mining and production efficiencies. There is a risk that the Group is unable to offset inflation through production efficiencies and that the Group's cost base could increase as a result negatively impacting the financial results of the Group.

 

For further information see Costs in the Financial Review and Pellet Production in the Operational Review.

 

Directors' Responsibility Statement

The Interim Report complies with the Disclosure and Transparency Rules ("DTR") of the United Kingdom's Financial Conduct Authority in respect of the requirement to produce a half-yearly financial report. The Interim Report is the responsibility of, and has been approved by, the Directors.

We confirm that to the best of our knowledge:

·     the condensed set of financial statements has been prepared in accordance with IAS 34;

·     the Interim Management Report includes a fair review of the important events during the first six months and description of the principal risks and uncertainties for the remaining six months of the year, as required by DTR4.2.7R; and

·     the Interim Management Report includes a fair review of disclosure of related party transactions and changes therein, as required by DTR 4.2.8R.

 

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

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

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

 

For and on behalf of the Board

Steve Lucas

Chairman

 

Chris Mawe

Chief Financial Officer

1 August 2018

 

 

Independent Review Report to Ferrexpo plc

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 which comprises the Consolidated Income Statement, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow statement and related notes 1 to 20. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

 

Directors' responsibilities

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

 

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

 

Our responsibility

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

 

Scope of review

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

 

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

 

Deloitte LLP

Statutory Auditor

London, UK

1 August 2018

 

Interim Consolidated Income Statement


6 months ended 30.06.2018 (unaudited)

6 months ended 30.06.2017 (unaudited)

Year-ended 31.12.17

(audited)

US$000

Notes

Before special items

Special items

Total

Before special items

Special items

Total

Before special items

Special   items

Total

Revenue

3/4

616,717

-

616,717

591,049

- 

591,049

1,197,494

-

1,197,494

Operating expenses

5/7

(402,148)

-

(402,148)

(328,017)

(79)

(328,096)

(716,947)

(407)

(717,354)

Other operating income


1,454

-

1,454

1,387

- 

1,387

3,238

-

3,238

Operating foreign exchange (losses)/gains

6

(15,564)

-

(15,564)

(5,159)

- 

(5,159)

6,661

-

6,661

Operating profit


200,459

-

200,459

259,260

(79)

259,181

490,446

(407)

490,039

Share of profit from associates


2,476

-

2,476

2,995

-

2,995

5,527

-

5,527

Profit/(loss) before tax and finance


202,935

-

202,935

262,255

(79)

262,176

495,973

(407)

495,566

Net finance expense

8

(24,025)

-

(24,025)

(27,804)

- 

(27,804)

(54,766)

-

(54,766)

Non-operating foreign exchange gains/(losses)

6

165

-

165

6,583

- 

6,583

9,033

-

9,033

Profit/(loss) before tax


179,075

-

179,075

241,034

(79)

240,955

450,240

(407)

449,833

Income tax (expense)/credit

7/9

(26,861)

-

(26,861)

(28,682)

3,426

(25,256)

(58,787)

3,426

(55,361)

Profit/(loss) for the period/year


152,214

-

152,214

212,352

3,347

215,699

391,453

3,019

394,472












Profit/(loss) attributable to:











Equity shareholders of Ferrexpo plc


151,666

-

151,666

211,477

3,578

215,055

389,675

3,254

392,929

Non-controlling interests


548

-

548

875

(231)

644

1,778

(235)

1,543

Profit/(loss) for the period/year


152,214

-

152,214

212,352

3,347

215,699

391,453

3,019

394,472












Earnings/(loss) per share:











Basic (US cents)

10

25.88

-

25.88

36.11

0.61

36.72

66.53

0.56

67.09

Diluted (US cents)

10

25.79

-

25.79

35.99

0.61

36.60

66.30

0.55

66.85

 

Interim Consolidated Statement of Comprehensive Income

US$000

Notes

6 months ended

30.06.18

6 months ended 30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Profit for the period/year


152,214

215,699

394,472

Items that may subsequently be reclassified to profit or loss:





Exchange differences on translating foreign operations

6

79,443

38,203

(41,415)

Income tax effect


(9,991)

(6,015)

4,557

Net other comprehensive income/loss that may be reclassified to profit or loss in subsequent periods


69,452

32,188

(36,858)

Items that will not be reclassified subsequently to profit or loss:





Remeasurement gains/(losses) on defined benefit pension liability


143

255

(9,172)

Income tax effect


(18)

(25)

1,556

Net other comprehensive (loss)/income not being reclassified to profit or loss in subsequent periods


125

230

(7,616)

Other comprehensive income/(loss) for the period/year, net of tax


69,577

32,418

(44,474)

Total comprehensive income for the period/year, net of tax


221,791

248,117

349,998






Total comprehensive income attributable to:





Equity shareholders of Ferrexpo plc


220,822

247,245

348,686

Non-controlling interests


969

872

1,312



221,791

248,117

349,998






 

Interim Consolidated Statement of Financial Position

US$000

Notes

As at

30.06.18

As at

31.12.17

As at

30.06.17

 

 

(unaudited)

 (audited)

(unaudited)

Assets





Property, plant and equipment

11

689,568

623,359

617,391

Goodwill and other intangible assets


40,613

36,858

36,694

Investments in associates


4,386

5,947

3,837

Inventories

13

212,806

175,831

162,740

Other non-current assets


22,018

10,501

12,085

Income taxes recoverable and prepaid

9

5,846

5,454

5,866

Deferred tax assets


35,756

40,408

51,892

Total non-current assets


1,010,993

898,358

890,505

Inventories

13

125,176

96,645

101,430

Trade and other receivables


80,529

88,327

80,539

Prepayments and other current assets


25,003

17,514

19,114

Income taxes recoverable and prepaid

9

11

14

142

Other taxes recoverable and prepaid

12

27,465

23,192

21,421

Cash and cash equivalents

3/14

82,250

97,742

92,645

Total current assets


340,434

323,434

315,291

Total assets


1,351,427

1,221,792

1,205,796






Equity and liabilities





Issued capital

18

121,628

121,628

121,628

Share premium


185,112

185,112

185,112

Other reserves

18

(1,951,422)

(2,020,864)

(1,952,514)

Retained earnings


2,404,848

2,310,226

2,178,821

Equity attributable to equity shareholders of Ferrexpo plc


760,166

596,102

533,047

Non-controlling interest


1,339

370

(45)

Total equity


761,505

596,472

533,002

Interest-bearing loans and borrowings

3/15

151,331

186,294

228,853

Defined benefit pension liability


22,449

20,514

16,615

Provision for site restoration


2,305

2,070

1,162

Deferred tax liabilities


372

381

572

Total non-current liabilities


176,457

209,259

247,202

Interest-bearing loans and borrowings

3/15

299,574

305,412

335,450

Trade and other payables


47,720

48,428

34,048

Accrued liabilities and deferred income


28,529

27,554

24,820

Income taxes payable

9

26,944

23,715

22,698

Other taxes payable


10,698

10,952

8,576

Total current liabilities


413,465

416,061

425,592

Total liabilities


589,922

625,320

672,794

Total equity and liabilities


1,351,427

1,221,792

1,205,796

The financial statements were approved by the Board of Directors on 1 August 2018.

Kostyantin Zhevago                                                                         Christopher Mawe

Chief Executive Officer                                                                    Chief Financial Officer

 

Interim Consolidated Statement of Cash Flows

US$000

Notes

6 months

 ended

30.06.18

6 months

 ended

30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Profit before tax


179,075

240,955

449,833

Adjustments for:





Depreciation of property, plant and equipment and amortisation of intangible assets

5

27,809

22,295

46,392

Finance expense

8

23,269

26,949

53,044

Finance income

8

(454)

(184)

(372)

Losses on disposal and liquidation of property, plant and equipment

5

2,969

2,103

7,754

Cash elements included in losses on disposal of property, plant and equipment


(73)

−

(2,953)

Operating special items

7

−

79

407

Share of profit from associates


(2,476)

(2,995)

(5,527)

Movement in allowance for doubtful receivables


45

(182)

576

Movement in site restoration provision


84

42

1,070

Employee benefits


1,817

1,538

(1,632)

Share-based payments


411

285

586

Operating foreign exchange losses/(gains)

6

15,564

5,159

(6,661)

Non-operating foreign exchange (gains)/losses

6

(165)

(6,583)

(9,033)

Other adjustments


(2,750)

−

(6,458)

Operating cash flow before working capital changes


245,125

289,461

527,026

Changes in working capital:





Decrease/(increase) in trade and other receivables


1,279

2,800

(3,024)

Increase in inventories


(45,339)

(45,945)

(78,892)

Increase/(decrease) in trade and other accounts payable


8,831

(22,974)

(27,317)

(Increase)/decrease in other taxes recoverable and payable (incl. VAT)


(65)

3,526

(511)

Cash generated from operating activities


209,831

226,868

417,282

Interest paid


(26,296)

(26,461)

(48,576)

Income tax paid


(26,236)

(5,383)

(13,721)

Post-employment benefits paid


(879)

(708)

(1,539)

Net cash flows from operating activities


156,420

194,316

353,446

Cash flows from investing activities





Purchase of property, plant and equipment and intangible assets


(55,765)

(45,284)

(102,953)

Proceeds from disposal of property, plant and equipment and intangible assets


387

103

138

Interest received


449

181

358

Dividends from associates


1,693

2,628

4,982

Net cash flows used in investing activities


(53,236)

(42,372)

(97,475)

Cash flows from financing activities





Proceeds from borrowings and finance

15

210,866

−

-

Repayment of borrowings and finance

15

(254,390)

(162,507)

(238,670)

Arrangement fees paid


−

−

(4,042)

Dividends paid to equity shareholders of Ferrexpo plc 1)

10

(73,996)

(39,050)

(58,316)

Net cash flows used in financing activities


(117,520)

(201,557)

(301,028)

Net decrease in cash and cash equivalents


(14,336)

(49,613)

(45,057)

Cash and cash equivalents at the beginning of the period/year


97,742

144,751

144,751

Currency translation differences


(1,156)

(2,493)

(1,952)

Cash and cash equivalents at the end of the period/year

14

82,250

92,645

97,742

1) Dividend paid in the period ended 30 June 2018 is net of withholding tax of US$3,187 thousand that is payable subsequent to the period end.

 

 

Interim Consolidated Statement of Changes in Equity

For the financial year 2017 and the six months ended

30 June 2018

Attributable to equity shareholders

of Ferrexpo plc


US$000

 

Issued

 capital

Share  premium

Other reserves

(Note 18)

Retained

 earnings

Total capital and reserves

Non-controlling interests

Total

equity

At 1 January 2017

121,628

185,112

(1,984,758)

2,002,153

324,135

(847)

323,288

Profit for the period

-

-

-

392,929

392,929

1,543

394,472

Other comprehensive loss

-

-

(36,692)

(7,550)

(44,242)

(230)

(44,472)

Total comprehensive loss for the year

-

-

(36,692)

385,379

348,687

1,313

350,000

Equity dividends paid to shareholders of Ferrexpo plc

-

-

-

(77,332)

(77,332)

-

(77,332)

Effect from increase of shareholding in subsidiary

-

-

-

26

26

(96)

(70)

Share-based payments

-

-

586

-

586

-

586

At 31 December 2017 (audited)

121,628

185,112

(2,020,864)

2,310,226

596,102

370

596,472

Application of new IFRSs (see Note 2)

-

-

-

989

989

-

989

At 1 January 2018 - after application of new IFRSs (unaudited)

121,628

185,112

(2,020,864)

2,311,215

597,091

370

597,461

Profit for the period

-

-

-

151,666

151,666

548

152,214

Other comprehensive income

-

-

69,031

125

69,156

421

69,577

Total comprehensive income for the period

-

-

69,031

151,791

220,822

969

221,791

Equity dividends paid to shareholders of Ferrexpo plc

-

-

-

(58,158)

(58,158)

-

(58,158)

Share-based payments

-

-

411

-

411

-

411

At 30 June 2018 (unaudited)

121,628

185,112

(1,951,422)

2,404,848

760,166

1,339

761,505

 

 For the six months ended 30 June 2017


Attributable to equity shareholders

of Ferrexpo plc


US$000

 

Issued

 capital

Share

 premium

Other reserves (Note 18)

Retained earnings

Total capital and reserves

Non-controlling interests

Total

equity

At 1 January 2017

121,628

185,112

(1,984,758)

2,002,153

324,135

(847)

323,288

Profit for the period

-

-

-

215,055

215,055

644

215,699

Other comprehensive income

-

-

31,959

231

32,190

228

32,418

Total comprehensive income for the period

-

-

31,959

215,286

247,245

872

248,117

Equity dividends paid to shareholders of Ferrexpo plc

-

-

-

(38,675)

(38,675)

-

(38,675)

Effect from increase of shareholding in subsidiary

-

-

-

57

57

(70)

(13)

Share-based payments

-

-

285

-

285

-

285

At 30 June 2017 (unaudited)

121,628

185,112

(1,952,514)

2,178,821

533,047

(45)

533,002

 

Notes to the Interim Condensed Consolidated Financial Statements

Note 1: Corporate information

Organisation and operation

Ferrexpo plc (the "Company") is incorporated in the United Kingdom, 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 operates 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-Plavninske and Lavrykivske ("GPL") and Yerystivske 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% (31 December 2017: 50.3%; 30 June 2017: 50.3%) of Ferrexpo plc's issued share capital.

The Group's interests in its subsidiaries are held indirectly by the Company, with the exception of Ferrexpo AG, which is directly held. The Group's consolidated subsidiaries are disclosed in the Additional Disclosures of the Annual Report and Accounts 2017.

At 30 June 2018, the Group also holds through PJSC Ferrexpo Poltava Mining an interest of 49.5% (31 December 2017: 49.5%; 30 June 2017: 49.4%) in TIS Ruda, a Ukrainian port located on the Black Sea. As this is an associate, it is accounted for using the equity method of accounting.

Note 2: Summary of significant accounting policies

Basis of preparation

The interim condensed consolidated financial statements for the six months period ended 30 June 2018 have been prepared in accordance with International Accounting Standard ('IAS') 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all of the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2017.

The interim condensed consolidated financial statements do not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for the full year is based on the statutory accounts for the financial year ended 31 December 2017. A copy of the statutory accounts for that year, which were prepared in accordance with International Financial Reporting Standards ('IFRS') issued by the International Accounting Standard Board ('IASB'), as adopted by the European Union as they apply to financial statements of the Group for the year ended 31 December 2017, have been delivered to the Register of Companies. The auditors' report under section 495 of the Companies Act 2006 in relation to those accounts was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Going concern

The Group has assessed that, taking into account: i) its available cash and cash equivalents available at the date of authorisation of the interim condensed consolidated financial statements; ii) its cash flow projections for the period of management's going concern assessment; and iii) events and conditions beyond the period of management's going concern assessment, it has sufficient liquidity to meet its present obligations and cover working capital needs for the aforementioned period and will remain in compliance with its financial covenants throughout this period. Therefore, the Group continues to adopt the going concern basis of accounting for the preparation

Accounting policies adopted

The accounting policies and methods of computation adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2017 except for the adoption of the new standards that became effective as of 1 January 2018.

New standards and interpretations adopted with an impact on the Group's consolidated financial statements

IFRS 9 Financial instruments

The Group applied IFRS 9 Financial instruments for the first time as of 1 January 2018 and elected to apply the modified retrospective method. The new standard became effective as of 1 January 2018 and 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 impact from the application of IFRS 9 on the Group's consolidated financial statements is predominantly related to the expected loss impairment model as the new standard established a new approach for the assessment of loans and receivable balances, including trade receivables, with a focus on the risk of default in the future rather than based on incurred losses in the past. The changes to classification and measurement of financial instruments is unchanged on application of the new standard and the Group does not intend to apply hedge accounting under IFRS 9.

IFRS 15 Revenue from customer contracts

The Group applied IFRS 15 Revenue from customer contracts for the first time as of 1 January 2018. The Group elected to apply the "modified retrospective" method, under which comparative financial information is not restated.   The new standard establishes the principles for the disclosure of useful information in the financial statements about the nature, amount, timing and uncertainties of revenue and cash flows arising from contracts with customers. Under IFRS 15 the revenue recognition model changed from one based on the transfer of risk and reward of ownership to the transfer of control of ownership. The Group's revenue is predominantly derived from sales of iron pellets, where the point of recognition is dependent on the contractual sales terms based on the International Commercial terms ("Incoterms"). As the time of the transfer of risks and rewards coincides with the transfer of a control, the timing and the amount of revenue recognised is not affected for the majority of the Group's sales. For the Incoterms Cost, Insurance and Freight ("CIF"), and Cost and Freight ("CFR"), the Group must contract for and pay the freight necessary to bring the goods to the named port of destination. Consequently, the freight service on sales contracts with CIF and CFR Incoterms meet the criteria of a separate performance obligation and a portion of the revenue earned under these contracts, representing the obligation to perform freight service, is deferred and recognised over time as this obligation is fulfilled, along with the associated costs.

The tables on the following page provide the details of the cumulative effects from the application of the new standards on the consolidated statement of financial position as of 1 January 2018 and the consolidated statement of financial position and the consolidated income statement as at 30 June 2018.

 

US$000

 

Balance as at 01.01.18

Effect from application of IFRS 15

Effect from application of IFRS 9

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(unaudited)

(audited)

Consolidated statement of financial position






Assets






Trade and other receivables


88,109

-

(218)

88,327

Prepayments and other current assets


24,727

7,213

-

17,514

Liabilities






Accrued liabilities and deferred income


(24,202)

(6,006)

-

(18,196)

Equity






Retained earnings


(2,308,801)

1,207

218

(2,310,226)

The freight service on sales contracts with CIF and CFR Incoterms meets the criteria of a separate performance obligation so that the portion of the revenue earned under these contracts, representing the obligation to perform freight services, is deferred and recognised over time as this obligation is fulfilled, along with the associated costs. The effect from the expected loss impairment model to be applied under the new standard is primarily calculated based on publically available ratings default risks of the Group's customers with outstanding receivable balances as at end of a reporting period. There are no non-current receivable balances to be considered in the computation of the Group's expected loss as all of the Group's receivable balance are classified as current based on the agreed terms and conditions.

 

Notes

 

As reported as at 30.06.18

Effect from application of IFRS 15

Effect from application of IFRS 9

Balance without effect from new IFRSs

 

 

 

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Consolidated income statement







Freight revenue related to sales of iron ore pellets and concentrate

4


32,567

2,508

-

30,059

Operating expenses



(402,148)

(3,693)

50

(398,505)

Consolidated statement of financial position







Assets







Trade and other receivables



80,529

-

(168)

80,697

Prepayments and other current assets



25,003

3,521

-

21,482

Liabilities







Accrued liabilities and deferred income



(28,529)

(3,498)

-

(25,031)

The table above shows the impact on the operating result from the application of the new accounting standards only. The impact from the separate presentation of the total freight revenue related to the sales of iron pellets and concentrate is shown in Note 4.

New standards, interpretations and amendments adopted without impact on the Group's consolidated financial statements

·     IFRIC 22 Foreign currency transactions and advance considerations clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency.

·     Amendment to IFRS 2 Share-based payments: Classification and measurement of share-based payments clarifies the classification of share-based payment transactions with net settlement features, the measurement of cash-settled share-based payment transactions that include a performance condition and of modifications of share-based payment transactions from cash-settled to equity-settled.

·     Annual improvements to IFRS standards 2014-2016 cycle contains amendments to IFRS 1 First-time Adoption of IFRS and IAS 28 Investments in associates and joint ventures.

New standards, interpretations and amendments not yet adopted 

A detailed description of the expected impact from the adoption of new accounting standards and interpretations that are in issue, but are not yet effective is provided in Note 3 of the Annual Report & Accounts for the year ended 31 December 2017 and outlines the expected impact of the following standards and interpretations that will become effective in future periods.

·     IFRS 16 Leases is effective for the financial year beginning on 1 January 2019. If the new standard were applied as of 30 June 2018, right-of-use assets and corresponding lease liabilities of US$15,167 thousand, before the effect from discounting, would have been recognised without a material effect on the operating result.

·     IFRIC 23 Uncertainty over income tax treatments is effective for the financial year beginning on 1 January 2019. The Group is currently in the process to complete the impact assessment, but does not expect a material impact on its consolidated financial statements from this new interpretation.

·     Annual Improvements to IFRS Standards 2015-2017 Cycle is effective for the financial year beginning on 1 January 2020 and contains amendments to IAS 12 Income taxes and IAS 23 Borrowing costs. The Group does not expect a material impact on its consolidated financial statements from these annual improvements.

·     Amendments to IFRS 9 Financial instruments: Prepayment features with negative compensation is effective for the financial year beginning on 1 January 2019 and clarifies the classification of particular pre-payable financial assets and the accounting for financial liabilities following a modification. The Group does not expect a material impact on its consolidated financial statements from these amendments.

·     Amendments to IAS 19 Employee benefits: Plan amendment, curtailment or settlement is effective for the financial year beginning on 1 January 2020. The amendments provide guidance, in the case of plan amendment, curtailment or settlement, on the measurement of the current service cost and the net interest for the period after the re-measurement and clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. The Group does not expect a material impact on its consolidated financial statements from these amendments.

·     Amendments to References to the Conceptual Framework in IFRS standards is effective for the financial year beginning on 1 January 2020 and introduces a new chapter on measurement, guidance on reporting financial performance, improved definitions of an asset and a liability and clarifications in areas, such as the roles of stewardship, prudence and measurement uncertainty in financial reporting.

Full disclosure of the final assessment of the impact of these standards, interpretations and amendments will be provided in the Annual Report & Accounts for the year ending 31 December 2018.

Use of critical estimates and judgements

In the course of preparing financial statements, management has to make estimates and judgements that can have a significant impact on the Group's consolidated financial statements. The most critical accounting estimates include taxation (recoverability of deferred tax assets), capitalisation of deferred stripping costs and the recoverability of capitalised lean and weathered ore. Critical judgements relate to taxation (tax legislation in Ukraine) and classification of net investments in foreign operations. The use of inaccurate assumptions in assessments made for any of these estimates and judgements could result in a significant impact on the Group's financial position and/or financial performance. The critical estimates and judgements are the same as those disclosed in the Group's consolidated financial statements for the year ended 31 December 2017.

Seasonality

The Group's operations are not affected by seasonality.

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 Underlying EBITDA, gross profit and the net debt.

Underlying EBITDA and gross profit

The Group presents the Underlying EBITDA as it is a useful measure for evaluating the Group's ability to generate cash and its operating performance. The Group's full definition of Underlying EBITDA is disclosed in the Glossary on page 41.

US$000

Notes

6 months ended

30.06.18

6 months ended   30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Profit before tax and finance


202,935

262,176

495,566

Losses on disposal and liquidation of property, plant and equipment

5

2,995

2,103

7,754

Share based payments


411

285

586

Operating special items

7

-

79

407

Depreciation and amortisation

5

27,809

22,295

46,392

Underlying EBITDA


234,150

286,938

550,705

 

US$000

Notes

6 months ended

30.06.18

6 months ended   30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Revenue

4

616,717

591,049

1,197,494

Cost of sales

5

(238,359)

(189,504)

(411,490)

Gross profit


378,358

401,545

786,004

Net debt

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

US$000

Notes

As at 30.06.18

As at 31.12.17

As at 30.06.17

 

 

(unaudited)

(audited)

(unaudited)

Cash and cash equivalents

14

82,250

97,742

92,645

Interest bearing loans and borrowings - current

15

(299,574)

(305,412)

(335,450)

Interest bearing loans and borrowings - non-current

15

(151,331)

(186,294)

(228,853)

Net debt


(368,655)

(393,964)

(471,658)

The Group's balance of cash and cash equivalents decreased by US$15,492 thousand after net debt repayments of US$43,524 thousand during the period ended 30 June 2018 (31 December 2017: US$238,670 thousand; 30 June 2017: US$162,507 thousand). Net debt is an Alternative Performance Measure ("APM"). Further information on the APMs used by the Group, including the definitions, is provided on pages 36 and 37.

In the current period, management have reviewed the presentation of the accrued interest and have re-classified it from interest bearing loans and borrowings to accrued liabilities in order to better reflect the nature of this balance in the presentation. US$9,358 thousand and US$9,599 thousand have been re-presented for the comparative periods ended 31 December 2017 and 30 June 2017 to be on a consistent basis and reducing the net debt by these amounts.

Note 4: Revenue

Revenue for the six months period ended 30 June 2018 consisted of the following:

US$000

 

6 months ended

30.06.18

6 months ended   30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Revenue from sales of iron ore pellets and concentrate


544,206

537,959

1,062,871

Freight revenue related to sales of iron ore pellets and concentrate


32,567

24,798

63,447

Total revenue from sale of iron ore pellets and concentrate


576,773

562,757

1,126,318

Revenue from logistics and bunker business


38,424

26,956

68,449

Revenue from other sales and services provided


1,520

1,336

2,727

Total revenue


616,717

591,049

1,197,494

The Group applied IFRS 15 Revenue from customer contracts for the first time as of 1 January 2018 and elected to apply the modified retrospective method.

As required under IFRS 15, the freight revenue related to the sales of iron ore pellets is shown separate from the revenue from sales of iron ore pellets and concentrate due to its separate performance obligations. This applies to sales made under the Incoterms Cost, Insurance and Freight ("CIF") and Cost and Freight ("CFR"). The information of the comparative periods have been re-presented to be on a consistent basis with the current period. There has been no restatement of the underlying financial information.

Total revenue from sales of iron ore pellets and concentrate by geographical destination were as follows:

US$'000

 

6 months ended

30.06.18

6 months ended   30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Central Europe


280,552

     289,714

536,836

Western Europe


85,403

      92,742

170,295

North East Asia


103,251

     120,162

198,165

China and South East Asia


78,425

      23,123

142,812

Turkey, Middle East and India


29,142

      37,016

78,210

Total revenue from sale of iron ore pellets and concentrate


576,773

     562,757

1,126,318

The Group markets its products across various regions. The disclosure of the segmentation reflects how the Group makes its business decisions and monitors its sales. Information about the composition of the regions is provided in the Glossary.

Note 5: Operating expenses before special items

Operating expenses for the six months period ended 30 June 2018 consisted of the following:

US$000

 

6 months ended

30.06.18

6 months ended   30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Cost of sales


238,359

189,504

411,490

Selling and distribution expenses


121,915

100,176

219,703

General and administrative expenses


22,222

19,542

41,954

Other operating expenses


19,652

18,795

43,800

Total operating expenses


402,148

328,017

716,947

Operating expenses include:

Inventories recognised as an expense upon sale of goods


209,109

172,558

367,161

Employee costs


37,596

25,420

53,293

Inventory movements


(24,965)

(8,621)

(1,846)

Depreciation of property, plant and equipment

3

27,484

22,100

45,920

Amortisation of intangible assets

3

325

195

472

Royalties and levies


14,140

9,794

19,610

Costs of logistics and bunker business


38,656

25,219

63,127

Audit and non-audit services


810

1,020

1,342

Community support donations


11,865

14,085

28,384

Losses on disposal and liquidation of property, plant and equipment


2,969

2,103

7,754

Special items not included in the operating expenses are shown in Note 7.

Note 6: Foreign exchange losses and gains

Foreign exchange losses and gains for the six months period ended 30 June 2018 consisted of the following:

US$000

 

6 months ended

30.06.18

6 months ended   30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Operating foreign exchange (losses)/gains





Revaluation of trade receivables


(15,967)

(5,098)

7,113

Revaluation of trade payables


363

(48)

(394)

Others


40

(13)

(58)

Total operating foreign exchange (losses)/gains


(15,564)

(5,159)

6,661

Non-operating foreign exchange gains/(losses)





Revaluation of interest-bearing loans


1,789

9,459

10,136

Conversion of cash and cash equivalents


(838)

(1,997)

(1,497)

Others


(786)

(879)

394

Total non-operating foreign exchange gains


165

6,583

9,033

Total foreign exchange (losses)/gains


(15,399)

1,424

15,694

Operating foreign exchange gains and losses are those items that are directly related to the production and sale of pellets (e.g. trade receivables, trade payables on operating expenditure). Non-operating gains and losses are those associated with the Group's financing and treasury activities and with local income tax payables.

The translation differences and foreign exchange gains and losses are predominantly depended on the fluctuation of the exchange rate of the Ukrainian Hryvnia against the US Dollar. The table below shows the closing and average rate of the most relevant currencies of the Group compared to the US Dollar.

 

Average exchange rate

Closing exchange rate

US$

6 months ended

30.06.18

6 months ended

30.06.17

Year ended

31.12.17

As at

30.06.18

As at

31.12.17

As at

30.06.17

UAH

26.747

26.762

26.597

26.189

28.067

26.099

EUR

0.826

0.925

0.887

0.864

0.838

0.876

Exchange differences arising on translation of non-USD functional currency operations (mainly in Ukrainian Hryvnia) are included in the translation reserve. See Note 18 for further details.

Note 7: Special items

Special items for the six months period ended 30 June 2018 consisted of the following:

US$000

 Note

6 months ended

30.06.18

6 months ended   30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Operating special items





Write-offs and impairment losses


-

79

407

Total operating special items


-

79

407

Total special items before related tax effect


-

79

407

Tax effect on special items


-

−

-

Total special items after related tax effect


-

79

407

Special tax items

9

-

(3,426)

(3,426)

Special items include those items, which due to their expected infrequency of the events or non-operational nature giving rise to them, are reported separately on the face of the income statement. These items are excluded from Underlying EBITDA, which is an Alternative Performance Measure ("APM"). Further information on the APMs used by the Group, including the definitions, is provided on pages 36 and 37.

Special items comprise:

·     Operating special items are those that relate to the operating performance of the Group and principally include write-offs and impairment losses and restructuring charges, if any.

·     Non-operating special items are items relating to changes in the Group's asset portfolio.

·     Tax special items are significant non-recurring tax items or the tax effect of other special items. Further details are provided in Note 9.

Note 8: Net finance expense

Net finance expense for the period ended 30 June 2018 consisted of the following:

US$000

 

6 months ended

30.06.18

6 months ended   30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Finance expense





Interest expense on loans and borrowings


(24,029)

(27,947)

(53,560)

Less capitalised borrowing costs


2,252

2,580

3,637

Interest on defined benefit plans


(1,210)

(1,039)

(2,094)

Bank charges


(340)

(1,314)

(2,537)

Other finance costs


(1,152)

(268)

(584)

Total finance expense


(24,479)

(27,988)

(55,138)

Finance income





Interest income


454

184

364

Other finance income


-

−

8

Total finance income


454

184

372

Net finance expense


(24,025)

(27,804)

(54,766)

The presentation of the interest expense on loans and borrowings has been changed in the current period to reflect an interest expense measured at amortised cost using the effective interest rate method by presenting the effect from the amortisation of prepaid arrangement fees in interest expense on loans and borrowings and not in bank charges as done in the previous periods. In order to be consistent with the presentation in the current period, the amounts of US$3,532 thousand and US$7,013 thousand have been reclassified from bank charges to interest expense on loans and borrowings for the comparative periods ended 30 June 2017 and 31 December 2017. The total finance expense remained unchanged.

Note 9: Taxation

The Group pays corporate profit tax in a number of jurisdictions and its tax rate is influenced by the mix of profits primarily between Ukraine, Switzerland, the United Kingdom and Dubai, as well as the level of non-deductible expenses for tax purposes in each of these jurisdictions. For the period ended 30 June 2018, the income tax expense was based on an expected weighted average tax rate of 15.0% for the financial year 2018, compared to an effective tax of 12.3% for the financial year 2017.

No special tax items during the period ended 30 June 2018, compared to US$3,426 thousand recorded during the comparative periods ended 31 December 2017 and 30 June 2017, respectively, reflecting the net effect from the capitalisation of a deferred tax asset from available tax loss carry forwards and temporary differences totalling US$28,822 thousand for an Ukrainian subsidiary and the de-recognition of a deferred tax asset of US$25,396 thousand as a result of the latest development of ongoing court proceedings in Ukraine. Further information on the ongoing court proceedings is provided in Note 17.

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 resulting in a remaining income tax receivable balance of US$5,846 thousand as at 30 June 2018 (31 December 2017: US$5,454 thousand; 30 June 2017: US$5,866 thousand) relating to prepayments made by two other Ukrainian subsidiaries and is classified as non-current due to the uncertainty in respect of the timing of the recovery.

US$000

 

6 months ended   30.06.18

Year ended
31.12.17

6 months ended   30.06.17

 

 

(unaudited)

(audited)

(unaudited)

Income tax receivable balance - current


11

14

142

Income tax receivable balance - non-current


5,846

5,454

5,866

Income tax payable balance


(26,944)

(23,715)

(22,698)

Net income tax payable


(21,087)

(18,247)

(16,690)

Note 10: Earnings per share and dividends paid and proposed

Basic EPS is calculated by dividing the net profit for the period attributable to ordinary equity shareholders of Ferrexpo plc by the weighted average number of Ordinary Shares.

Diluted earnings per share are calculated by adjusting the weighted average number of Ordinary Shares in issue on the assumption of conversion of all potentially dilutive Ordinary Shares. All share awards are potentially dilutive and have been considered in the calculation of diluted earnings per share.

 


6 months ended 30.06.2018 (unaudited)

6 months ended 30.06.2017 (unaudited)

Year-ended 31.12.17

(audited)

Earnings/(loss) for the period/year attributable to equity shareholders per share


Before special items

Special items

After special items

Before special items

Special items

After special items

Before special items

Special   items

After special items

Basic (US cents)


25.88

-

25.88

36.11

0.61

36.72

66.53

0.56

67.09

Diluted (US cents)


25.79

-

25.79

35.99

0.61

36.60

66.30

0.55

66.85

 

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

Thousands

 

6 months ended   30.06.18

Year ended
31.12.17

6 months ended   30.06.17

 

 

(unaudited)

(audited)

(unaudited)

Weighted average number of shares





Basic number of ordinary shares outstanding


585,940

585,674

585,641

Effect of dilutive potential ordinary shares


2,107

2,074

2,033

Diluted number of ordinary shares outstanding


588,047

587,748

587,674

The basic number of ordinary shares is calculated by subtracting the shares held in treasury from the total number of ordinary shares in issue.

Dividends proposed and paid

Prior to the dividend proposed below and taking into account relevant thin capitalisation rules and dividend-related covenants for the Group's major bank debt facilities, the total available distributable reserves of Ferrexpo plc is US$86,114 thousand as of 30 June 2018.

US$000

 

6 months ended

30.06.18

6 months ended   30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Dividends proposed





Interim dividend for 2018: 3.3 US cents per Ordinary Share


19,348

−

−

Final dividend for 2017: 3.3 US cents per Ordinary Share


−

−

19,328

Special dividend for 2017: 6.6 US cents per Ordinary Share


−

−

38,656

Special dividend for 2017: 3.3 US cents per Ordinary Share


−

−

19,328

Interim dividend for 2017: 3.3 US cents per Ordinary Share


−

19,328

−

Total dividends proposed


19,348

19,328

77,312

 

US$000

 

6 months ended

30.06.18

6 months ended   30.06.17

Year ended
31.12.17

 

 

(unaudited)

(unaudited)

(audited)

Dividends paid during the year





Final dividend for 2017: 3.3 US cents per Ordinary Share


18,929

−

−

Special dividend for 2017: 6.6 US cents per Ordinary Share


38,615

−

−

Special dividend for 2017: 3.3 US cents per Ordinary Share


19,639

−

−

Interim dividend for 2017: 3.3 US cents per Ordinary Share


−

−

19,266

Final dividend for 2016: 3.3 US cents per Ordinary Share


−

19,679

19,679

Special dividend for 2016: 3.3 US cents per Ordinary Share


−

19,371

19,371

Total dividends paid during the period


77,183

39,050

58,316

The final dividend paid for 2017 includes withholding tax of US$3,187 thousand that is payable subsequent to the period ended 30 June 2018.

Note 11: Property, plant and equipment

During the six months period ended 30 June 2018, the additions to property, plant and equipment totalled US$62,396 thousand (30 June 2017: US$45,539 thousand; 31 December 2017: US$123,643 thousand) and the net book value of the disposals of property, plant and equipment totalled US$3,409 thousand (30 June 2017: US$1,635 thousand; 31 December 2017: US$6,447 thousand). The total depreciation charge for the period was US$30,192 thousand (30 June 2017: US$26,863 thousand; 31 December 2017: US$55,520 thousand).

The carrying value of property, plant and equipment includes capitalised borrowing costs on qualifying assets of US$21,178 thousand (31 December 2017: US$17,810 thousand; 30 June 2017: US$17,698 thousand).

Note 12: Other taxes recoverable and prepaid

As at 30 June 2018, taxes recoverable and prepaid comprised:

US$000

 

As at 30.06.18

As at 31.12.17

As at 30.06.17

 

 

(unaudited)

 (audited)

(unaudited)

VAT receivable


27,205

23,081

21,290

Other taxes prepaid


260

111

131

Total other taxes recoverable and prepaid


27,465

23,192

21,421

As at 30 June 2018, US$26,667 thousand of the VAT receivable relates to the Group's Ukrainian business operations (31 December 2017: US$21,254 thousand; 30 June 2017: US$19,673 thousand) of which US$726 thousand (31 December 2017: US$678 thousand; 30 June 2017: US$109 thousand) was overdue. Management is of the opinion that the overdue balances 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$1,366 thousand (31 December 2017: US$1,190 thousand; 30 June 2017: US$1,052 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.

Note 13: Inventories

As at 30 June 2018, inventories comprised:

US$000

 

As at 30.06.18

As at 31.12.17

As at 30.06.17

 

 

(unaudited)

 (audited)

(unaudited)

Raw materials and consumables


31,701

34,295

32,338

Spare parts


53,882

42,053

43,147

Finished ore pellets


34,249

15,482

20,119

Work in progress


3,049

2,475

4,064

Other


2,295

2,340

1,762

Total inventories - current


125,176

96,645

101,430

Lean and weathered ore


212,806

175,831

162,740

Total inventories - non - current


212,806

175,831

162,740

Total inventories


337,982

272,476

264,170

Inventories are held at the lower of cost or net realisable value.

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 14: Cash and cash equivalents

As at 30 June 2018, cash and cash equivalents comprised:

US$000

Notes

As at 30.06.18

As at 31.12.17

As at 30.06.17

 

 

(unaudited)

 (audited)

(unaudited)

Cash at bank and on hand


82,250

97,742

92,645

Total cash and cash equivalents

3

82,250

97,742

92,645

The debt repayments net of proceeds during the period ended 30 June 2018 totalled US$43,524 thousand (31 December 2017: US$238,670 thousand; 30 June 2017: US$162,507 thousand) affecting the balance of cash and cash equivalents. Further information on the Group's gross debt is provided in Note 15.

The balance of cash and cash equivalents held in Ukraine amounts to US$27,205 thousand as at 30 June 2018 (31 December 2017: US$10,281 thousand; 30 June 2017: US$13,593 thousand).

Note 17 provides details on the Group's balance of restricted cash and deposits which has been fully provided for as currently not available to the Group.

Note 15: Interest bearing loans and borrowings

This note provides information about the contractual terms of the Group's interest bearing loans and borrowings, which are measured at amortised cost and denominated in US Dollars.

US$000

Notes

As at 30.06.18

As at 31.12.17

As at 30.06.17

 

 

(unaudited)

 (audited)

(unaudited)

Current





Eurobond issued


171,165

171,202

169,987

Syndicated bank loans - secured


92,500

112,500

135,000

Other bank loans - secured


14,733

16,218

17,660

Other bank loans - unsecured


1,494

1,523

1,494

Obligations under finance leases


3,816

3,969

3,817

Trade finance facilities


15,866

-

7,492

Total current interest bearing loans and borrowings

3

299,574

305,412

335,450

Non-current





Eurobond issued


-

171,202

169,987

Syndicated bank loans - secured


146,250

-

33,750

Other bank loans - secured


1,773

9,267

16,502

Other bank loans - unsecured


3,005

3,752

4,499

Obligations under finance leases


303

2,073

4,115

Total non-current interest bearing loans and borrowings

3

151,331

186,294

228,853

Total interest bearing loans and borrowings


450,905

491,706

564,303

In the current period, management have reviewed the presentation of the accrued interest and have re-classified it from interest bearing loans and borrowings to accrued liabilities in order to better reflect the nature of this balance in the presentation. US$9,358 thousand and US$9,599 thousand have been re-presented for the comparative periods ended 31 December 2017 and 30 June 2017 to be on a consistent basis. There has been no restatement of the underlying financial information.

 

At 30 June 2018, the Group's major external debt facilities comprised:

·      a syndicated revolving US$350,000 thousand pre-export finance facility, of which US$43,750 thousand was available (31 December 2017: US$131,250 thousand; 30 June 2017: US$218,750 thousand) and fully drawn. The amortisation of this facility commenced in November 2016 with eight quarterly amortisations and commitment reductions of US$43,750 thousand to the final maturity date of 8 August 2018; and

·      a syndicated revolving US$195,000 thousand pre-export finance facility, signed on 16 November 2017, which has been fully drawn in March 2018. Following a grace period, the facility will be amortised in eight quarterly instalments. The first instalment is due on 31 March 2019 and the final maturity date is 31 December 2020.

The aforementioned major bank debt facilities were guaranteed and secured as follows:

·      Ferrexpo AG and Ferrexpo Middle East FZE assigned the rights to revenue from certain sales contracts;

·      PJSC Ferrexpo Poltava Mining assigned all of its rights of certain export contracts for the pellets sales to Ferrexpo AG and Ferrexpo Middle East FZE; 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 major bank debt facilities listed above, the Group has outstanding unsecured Notes at par value totalling US$173,181 thousand as at 30 June 2018 (31 December 2017: US$346,385 thousand; 30 June 2017: US$346,385 thousand) which fall due in one instalment on 7 April 2019. The first instalment of US$173,181 thousand fell due and was repaid on 7 April 2018. The Notes have a 10.375% interest coupon payable semi-annually. 

As at 30 June 2018, the Group has US$15,866 thousand open trade finance facilities (31 December 2017: nil; 30 June 2017: US$7,492 thousand). Trade finance facilities are secured against receivables related to these specific trades.

All facilities are shown net of associated arrangement fees, except for the revolving syndicated pre-export finance facility, for which the fees are presented in prepayments and current assets and other non-current assets based on the maturity of the underlying facility and are amortised over the term of the facility.

The table below shows the movements in the interest-bearing loans and borrowings:

US$000

 

6 months ended

30.06.18

6 months ended   31.12.17

Year ended
30.06.17

 

 

(unaudited)

(unaudited)

(audited)

Opening balance of interest bearing loans and borrowings


491,706

723,154

723,154

Cash movements





Repayments of Eurobond issued


(173,181)

-

-

Proceeds from syndicated bank loans - secured


195,000

-

-

Repayments of syndicated bank loans - secured


(68,750)

(193,750)

(137,500)

Repayments of other bank loans - secured


(9,803)

(20,512)

(10,806)

Repayments of other bank loans - unsecured


(820)

(1,534)

(767)

Repayments of obligations under finance leases


(1,985)

(3,690)

(1,812)

Change of trade finance facilities, net


15,837

(19,025)

(11,532)

Total cash movements


(43,702)

(238,511)

(162,417)

Non-cash movements





Amortisation of fees


2,747

7,014

3,532

Others


154

49

34

Total non-cash movements


2,901

7,063

3,566

Closing balance of interest bearing loans and borrowings


450,905

491,706

564,303

Further information on the Group's exposure to interest rate, foreign currency and liquidity risk is provided in Note 27 of the Annual Report and Accounts 2017.

Note 16: Financial instruments

Fair values

Set out below are the carrying amounts of the Group's financial instruments that are carried in the interim consolidated statement of financial position:

US$000

 

As at 30.06.18

As at 31.12.17

As at 30.06.17

 

 

(unaudited)

 (audited)

 (unaudited)

Financial assets





Cash and cash equivalents


82,250

97,742

92,645

Trade and other receivables


80,529

88,327

80,539

Other financial assets


847

620

516

Total financial assets


163,626

186,689

173,700

Financial liabilities





Trade and other payables


47,720

48,428

34,048

Accrued liabilities


22,524

25,315

24,858

Interest bearing loans and borrowings


450,905

491,706

564,303

Total financial liabilities


521,149

565,449

623,209

Interest bearing loans and borrowings

The fair values of interest-bearing loans and borrowings are based on the discounted cash flows using market interest rates except for the fair value of the Eurobond issued, which is based on the market price quotation at the reporting date. The fair values of interest-bearing loans and borrowings totalled US$456,702 thousand (31 December 2017: US$514,515 thousand; 30 June 2017: US$584,689 thousand).

Other financial assets

The fair values of cash and cash equivalents, trade and other receivables and payables, restricted cash and deposits, other financial assets and accrued liabilities are approximately equal to their carrying amounts due to their short maturity.

Note 17: Commitments and contingencies

Commitments

US$000

 

As at 30.06.18

As at 31.12.17

As at 30.06.17

 

 

(unaudited)

 (audited)

 (unaudited)

Operating lease commitments


47,676

42,470

47,927

Capital commitments on purchase of PPE


51,302

29,681

32,403

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's transactional bank in Ukraine, Bank F&C ("BFC"), is still going through the liquidation process after having been declared insolvent by the National Bank of Ukraine and put under temporary administration on 18 September 2015. The Group, through its major subsidiaries in Ukraine, is engaged in various court proceedings with the aim to maximise its recovery in the liquidation process of BFC as disclosed below.

Following the commencement of the liquidation process of BFC and in accordance with the applicable local legislation, FPM, LLC Ferrexpo Yeristovo Mining GOK ("FYM") and LLC Ferrexpo Belanovo Mining GOK ("FBM"), collectively referred to as "Ukrainian subsidiaries", submitted on 21 January 2016 their claims for cash and deposit balances held with BFC on the date of introduction of temporary administration totalling UAH4,262 million (US$162,740 thousand as of 30 June 2018).

On 22 April 2016, the liquidator of BFC issued certificates recognising UAH540 million (US$20,619 thousand as of 30 June 2018) of these claims and recognised these claims in the ninth rank. The afore-mentioned Ukrainian subsidiaries are currently involved in legal proceedings in respect of the under-recognition of the claims amounting to UAH3,722 million (US$142,121 thousand as of 30 June 2018) and the ranking of the claims in the liquidation process. The court proceedings commenced in October 2016 and following various hearings during the financial year 2017, the relevant court instance dismissed on 25 October 2017 FPM's claim in full. FPM filed an appeal on 13 November 2017. Several hearings took place since the filing of the appeal without the court ruling on the parties' motions. The hearing on 18 July 2018 ruled in favour of FPM and as at the date of the approval of this set of accounts it is not known whether the counter party is going to appeal against this decision. A hearing in respect of FYM's claim on the same matter took place on 9 July 2018 and was adjourned to 22 August 2018 whereas the claim of FBM is still pending with the relevant court, but no hearings took place or are scheduled yet.

Taxation

Tax legislation in Ukraine

The Group prices its sales between its subsidiaries using international benchmark prices for comparable products covering product quality and applicable freight. The Group judges these to be on terms which comply with applicable legislation. In August 2017, the State Fiscal Service of Ukraine ("SFS") commenced a tax audit at the Group's major subsidiary in Ukraine with a focus on cross-border transactions in terms of its pellet sales to another subsidiary of the Group. According to the current legislation, the SFS has to complete this audit within 18 months from the commencement. No provision has been booked as at 30 June 2018.

Following a tax audit at PJSC Ferrexpo Poltava Mining ("FPM") claims were made by the Ukrainian tax authorities in relation to allegedly unpaid withholding tax totalling US$6,491 thousand (UAH170 million) and associated fines and penalties of US$1,604 thousand (UAH42 million) in respect of interest paid to a subsidiary of the Group in the United Kingdom in 2013 and 2014. Following the audits for aforementioned years, the Ukrainian tax authorities also initiated tax audits for the years 2015 and 2016. The management of the Group expects to continue to successfully defend any claims made by the tax authorities in the Ukrainian courts. Consequently, no provision has been made for the claimed withholding tax and associated fines and penalties as at 30 June 2018.

Note 18: Share capital and reserves

The share capital of Ferrexpo plc at 30 June 2018 was 613,967,956 (31 December 2017: 613,967,956; 30 June 2017: 613,967,956) Ordinary Shares at par value of £0.10 paid for cash, resulting in share capital of US$121,628 thousand, which is unchanged since the Group's Initial Public Offering in June 2007. This balance includes 25,343,814 shares (31 December 2017: 25,343,814 shares; 30 June 2017: 25,343,814 shares), which are held in treasury, resulting from a share buyback that was undertaken in September 2008, and 2,336,256 shares held in the employee benefit trust reserve (31 December 2017: 2,916,419 shares; 30 June 2017: 2,916,419 shares).

The translation reserve includes the effect from the exchange differences arising on translation of non-US Dollar functional currency operations (mainly in Ukrainian Hryvnia). The exchange differences arising on translation of the Group's foreign operations are initially recognised in the other comprehensive income. See also the Interim Consolidated Statement of Comprehensive Income on page 18 of these financial statements for further details.

As at 30 June 2018 other reserves attributable to equity shareholders of Ferrexpo plc comprised:

 

For the financial year 2017 and the 6 months ended 30.06.18






US$000

 

Uniting of interest reserve

Treasury share reserve

Employee Benefit Trust reserve

Translation reserve

Total other

reserves

At 1 January 2017

31,780

(77,260)

(5,108)

(1,934,170)

(1,984,758)

Foreign currency translation differences

-

-

-

(41,249)

(41,249)

Tax effect

-

-

-

4,557

4,557

Total comprehensive loss for the year

-

-

-

(36,692)

(36,692)

Share based payments

-

-

586

-

586

At 31 December 2017 (audited)

31,780

(77,260)

(4,522)

(1,970,862)

(2,020,864)

Foreign currency translation differences

-

-

-

79,022

79,022

Tax effect

-

-

-

(9,991)

(9,991)

Total comprehensive income/(loss) for the period

-

-

-

69,031

69,031

Share based payments

-

-

411

-

411

At 30 June 2018 (unaudited)

31,780

(77,260)

(4,111)

(1,901,831)

(1,951,422)

 

For the 6 months ended 30.06.17






US$000

 

Uniting of interest reserve

Treasury

Share

reserve

Employee Benefit Trust reserve

Translation

reserve

Total

other

reserves

At 1 January 2017

31,780

(77,260)

(5,108)

(1,934,170)

(1,984,758)

Foreign currency translation differences

-

-

-

37,974

37,974

Tax effect

-

-

-

(6,015)

(6,015)

Total comprehensive loss for the period

-

-

-

31,959

31,959

Share based payments

-

-

285

-

285

At 30 June 2017 (unaudited)

31,780

(77,260)

(4,823)

(1,902,211)

(1,952,514)

Note 19: 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 and with associated companies and with other related parties. Management considers that the Group has appropriate procedures in place to identify and properly disclose 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 49.5%. This is the only associated company of the Group. Other related parties are principally those entities controlled by Anatoly Trefilov who re-signed as member of the supervisory board of PJSC Ferrexpo Poltava Mining as of 19 April 2017. In accordance with the Listing Rules, all transactions with the entities controlled by Anatoly Trefilov within one year of his resignation from the supervisory board have been still considered as related party transactions and disclosed as such. Effective 20 April 2018, the entities controlled by Anatoly Trefilov are no longer considered as related parties.

All related party transactions entered into by the Group during the periods presented are summarised in the tables on the following pages.

 

Revenue, expenses, finance income and finance expenses

 

6 months ended 30.06.18 (unaudited)

6 months ended 30.06.17

 (unaudited)

Year ended 31.12.17

 (audited)

US$000

 

Entities under common control

Asso-ciated compa- nies

Other related parties

Entities   under common control

Asso-

ciated compa-

nies

Other related parties

Entities under common control

Asso-

 ciated compa-

 nies

Other  related parties

Other sales a

398

-

107

290

-

75

677

-

94

Total related party transactions within revenue

398

-

107

290

-

75

677

-

94

Materials b

4,252

-

3

3,552

-

4

7,558

-

8

Spare parts and consumables c

1,291

-

-

802

-

-

1,382

-

-

Total related parties transactions within cost of sales

5,543

-

3

4,354

-

4

8,940

-

8

Selling and distribution expenses d

5,373

8,311

702

5,492

8,943

644

10,867

18,366

827

General and administration expenses e

344

-

212

284

-

267

594

-

425

Total related parties transactions within expenses

11,260

8,311

917

10,130

8,943

915

20,401

18,366

1,260

Finance expenses

58

-

-

17

-

-

34

-

-

Total related party transactions

11,318

8,311

917

10,147

8,943

915

20,435

18,366

1,260

The Group entered into various related party transactions. A description of the most material transactions, which are in aggregate over US$200 thousand (on an expected annualised basis) in the current or comparative periods is given below. All transactions were carried out on an arm's length basis in the normal course of business.

Entities under common control

a   Sales of power, steam and water and other materials for US$58 thousand (30 June 2017: US$38 thousand; 31 December 2017: US$88 thousand) and income from premises leased to Kislorod PCC of US$68 thousand (30 June 2017: US$68 thousand; 31 December 2017: US$135 thousand), and

a   Sales of diesel to DVD Trans totalling US$155 thousand (30 June 2017: US$152 thousand; 31 December 2017: US$313 thousand).

b   Purchases of compressed air, oxygen and metal scrap from Kislorod PCC for US$2,199 thousand (30 June 2017: US$1,836 thousand; 31 December 2017: US$3,911 thousand);

b   Purchases of cast iron balls from AutoKraZ Holding Co. for US$229 thousand (30 June 2017: US$430 thousand; 31 December 2017: US$851 thousand); and

b   Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas for US1,762 thousand (30 June 2017: US$1,237 thousand; 31 December 2017: US$2,673 thousand).

c   Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship Repair Plant ("KSRSSZ") in the amount of US$549 thousand (30 June 2017: US$96 thousand; 31 December 2017: US$96 thousand);

c   Purchases of spare parts from OJSC Uzhgorodsky Turbogas in the amount of US$189 thousand (30 June 2017: US$137 thousand; 31 December 2017: US$294 thousand);

c   Purchases of spare parts from Valsa GTV of US$263 thousand (30 June 2017: US$500 thousand; 31 December 2017: US$756 thousand); and

c   Purchases of spare parts from OJSC Berdichev Machine-Building Plant Progress of US$274 thousand (30 June 2017: US$65 thousand; 31 December 2017: US$211 thousand).

d   Purchases of advertisement, marketing and general public relations services from FC Vorskla of US$5,373 thousand (30 June 2017: US$5,492 thousand; 31 December 2017: US$10,867 thousand).

e   Insurance premiums of US$240 thousand (30 June 2017: US$188 thousand; 31 December 2017: US$403 thousand) paid to ASK Omega for workmen's insurance and other insurances.

Associated companies

d   Purchases of logistics services in the amount of US$8,311 thousand (30 June 2017: US$8,943 thousand; 31 December 2017: US$18,366 thousand) relating to port operations, including port charges, handling costs, agent commissions and storage costs.

Other related parties

d   Purchases of logistics management services from Slavutich Ruda Ltd. relating to customs clearance services and the coordination of rail transit totalling US$702 thousand (30 June 2017: US$644 thousand; 31 December 2017: US$827 thousand). Effective 20 April 2018, Slavutich Ruda Ltd. is no longer considered as a related party. Further information is provided on page 32.

e   Legal and administrative services in the amount of US$186 thousand (30 June 2017: US$216 thousand; 31 December 2017: US$221 thousand) provided by Kuoni Attorneys at law Ltd., which is controlled by a former member of the Board of Directors of Ferrexpo plc who resigned in November 2016, but still acts as member of the Board of Directors of one of the subsidiaries of the Group and received Directors' fee of US$48 thousand (30 June 2017: US$38 thousand; 31 December 2017: 86 thousand); and

e   Consulting services totalling US$26 thousand (30 June 2017: US$51 thousand; 31 December 2017: US$205 thousand) provided by Nage Capital Management AG, which is controlled by a former member of the Board of Directors of Ferrexpo plc who resigned in August 2014, but still acts as a member of the Board of Directors of one of the subsidiaries of the Group and received Directors' fee of US$19 thousand (30 June 2017: US$20 thousand; 31 December 2017: US$39 thousand).

Purchases of property, plant, equipment and investments

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.

 

6 months ended 30.06.18 (unaudited)

6 months ended 30.06.17 (unaudited)

Year ended 31.12.17 (audited)

US$000

 

Entities    under  common control

Asso-ciated compa-nies

Other related parties

Entities   under common control

Asso- ciated compa- nies

Other related parties

Entities under common control

Asso- ciated compa- nies

Other  related parties

Purchases in the ordinary course of business

688

-

-

373

-

-

781

-

-

Total purchases of property, plant and equipment

688

-

-

373

-

-

781

-

-

During the period ended 30 June 2018, the Group purchased major spare parts and equipment from Valsa GTV totalling US$212 thousand in respect of the upgrade of two sections at the beneficiation plant. The Group further procured services relating to the top soil removal and relocation of waste material and gravel in the amount of US$472 thousand from DVD Trans.

During the comparative periods ended 30 June 2017 and 31 December 2017, the Group procured services relating to the top soil removal and relocation of waste material and gravel from DVD Trans totalling US$310 thousand and US$713 thousand, respectively.

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:

6 months ended 30.06.18 (unaudited)

Year ended 31.12.17 (audited)

6 months ended 30.06.17 (unaudited)

US$000

 

Entities under common control

Asso-ciated compa-nies

Other related parties

Entities   under common control

Asso- ciated compa- nies

Other related parties

Entities under common control

Asso- ciated compa- nies

Other  related parties

Prepayments for property, plant and equipment f

4,893

-

-

3,022

-

-

-

-

-

Total non-current assets

4,893

-

-

3,022

-

-

-

-

-

Trade and other receivables g

218

3,957

-

203

1,082

37

257

3,559

50

Prepayments and other current assets h

1,411

-

-

1,088

-

171

1,167

-

-

Total current assets

1,629

3,957

-

1,291

1,082

208

1,424

3,559

50

Trade and other payables i

801

486

-

344

1,367

64

619

1,081

207

Accrued liabilities and deferred income

-

-

-

-

-

51

-

-

-

Current liabilities

801

486

-

344

1,367

115

619

1,081

207

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

Entities under common control

f      Prepayments for property, plant and equipment totalling US$4,599 thousand (31 December 2017: US$2,722 thousand; 30 June 2017: nil) were made to OJSC Berdichev Machine-Building Plant Progress and US$293 thousand (31 December 2017: US$256 thousand; 30 June 2017: nil) to AutoKraZ Holding Co.

h     Prepayments and other current assets totalling US$953 thousand relate to prepayments made to FC Vorskla for advertisement, marketing and general public relations services (31 December 2017: US$858 thousand; 30 June 2017: US$858 thousand).

i      Trade and other payables included US$246 thousand (31 December 2017: US$172 thousand; 30 June 2017: US$166 thousand) related to the purchase of compressed air, oxygen and metal scrap from Kislorod PCC and US$237 thousand (31 December 2017: US$23 thousand; 30 June 2017: US$145 thousand) related to the purchase of cast iron balls from OJSC Uzhgorodsky Turbogas.

Associated companies

g     Trade and other receivables of US$3,957 thousand (31 December 2017: US$1,082 thousand; 30 June 2017: US$3,559 thousand) related to dividend receivables from TIS Ruda LLC.

i      Trade and other payables included US$486 thousand (31 December 2017: US$1,367 thousand; 30 June 2017: US$1,081 thousand) related to purchases of logistics services from TIS Ruda LLC.

Corporate Social Responsibility ("CSR") programme

In order to maintain its social license to operate, the Ferrexpo Group operates a Corporate Social Responsibility ('CSR') programme in Ukraine and makes contributions into Blooming Land Charitable Foundation ("Blooming Land"), which was established with the primary function of co-ordinating the Group's CSR programme. Blooming Land focuses on activities related to diabetes awareness and diagnosis, eyesight diagnosis and preventative care, and general support and care for the elderly on a national basis. Funding is provided solely by one of Ferrexpo's subsidiaries in Ukraine and Khimreaktiv LLC, an entity connected with Rosava which in turn is controlled by Kostyantin Zhevago, the CEO and ultimate beneficial owner of Ferrexpo. Blooming Land, and its three sub-funds, are separately managed and accordingly are not controlled and consolidated by the Group. There is no agreement or arrangement between Ferrexpo and Khimreaktiv LLC in relation to their contributions to Blooming Land and its sub-funds.

In the six months ended 30 June 2018, Ferrexpo made charitable contributions of US$9,514 thousand to Blooming Land. In the year ended 31 December 2017, Ferrexpo made charitable payments to Blooming Land totalling US$24,003 thousand, of which US$12,034 thousand was paid in the six months ended 30 June 2017. Blooming Land's charitable activities are managed via three related charitable sub-funds which carry out charitable activities by subcontracting individual managers for the specific events they run.

During the period, the Board became aware that in the financial year 2017, temporary funding contributions totalling US$16,318 thousand were advanced by Khimreaktiv LLC into one of the sub-funds of Blooming Land. Later during the financial year 2017, those monies were paid to the event managers to conduct their charitable activities and the sub-fund repaid Khimreaktiv LLC using monies subsequently received from Ferrexpo. Based on the advice obtained from the Group's Sponsor, those repayments to Khimreaktiv LLC are not considered to be related party transactions for the Ferrexpo Group under the UK Listing Rules, but are considered related party transactions under IAS 24 Related Parties, that ought previously to have been disclosed. In light of this, the Board has made further enquiries about the transactions of Blooming Land and its sub-funds and is satisfied that the related party disclosures are complete.

Note 20: Events after the reporting period

No material adjusting or non-adjusting events have occurred subsequent to the period end other than the proposed dividend disclosed in Note 10.

 

Alternative Performance Measures ("APM")

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

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.

Ferrexpo makes reference to the following APMs in the 2018 Half Year Results.

C1 cash cost of production

Definition: Non-financial measure, which represents the cash costs of production of iron pellets from own ore divided by production volume of own production 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 operational measure of its cost competitiveness compared to its peer group.

US$000


As at 30.06.18

As at 30.06.17

As at 31.12.17



(unaudited)

 (unaudited)

 (audited)

C1 cash costs


211,458

162,655

335,451

Non-C1 cost components


1,156

9,917

31,745

Cost of sales - pellet production


212,614

172,572

367,196

Own ore produced (tonnes)


5,081,720

5,138,600

10,394,440

C1 cash cost per tonne (US$)


41.6

31.7

32.3

Underlying EBITDA

Definition: The Group calculates the underlying EBITDA as profit before tax and finance plus depreciation and amortisation and net gains and losses from disposal of investments and property, plant and equipment and share-based payments and operating and non-operating special items, including write-offs and impairment losses and other exceptional items. The underlying EBITDA is presented because it is a useful measure for evaluating the Group's ability to generate cash and its operating performance. See Note 5 for further details.

Closest equivalent IFRS measure: Profit before tax and finance.

Rationale for adjustment: The Group presents the underlying EBITDA as it is a useful measure for evaluating its ability to generate cash and its operating performance. It excludes the impact of special items that can mask underlying changes in performance. Also it aids comparability across peer groups as it is a measurement that is often used.

Reconciliation to closest IFRS equivalent:

US$000

Notes

As at 30.06.18

As at 30.06.17

As at 31.12.17



(unaudited)

 (unaudited)

 (audited)

Underlying EBITDA


234,150

286,938

550,705

Losses on disposal of property, plant and equipment


(2,995)

(2,103)

(7,754)

Share-based payments


(411)

(285)

(586)

Operating special items

7

-

(79)

(407)

Depreciation and amortisation


(27,809)

(22,295)

(46,392)

Profit before tax and finance


202,935

262,176

495,566

Underlying diluted earnings per share before special items

Definition: Earnings per share excluding special items and calculated using the diluted number of Ordinary Shares outstanding.

Closest equivalent IFRS measure: Diluted earnings per share.

Rationale for adjustment: Excludes the impact of special items that can mask underlying changes in performance.

Reconciliation to closest IFRS equivalent:

6 months ended 30.06.2018 (unaudited)

6 months ended 30.06.2017 (unaudited)

Year-ended 31.12.17

(audited)

US$000

Before special items

Special items

Total

Before special items

Special items

Total

Before special items

Special   items

Total

Earnings/(loss) for the year attributable to equity shareholders per share










Basic (US cents)

25.88

-

25.88

36.11

0.61

36.72

66.53

0.56

67.09

Diluted (US cents)

25.79

35.99

66.85

 

Net debt to underlying EBITDA

Definition: Net debt divided by the underlying EBITDA (for the last 12 months):

US$000


As at 30.06.18

As at 31.12.17

As at 30.06.17



(unaudited)

 (audited)

 (unaudited)

Net debt (US$000)


(368,655)

(393,964)

(471,658)

Underlying EBITDA (US$000)


497,917

550,705

502,262

Net debt to underlying EBITDA


0.74x

0.72x

0.94x

Rationale for adjustment: The ratio is a measurement of the underlying EBITDA Group's leverage, calculated as a company's interest-bearing liabilities minus cash or cash equivalents, divided by its underlying EBITDA.

Reconciliation to net debt:

US$000

Notes

As at 30.06.18

As at 31.12.17

As at 30.06.17



(unaudited)

 (audited)

 (unaudited)

Cash and cash equivalents

14

82,250

97,742

92,645

Interest-bearing loans and borrowings - current

15

(299,574)

(305,412)

(335,450)

Interest-bearing loans and borrowings - non-current

15

(151,331)

(186,294)

(228,853)

Net debt


(368,655)

(393,964)

(471,658)

For a reconciliation of underlying EBITDA to profit before tax and finance see page 24.

Underlying EBITDA margin

Definition: Underlying EBITDA divided by revenue:

US$000

Notes

As at 30.06.18

As at 30.06.17

As at 31.12.17



(unaudited)

 (unaudited)

 (audited)

Underlying EBITDA (US$000)


234,150

286,938

550,705

Revenues (US$000)

4

616,717

591,049

1,197,494

Underlying EBITDA margin


38%

49%

46%

Rationale for adjustment: The Group presents the Underlying EBITDA margin as it is a useful measure for evaluating its operating performance as a percentage of total revenue. It excludes the impact of special items that can mask underlying changes in performance. Also it aids comparability across peer groups as it is a measurement that is often used.

Reconciliation to closest IFRS equivalent:

US$000

Notes

As at 30.06.18

As at 30.06.17

As at 31.12.17



(unaudited)

 (unaudited)

 (audited)

Revenue

4

616,717

591,049

1,197,494

For a reconciliation of Underlying EBITDA to profit before tax and finance see page 24.

Capital investment

Definition: Capital expenditure for the purchase of property, plant and equipment and intangible assets.

Closest equivalent IFRS measure: Purchase of property, plant and equipment and intangible assets (net cash flows used in investing activities).

Rationale for adjustment: The Group presents the capital investment as it is a useful measure for evaluating the degree of capital invested in its business operations.

Reconciliation to closest IFRS equivalent:

US$000

 Notes

As at 30.06.18

As at 31.12.17

As at 30.06.17



(unaudited)

 (audited)

 (unaudited)

Purchase of property, plant and equipment and intangible assets

(net cash flows used in investing activities)

11

55,765

102,953

(45,284)

Total liquidity

Definition: Sum of cash and cash equivalents and available facilities.

Closest equivalent IFRS measure: Cash and cash equivalents.

Rationale for adjustment: The Group presents total liquidity as it is a useful measure for evaluating its ability to meet short-term business requirements.

Reconciliation to closest IFRS equivalent:

US$000

Notes

As at 30.06.18

As at 31.12.17

As at 30.06.17



(unaudited)

 (audited)

 (unaudited)

Cash and cash equivalents

14

82,250

97,742

92,645

Available facilities


-

213,750

50,000

Total liquidity


82,250

311,492

142,645

 

Glossary

 

Act

 

The Companies Act 2006

AGM

The Annual General Meeting of the Company

Articles

Articles of Association of the Company

Audit Committee

The Audit Committee of the Company's Board

Bank F&C

Bank Finance & Credit

Belanovo or Bilanivske

An iron ore deposit located immediately to the north of Yeristovo

Benchmark Price

International seaborne traded iron ore pricing mechanism understood to be offered to the market by major iron

ore producers under long-term contracts

Beneficiation Process

A number of processes whereby the mineral is extracted from the crude ore

BIP

Business Improvement Programme, a programme of projects to increase production output and efficiency at FPM

Blast furnace pellets

Used in Basic Oxygen Furnace "BOF" steelmaking and constitute about 70% of the traded pellet market

Board

The Board of Directors of the Company

Bt

Billion tonnes

C1 costs

Represents the cash costs of production of iron pellets from own ore, divided by production volume from own

ore, and excludes non-cash costs such as depreciation, pension costs and inventory movements, costs of

purchased ore, concentrate and production cost of gravel

Capesize

Capesize vessels are typically above 150,000 tonnes deadweight. Ships in this class include oil tankers, supertankers and bulk carriers transporting coal, ore, and other commodity raw materials. Standard capesize vessels are able to transit through the Suez Canal

Capital Employed

The aggregate of equity attributable to shareholders, non-controlling interests and borrowings

Central Europe

This segmentation for the Group's sales includes Austria, Czech Republic, Hungary, Serbia and Slovakia

CFR

Delivery including cost and freight

China and South East Asia

This segmentation for the Group's sales includes China and Vietnam

CIF

Delivery including cost, insurance and freight

CIS

The Commonwealth of Independent States

Code

The UK Corporate Governance Code

CODM

The Executive Committee is considered to be the Group's Chief Operating Decision-Maker

Company

Ferrexpo plc, a public company incorporated in England and Wales with limited liability

CPI

Consumer Price Index

CRU

The CRU Group provides market analysis and consulting advice in the global mining industry

(see www.crugroup.com)

CSR

Corporate Safety and Social Responsibility

CSR Committee

The Corporate Safety and Social Responsibility Committee of the Board of the Company

DAP

Delivery at place

DFS

Detailed feasibility study

Directors

The Directors of the Company

EBT

Employee Benefit Trust

EPS

Earnings per share

Executive Committee

The Executive Committee of management appointed by the Company's Board

Executive Directors

The Executive Directors of the Company

FBM

LLC Ferrexpo Belanovo Mining, a company incorporated under the laws of Ukraine

Fe

Iron

Ferrexpo

The Company and its subsidiaries

Ferrexpo AG Group

Ferrexpo AG and its subsidiaries including FPM

Fevamotinico

Fevamotinico S.a.r.l., a company incorporated with limited liability in Luxembourg

FOB

Delivered free on board, which means that the seller's obligation to deliver has been fulfilled when the goods have passed over the ship's rail at the named port of shipment, and all future obligations in terms of costs and risks of loss or damage transfer to the buyer from that point onwards

FPM

Ferrexpo Poltava Mining, also known as PJSC Ferrexpo Poltava Mining, a company incorporated under the laws of Ukraine

FRMC

Financial Risk Management Committee, a sub-committee of the Executive Committee

FTSE 250

Financial Times Stock Exchange top 250 companies

FYM

LLC Ferrexpo Yeristovo Mining, a company incorporated under the laws of Ukraine

GPL

Gorishne-Plavninske-Lavrykivske, the iron ore deposit being mined by FPM

Group

The Company and its subsidiaries

HSE

Health, safety and environment

IAS

International Accounting Standards

IASB

International Accounting Standards Board

IFRS

International Financial Reporting Standards, as adopted by the EU

IPO

Initial public offering

Iron ore concentrate

Product of the beneficiation process with enriched iron content

Iron ore pellets

Balled and fired agglomerate of iron ore concentrate, whose physical properties are well suited for transportation to and reduction within a blast furnace

Iron ore sinter fines

Fine iron ore screened to -6.3mm

JORC

Australasian Joint Ore Reserves Committee - the internationally accepted code for ore classification

K22

GPL ore has been classified as either K22 or K23 quality, of which K22 ore is of higher quality (richer)

KPI

Key Performance Indicator

Kt

Thousand tonnes

LIBOR

The London Inter Bank Offered Rate

LLC

Limited Liability Company (in Ukraine)

LTIFR

Lost-Time Injury Frequency Rate

LTIP

Long-Term Incentive Plan

m3

Cubic metre

Majority Shareholder

Fevamotinico S.a.r.l., The Minco Trust and Kostyantin Zhevago (together)

Mm

Millimetre

Mt

Million tonnes

Mtpa

Million tonnes per annum

Nominations Committee

The Nominations Committee of the Company's Board

Non-executive Directors

Non-executive Directors of the Company

NOPAT

Net operating profit after tax

North East Asia

This segmentation for the Group's sales includes Japan and Korea

OHSAS 18001

International safety standard 'Occupational Health & Safety Management System Specification'

Ordinary Shares

Ordinary Shares of 10 pence each in the Company

Ore

A mineral or mineral aggregate containing precious or useful minerals in such quantities, grade and chemical combination as to make extraction economic

Panamax

Modern panamax ships typically carry a weight of between 65,000 to 90,000 tonnes of cargo and can transit both Panama and Suez canals

PPI

Ukrainian producer price index

Probable Reserves

Those measured and/or indicated mineral resources which are not yet 'proved', but of which detailed technical and economic studies have demonstrated that extraction can be justified at the time of determination and under specific economic conditions

Proved Reserves

Measured mineral resources of which detailed technical and economic studies have demonstrated that extraction can be justified at the time of determination and under specific economic conditions

Rail car

Railway wagon used for the transport of iron ore concentrate or pellets

Relationship Agreement

The relationship agreement entered into among Fevamotinico S.a.r.l., Kostyantin Zhevago, The Minco Trust and the Company

Remuneration Committee

The Remuneration Committee of the Company's Board

Reserves

Those parts of mineral resources for which sufficient information is available to enable detailed or conceptual mine planning and for which such planning has been undertaken. Reserves are classified as either proved or probable

Sinter

A porous aggregate charged directly to the blast furnace which is normally produced by firing fine iron ore and/or iron ore concentrate, other binding materials, and coke breeze as the heat source

Spot price

The current price of a product for immediate delivery

Sterling/£

Pound Sterling, the currency of the United Kingdom

STIP

Short-Term Incentive Plan

Tailings

The waste material produced from ore after economically recoverable metals or minerals have been extracted. Changes in metal prices and improvements in technology can sometimes make the tailings economic to process at a later date

Tolling

The process by which a customer supplies concentrate to a smelter and the smelter invoices the customer the smelting charge, and possibly a refining charge, and then returns the metal to the customer

Ton

A US short ton, equal to 0.9072 metric tonnes

Tonne or t

Metric tonne

Treasury Shares

A company's own issued shares that it has purchased but not cancelled

TSF

Tailings storage facility

TSR

Total shareholder return. The total return earned on a share over a period of time, measured as the dividend per share plus capital gain, divided by initial share price

UAH

Ukrainian Hryvnia, the currency of Ukraine

Ukr SEPRO

The quality certification system in Ukraine, regulated by law to ensure conformity with safety and environmental standards

Underlying EBITDA

The Group calculates the Underlying EBITDA as profit before tax and finance plus depreciation and amortisation and net gains and losses from disposal of investments and property, plant and equipment and share based payments and operating and non-operating special items, including write-offs and impairment losses and other exceptional items

Underlying EBITDA margin

Underlying EBITDA (see definition above) as a percentage of revenue

US$/t

US Dollars per tonne

Value-in-use

The implied value of a material to an end user relative to other options, e.g. evaluating, in financial terms, the productivity in the steel making process of a particular quality of iron ore pellets versus the productivity of alternative qualities of iron ore pellets.

VAT

Value Added Tax

WAFV

Weighted average fair value

Western Europe

This segmentation for the Group's sales includes Germany and Italy

WMS

Wet magnetic separation

Yeristovo or Yerystivske

The deposit being developed by FYM

 

 


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