Final Results

RNS Number : 3397P

Ferrexpo PLC

24 March 2009

 



24 March 2009

Ferrexpo plc

Preliminary Results for the year ended 31st December 2008

Financial highlights

• Revenue up by 60.0% to US$1,116.9 million

• EBITDA up by 104.8% to US$503.9 million

• Underlying earnings up by 129.0% to US$347.4 million 

• Free cash flow increased by 116.0% to US$300.3 million 

• Dividend of 3.3 US cents per share amounting to US$20.0 million

Operating highlights

• Average price for pellets sold was 72.3% higher than in 2007

• 87.7% of sales accounted for by long term contracts with higher spot sales later in year

• Total pellet production in 2008 maintained at 2007 level

• 8.5% increase in production of high quality (65% Fe) pellets from the Group's own ore 

• Substantial reductions in use of raw materials and energy per unit of output 

• Significantly lower C1 costs in December 

• Growth projects on hold while the Group focuses on cash conservation 

Financial and production highlights 

(US$ '000, unless stated)	Twelve Months ended  31 December 2008	Twelve Months ended  31 December 2007	% Change
Iron ore production (kt)	27,763	28,934	(4.0%)
Pellet production (kt)	9,035	9,072	(0.4%)
Of which 65% Fe content (kt)	4,014	3,701	8.5%
Revenue	1,116,854	698,216	60.0%
EBITDA	503,946	246,057	104.8%
Profit for the period	313,048	134,035	133.6%
Underlying earnings	347,431	151,717	129.0%
Basic EPS (USc)	48.46	20.33	138.4%

Kostyantin Zhevago, CEO of Ferrexpo plc, commented:

'Ferrexpo had a record year in 2008, and since the economic downturn has continued to trade profitably. We improved all aspects of our business, and were able to increase our operating efficiency and production quality during the year while reducing cash costs in the fourth quarter. Together with our proximity to our key customers and our established marketing presence and reputation in our Traditional and Growth Markets and despite uncertain market conditions, this leaves us well placed to continue to maintain positive margins and to increase our market share in 2009.'

For further information, please contact:

Ferrexpo: Gavin Mackay	[phone]
Finsbury: Robin Walker  Alex Simmons	[phone]

Notes to editors:

Ferrexpo plc is a Swiss headquartered resources company with assets in Ukraine, principally involved in the production and export of iron ore pellets, used in producing steel. Current output is over 9 million tonnes, approximately 85% of which is exported to steelmakers around the world. The Ferrexpo Group is listed on the main market of the London Stock Exchange under the ticker FXPO. For further information please visit www.ferrexpo.com. 

  CHAIRMAN'S AND CHIEF EXECUTIVE OFFICER'S REVIEW

Ferrexpo had a record year in 2008. Demand for iron ore was exceptionally strong in the first part of the year, resulting in unprecedented international benchmark price settlements in April. By leveraging our proximity to our major customers and the strong relationships we have with them, our marketing arm was able to achieve long term contract prices for our products in excess of even these record benchmarks. Our mining operations also responded well to these high levels of iron ore demand, delivering a strong production performance both in terms of absolute output and in particular the proportion of higher-grade 65% Fe pellets produced. Our Business Improvement Programme achieved further success in reducing unit costs and increasing operational efficiency. 

The fundamental elements of our business all outperformed during 2008, a year in which we were able to maintain high levels of production and use our established marketing strategy to good effect. This strong operational performance resulted in a record financial performance which enabled the Group to maintain its dividend and also to return further capital to shareholders via the substantial on-market share buyback conducted in September. 

In the fourth quarter of the year, both the iron ore market and global economic conditions began to deteriorate. From the Group's perspective, iron ore demand weakness manifested first in the Ukrainian domestic market, followed by sudden decreased demand in most of our export markets. This challenging operating environment required prompt action to find alternative markets, limit production and reduce overall costs. Having reacted flexibly and taken the appropriate measures, we were able to maintain our profitability through the final months of the year. While November sales were weaker, an outstanding performance by our marketing department and our established status as a reliable supplier enabled us to return to the market quickly and successfully in December.

As a result, the Group delivered another strong operational and financial performance in this difficult period and for the year as a whole. 

2008 Results

The Group achieved contract price increases of more than 90% on average for the 2008/2009 contract year through strong customer relationships, 'value-in-use' marketing and our ability to provide small-lot 'just-in-time' deliveries. This generated a 72.3% increase for 2008 on the average price achieved in the previous calendar year. These higher prices together with the production of larger quantities of our premium 65% Fe grade pellets enabled us to grow both revenues and profits during 2008, despite weakening global demand in the fourth quarter. 

As a result, revenues for 2008 increased by 60.0% compared to the prior year (2007: US$698.2 million). Earnings before interest, tax, depreciation and amortisation for the period increased by 104.8% to US$503.9 million (2007: US$246.1 million), and pre-tax profit increased by 133.6% to US$375.6 million (2007: US$160.8 million). 

Actions to scale back our production slightly in the final part of the year followed a ten month period of record output. Production for the full year reached the same record levels achieved in 2007 but included a higher ratio of high grade 65% Fe pellets (an increase of 8.5% compared to 2007). Our mining operations again performed well, increasing production efficiency even during the period of reduced output in the fourth quarter.

The Group's C1 costs fell sharply to US$34.7 per tonne in December 2008 compared to US$42.3 per tonne for the full year. We faced significant cost pressures in the first six months of the year, as a result of high Ukrainian inflation and sharp increases in both cyclically priced and state-controlled inputs. In the fourth quarter this trend was reversed and our C1 costs have since experienced significant downward pressure due primarily to depreciation of the Ukrainian Hryvnia, as well as lower oil and steel related costs and continued Business Improvement Programme results. Overall our cost of production ended 2008 at the same level as the end of 2007, providing a strong finish to 2008 and a beneficial starting point for 2009. Distribution costs also rose sharply during 2008, but the rate of increase slowed considerably in the final months of the year.

The Group's full year results exceeded all prior years.  

Marketing and market environment

Ferrexpo enjoys several unique logistical advantages, the most notable of which is our proximity to our key customers. Our operations in central Ukraine are several times closer to our principal European markets than most of our global competitors, and as a result we are in many cases the lowest cost supplier to our customers. The advantage of proximity is enhanced by our location next to a navigable river, established rail links between us and our customers, and our joint venture bulk seaborne port facility on the Black Sea. 

In 2008 we continued our strategy of selling the majority of our production on long term contract to our well-established customer base. The Group remains committed to building strong customer relationships, and we used our reliable and growing pellet supply to support these long-standing customers during the period of high demand. At the same time we continued to develop new global market opportunities. When reduced demand in the fourth quarter affected our Traditional and Natural Markets we were well placed to compensate with sales in seaborne markets where demand was more resilient and Ferrexpo had an established presence and reputation. In addition, by capitalising on our proximity to Traditional and Natural Market customers and our ability to provide them with continuous small lot iron ore deliveries, we are well placed to increase our share of those markets. The Group remains the largest exporter of iron ore pellets from Ukraine.

Management and people

In late October the Board concluded that along with the rest of the industry, the Group was likely to face a more challenging market environment in the coming months, and as a result it resolved to hold all strategic initiatives in abeyance in the medium term and refocus the Group's activities on ensuring the continuing strength of its existing operations. As a result of this change in the strategic direction of the Group, Mike Oppenheimer, at the time Chief Executive Officer, and Dennis McShane, then Executive Director Business Development, informed the Board that they believed their roles to have changed from the form envisaged previously, and resigned from the Board and left the Group. We would like to thank them both for their contributions to the Group and we wish them well for the future. 

Following these developments, the Board approved Kostyantin Zhevago to lead the Group, and unanimously appointed him as Chief Executive Officer. His role as Chief Executive Officer of Ferrexpo is now Mr. Zhevago's principal activity.

The Group has achieved a great deal in 2008, despite the final months of the year proving to be a particularly challenging period in the industry and globally. We employ almost 9,000 management and staff, and the outstanding results achieved by the Group across its entire business are a testament to the positive response to these challenges by every one of them. We and the Board would like to thank all the management and staff of Ferrexpo for their hard work and dedication. Ferrexpo is very conscious of its responsibilities as one of the major employers in Ukraine, and maintaining the employment of our people is a priority. While we will continue to actively manage the size of our workforce over time to maximise productivity, we are proud that we have been able to avoid any forced redundancies during this difficult period in the industry. 

Corporate governance and social responsibility

The Group has high standards of corporate governance, and the Board reaffirms its commitment to these.

The Board's Corporate Safety and Social Responsibility ('CSR') Committee continues to monitor the management of the Group's health, safety, environmental and community programmes in line with best practice for mining companies. CSR remains a priority and we are pursuing further initiatives to institutionalise safety conscious behaviour in particular.

Growth projects and strategy

Significant progress was made with our growth projects in 2008, which concern primarily the increase of output and product quality from our existing operations and accessing more of the Group's substantial ore reserves at the Yeristovskoye and Belanovskoye deposits. In November the Board suspended capital expenditure on these projects, delaying them until the markets stabilise. These projects remain a priority for the Group, and we aim to resume their development as soon as economic conditions permit. 

In the course of the year our discussions moved forward with a selection of potential strategic investors in regard to partnering with the Group in some of these growth projects to provide funding and additional project execution capability. Following the suspension of expansionary capital expenditure in November, this process was suspended but will be resumed when market conditions allow.

In 2009 we will focus primarily on cash conservation. We aim to increase our cost competitiveness through aggressive operating cost reduction, capital management and continuing efficiency improvements, while leveraging our strategic location and strong customer relationships to maintain sales and production tonnages and to increase market share in our Traditional and Natural Markets. While focus in 2009 will be firmly on our existing operations, the Board and management retain the flexibility to resume investment in our growth projects when the markets recover, and we have now taken all the necessary steps to be able to react swiftly when that time comes. We have demonstrated in 2008 that we have the operational, financial and risk management capabilities required to manage this strategy effectively.

Dividend

It is the view of the Board that Ferrexpo should pay modest consistent dividends based on continuing profitability and that the business has sufficient operational flexibility to respond to the demands it will face in 2009. The Group has operations which are cash generative and can both support returns to shareholders and form a platform to finance the development of its significant world class undeveloped reserves. 

The Board believes it is able and appropriate to continue with a dividend in line with prior years, reflecting the flexibility of the business to both develop its world class undeveloped reserves in normal times and slow its investment plans and maintain dividends where there is a more uncertain outlook. The Directors therefore recommend a dividend in respect of profits generated for the Group in 2008 of 3.3 US cents per Ordinary Share for payment on 22 May 2009 to shareholders on the register at the close of business on 17 April 2009. The dividend will be paid in UK pounds sterling with an election to receive US dollars.

Outlook 

The outlook for the iron ore market remains uncertain in the short term, as the effects of the global economic crisis continue to be felt in 2009. Ferrexpo remained cash flow positive and profitable during the final quarter of 2008, despite weaker demand for iron ore and steel worldwide. Spot prices for iron ore stabilised to some extent in December, as production cuts throughout the world began to take effect and steel companies began to conclude their destocking exercises. The Group has been able to take advantage of this trend, using its strong marketing reputation to offset weaker Traditional and Natural Markets with increased seaborne sales. The Group is exposed to the outlook for iron ore pricing, but because of its specific logistical advantages and customer relationships, the Board believes that it will be able to access the seaborne market to compensate for weakness in its traditional markets and continue to trade profitably. Pressure on the Group's margins resulting from decreasing iron ore prices is likely to be partially offset by a decline in production costs throughout the industry, and particularly in Ukraine, given the weakening local currency. 

During the course of 2008, volatility in the global economy and changes in the industry's operating environment reduced growth expectations for our business in the near term. In response to these events and at a time of uncertain short term demand the Board has taken care to ensure that the options to develop our substantial iron ore reserve base and to increase production and product quality at our existing operation are preserved, whilst minimising cash outflow. We expect these actions to underpin the business' sustainable performance and protect shareholder value now and in the longer term. We remain focused on building our organisation, adding capability in project execution and consolidating our strengths in best practice mining and marketing in preparation for the resumption of growth.

Despite spot prices falling as much as 70% from their peaks earlier in 2008, iron ore was one of the better-performing commodities over the year. We remain of the view that notwithstanding the current instability in world markets, the fundamentals of steel demand remain strong in the medium and long term, driven by growth from developing and industrialising nations.

Ferrexpo was able to maintain positive margins during the first two months of 2009, despite ongoing weakness in the global iron ore market. The substitution of additional seaborne spot sales for weaker contract volumes in our Traditional Markets enabled the Group to continue to trade profitably during the period, and we are well placed to increase market share in 2009.

Michael Abrahams CBE DL                        Kostyantin Zhevago

Chairman                                                    Chief Executive Officer

  BUSINESS REVIEW

Summary

The Group achieved a record financial performance in 2008 in the face of challenging economic conditions in the latter part of the year. Operational and managerial flexibility allowed us to both outperform our own targets in production, sales and price up to October and then to quickly adapt to the changing circumstances in the iron ore market in the final months of the year. 

Operational goals set for the year were achieved, with marked improvements in efficiency and product quality. Production levels ran at record rates through most of the year and were ultimately comparable to 2007 following a decision to reduce production in November and December in response to declining iron ore demand, in order to both preserve cash and optimise unit production costs at a time of uncertainty.

Among the world's smaller iron ore producers, we are very favourably located. The Group's marketing activities in 2008 built on our status as the iron ore supplier of choice for our key Traditional and Growth Markets. We achieved contract price settlements ahead of the record benchmark prices set early in the year and were subsequently also able to react flexibly to reductions in off-take levels in the last two months of the year.

In 2008, 88.0% (by volume) of the Group's iron ore products were exported. Approximately 87.7% of our 2008 sales by volume were made under long term supply agreements with iron and steel producers. It is our strategy to increase the number and duration of such contracts and build customer relationships and this continued through 2008. The Group's principal export markets are Central and Eastern Europe and China. At the end of 2008, 8.1 million tonnes of iron ore were committed under long term framework contracts with major customers.

The Group holds the exclusive licences to a world class iron ore resource, uniquely positioned close to our core markets. Our expansion plans were advanced significantly in 2008 with the completion of the Detailed Feasibility Study ('DFS') for the new Yeristovskoye mine and the DFS for the project to upgrade the capacity and quality of product coming from our existing well-established operation. This progress has included the commencement of stripping activities and further capital investment to increase capacity in the existing mine. Following the hiatus in the iron ore market in late 2008, these projects have been slowed to retain financial flexibility but are being advanced at a low level to preserve their value pending a clearer market outlook for 2009.

Our primary focus in 2009 will be on the Group's existing mining operations. The Group's operating subsidiary, Ferrexpo Poltava Mining ('FPM'), performed strongly in 2008, demonstrating an established trend of continuous improvement in operating efficiency, product quality and production output. These key drivers will remain a focus in 2009 combined with further cost reduction programmes targeting operating costs and optimising capital expenditure. These programmes will be helped by both a lower local currency and more available capacity at our key suppliers. We expect that this, together with significantly reduced energy prices, will help contain cash costs of production in 2009.

Strategy

The Group holds the licences to a world class iron ore resource and is positioned close to core steel-producing markets. The operations have been producing continuously for several decades. The strategy remains to exploit these reserves whilst maximising the return on the current operations utilising our strategic location, customer relationships and low cost base. 

Our long term plans are to commercialise our extensive undeveloped ore deposits in a prudent and financially responsible manner, whilst ensuring continuous production growth and cost competitiveness in our existing operations. Our priorities are to maintain and improve operational, financial and risk management capabilities within our existing operations and our development projects in order to maintain flexibility throughout the economic cycle.

Operations 

The mining operation at FPM is well developed and has produced iron ore on an uninterrupted basis for over 30 years. The mining and processing operation is situated on a large iron ore deposit located in Ukraine which is substantially under-exploited.  

Our principal business is the mining, processing and sale of iron ore in the form of pellets, used in the production of steel. The Group owns and operates an integrated mining and processing facility, comprising an open cut iron ore mine, concentrating facility and pelletising plant in the city of Komsomolsk. Our operations are fully integrated from the mining of ore through to the production of pellets. All production is converted into pellets in our own facilities. Third party iron ore concentrate is also converted into pellets to utilise surplus plant capacity where this provides adequate margins.

The FPM operations are located on the Dnieper River in Ukraine in close proximity to our major customers in Central and Eastern Europe. FPM has access to both the Black Sea for ocean borne shipments throughout the world and to extensive rail networks throughout Europe.

To access the large and growing market outside Ukraine, the marketing of iron ore pellets for export is managed by the Group's specialist sales and marketing arm, based in Switzerland with branches in Kiev and Shanghai.

Operating environment - Ukraine

Ukraine remains a beneficial place to conduct business, despite well-publicised issues such as political instability, the natural gas dispute with Russia and speculation as to the wider effects of the Russia-Georgia war on the region. The Group has operated there continuously through Soviet rule, independence from Russia and the Orange Revolution in 2004. The Ukrainian political sphere tends not to interfere in Ukrainian business, and the workforce is for the most part well educated and cost competitive. 

Ukraine is a parliamentary presidential republic and formerly part of the Soviet Union. The ruling coalition government broke up in September and a general election is likely to take place in 2009. It is noteworthy that Ukraine has continued to observe peaceful democratic political processes regardless of government instability. The country intends to join the European Union as soon as it is able to do so. Ukraine was granted a US$16.4 billion International Monetary Fund loan in late 2008 in response to the significant effects of the global financial crisis on its economy. This loan prescribes several conditions which are likely to result in increased fiscal and economic discipline in Ukraine, which is likely to benefit our business. Among others, these conditions include a prohibition on intervening in the market to support the Ukrainian currency, and more transparency around economic policy-setting.

Ukraine's economy is heavily reliant on the steel industry, and as a result the country saw strong growth and high inflation in the first half of 2008, followed by rapid contraction of the local metallurgical sector and the beginnings of a severe economic downturn in the second half. The Ukrainian steel industry is relatively high-cost and export-focused, and Ukraine has thus been more severely affected than many other steel-producing nations by the economic downturn. These developments are likely to have a positive effect on our cost base as Ukraine takes measures to ensure the survival of its mining and metallurgical industry.

The local currency (the Hryvnia) was informally pegged to the US dollar at approximately UAH5.05 per US dollar until early 2008. It has since weakened to approximately UAH7.70 per US dollar, as a result of continuing high inflation. The average exchange rate during 2008 was UAH5.29 per US dollar.

The country has seen high inflation in 2008, with the official domestic Producer Price Index ('PPI') increasing by 23.0%, and the Consumer Price Index ('CPI') increasing by 22.3%. The rate of annual increase in inflation peaked in July, and has since begun to moderate. 

Market environment

The demand for iron ore pellets is directly linked to steel demand which is closely correlated to the global economic cycle. As a result the demand for steel initially grew strongly in 2008 and then sharply reduced, bringing world output in line with 2007. In the latter part of 2008 the global banking crisis combined with a wider economic slowdown impacted the construction and automotive industries, reducing steel demand at an unprecedented rate. This overall weakening in demand has had a direct consequential effect on demand for iron ore generally with the impact flowing through to the Group in November. In response the Group and many of our competitors reduced supply significantly in the final months of the year.

  OPERATING REVIEW

Highlights 

• Iron ore pellet production from the Group's own ore only slightly lower at 8.6mt

• 8.5% increase in production of high quality (65% Fe) pellets 

• Substantial reductions in use of raw materials and energy per unit of output 

• Dewatering, infrastructure and power established at Yeristovskoye deposit

• Two draglines delivered and assembled

Production - Operating Statistics

					Change
('000t unless otherwise stated)			2008	2007	+/-	%
Iron ore mined			27,763	28,934	(1,171)	(4.1)
	Fe content	%	30.2	29.9	0.3	1.0
Iron ore processed			27,582	29,024	(1,442)	(5.0)
Concentrate produced ('WMS')			10,459	10,651	(192)	(1.8)
	Fe content	%	63.4	63.5	(0.2)	(0.2)
Floated concentrate			6,167	5,620	547	9.7
	Higher grade		4,375	4,032	343	8.5
	Fe content	%	67.1	67.3	(0.2)	(0.3)
Purchased concentrate			386	266	120	45.1
	Fe content	%	65.2	64.1	1.1	1.7
Purchased iron ore			276	172	104	60.5
Pellets produced from own ore			8,608	8,793	(185)	(2.1)
	Higher grade		4,014	3,701	313	8.5
	Fe content	%	65.0	65.1	(0.1)	(0.2)
	Lower grade		4,594	5,092	(498)	(9.8)
	Fe content	%	62.2	62.2	0.0	0.0
Pellets produced from purchased concentrate and ore			427	279	148	53.1
	Lower grade		427	279	148	53.1
	Fe content	%	62.2	62.2	0.0	0.0
Total pellet production			9,035	9,072	(37)	(0.4)
Pellet sales volume			8,711	9,261	(550)	(5.9)
Gravel output			2,751	3,162	(411)	(13.0)
Stripping volume		000'm3	20,573	18,664	1,909	10.2

The Group's operations continued to focus on the improvement of product quality and operating efficiency in 2008. Record production was achieved for most of the year and following demand reductions in November and December the operations responded quickly, reducing unit costs and temporarily reducing production whilst pushing up pellet quality. 

The managed reduction in output resulted in a slight in a decline in total pellet production of 0.4% for the full year after a record 10 month period to October. 

As a result the mine produced 27.8mt of iron ore in 2008, 4.0% less than in the previous year. Selective mining techniques increased the proportion of rich (K22) ore mined by 3.0%. This increase in the overall quality of the ore increased the operational efficiency of the concentrating plant, thereby improving pellet quality as measured by the proportion of higher grade pellets produced.

As a result of the above actions, for the fifth year in a row we were able to substantially increase our production of higher quality 65% Fe pellets. Production of 65% Fe pellets from own ore increased by 8.5% to 4.0mt, and now constitutes 44% of FPM's total production (42% in 2007), consistent with our commitment to quality enhancement and our 'value in use' marketing strategy.

427.6kt of pellets were produced from purchased ore and concentrate in 2008 to fill our surplus pelletising capacity. This occurred in the first nine months of the year when this generated sufficient margin but was scaled down due to the slowdown in demand and the consequent switch to the sale of the much higher margin pellets produced from our own ore. 

Business Improvement Programme ('BIP')

Following a three year period of skills transfer by GPR Dehler the managers and employees of FPM are now leading the successful BIP forward. We have completed a wide range of BIP workshops, building on the culture of continuous improvement. We have continued to see positive results from the BIP, which continues to be a priority for management in respect of both short and long term objectives and KPIs. FPM continues to move towards global best practice across its operations. 

Operating costs

Operating costs continued to benefit from efficiency gains in the production process and from reducing oil and steel prices along with local currency devaluation late in the year.

BIP-related and other efficiency gains enabled us to reduce the rates of consumption of energy and raw materials in 2008. Consumption per tonne of pellets produced from own ore for electricity, natural gas and diesel all improved by between 1% and 3%. Efficiency programmes also resulted in a reduction of the average number of employees at FPM by 10% in 2008, although as a result of management actions no forced redundancies were necessary during the year. Overall, 8,243 people were employed by FPM as of 31 December 2008. 

Growth projects

As previously outlined, the Group has three major growth projects:

• The expansion of the current GPL open pit mine

• The GPL concentrator plant upgrade 

• The new Yeristovskoye mine, processing plant and pelletising facility

We also have planned developments at the Belanovskoye and Galeshchina deposits which are less advanced.

Significant work has been completed in 2008 to allow access to the substantial undeveloped resources located adjacent to the existing operations. The DFS was completed for the Yeristovskoye project in September and initial low level stripping operations commenced in December along with the establishment of a small project team, and a legal and managerial infrastructure. The scope of the initial pre-stripping operation has been scaled down at the current time pending further reviews in 2009; however operational expenditure and small future commitments are being made at a limited level to enable the value of the project to be maintained and to minimise delays to the original development schedule.

The capital expenditure for these projects was estimated at the peak of the commodity cycle and consequently we believe that DFS capital costs will be significantly reduced when final commitments to these projects are made. We intend to recommence our growth projects as soon as circumstances allow, and we expect full value to be realised for the expenditure to date.

DTP Terrassement S.A. (France) ('DTP') and the project management alliance with Worley Parsons Europe Limited ('WP') are being maintained at a low level of activity in order to retain growth options. We are also supporting a minimal corporate subsidiary presence in Ukraine for DTP and WP as a base from which to rebuild project momentum should the outlook improve during 2009.

Activity continues at the pushback of the current GPL open pit. This project was on schedule and within budget prior to it being scaled back in October and remains a priority once markets stabilise. The expansion enables us to take advantage of currently under-utilised processing capacity. It will increase production of 65% Fe pellets by approximately 15%. Of the original US$158 million of capital expenditure committed to this project in 2007, US$58 million remains to be invested, primarily on stripping works. 

The DFS for the GPL concentrator plant upgrade was also completed in September. This project will enable all the Group's mined ore to be processed into 65% Fe pellets and will potentially allow the production of Direct Reduction ('DR') grade (68% Fe) pellets. 65% Fe pellets enjoy more robust demand, and DR pellets would constitute a new premium product for Ferrexpo which we could sell into world markets and in particular the Middle East, a growth market which can be easily supplied. 

A Preliminary Feasibility Assessment for the Belanovskoye mine was completed in September, and work also continued on development options for Galeshchina, the next deposit to the north of Belanovskoye. The Yeristovskoye and Belanovskoye growth projects both remain a priority for the Group, as they continue to represent an attractive option for the expansion of the Group's existing business as they will enable access to our extensive uncommercialised resources. Because these developments will take place on the same ore body currently being exploited by the Group and their situation adjacent to our existing logistics infrastructure, these investments represent low risk additions of new iron ore capacity compared to many of the iron ore projects that have been announced worldwide.

Strategic Investor Programme

During 2008 we identified several potential strategic investors. This was done in order to share the risk of our development projects, which are substantial for a company of Ferrexpo's size, by providing some of the additional funding and execution capability required to progress our growth plans on an aggressive timetable. This reached an advanced stage but was placed on hold following severe falls in the valuations ascribed to commodity based companies in late 2008.

All of the potential Strategic Investors on the shortlist have reiterated their willingness to continue to participate in the process once market conditions improve. 

Marketing 

Marketing performance in 2008

In 2008, 88.0% of our output by volume was exported (2007: 81.0%) The share of pellet sales to Ukrainian customers decreased from 19.0% in 2007 to 12.0% in 2008, primarily as a result of the collapse of the Ukrainian steel industry and the consequent drop in local demand for iron ore from late 2008. We increased export sales in response to this by actively selling into the spot market in Asia and increasing shipments to long term export customers. Domestic Ukrainian sales are made on an ex-works basis while export sales are usually made on a Delivered at Frontier ('DAF') or Free on Board ('FOB') basis. Of the total exported by the Group in 2008 by value, 17.9% was sold into China, with the remainder sold into Central and Western Europe and Turkey. An analysis of sales by market is contained in note 6 to the accounts.

The following table shows our principal export markets for iron ore pellets for the years ended 31 December 2008 and 2007 (by volume):

('000t)	2008	2007
Traditional Markets	5780.8	5,900.7
Natural Markets	323.2	187.9
Growth Markets	1,558.4	1,576.0
Total	7,662.4	7,664.6

Approximately 87.7% of our 2008 sales by volume were made pursuant to long term supply contracts, a lower level of contract sales to that seen in 2007 due to increased spot selling in the fourth quarter in response to deferrals from contract customers. We commenced our first long term contract with a Turkish steel mill in 2008, and have continued to supply our major customers in Eastern and Central Europe and China, building on our track record of solid customer relationships. 

We announced in late October that we had received requests to defer deliveries from several of our contract customers from the fourth quarter of 2008 to the first quarter of 2009, as a result of rapidly falling demand for steel. These deferrals came from customers in all of our market segments, and particularly in Ukraine, Traditional Markets and Growth Markets (see definitions below), and resulted in lower overall full year 2008 sales. 

As a result, we sold some iron ore pellets in Q4 on shorter-term contracts consistent with the terms of trade in these markets, or on the spot market. In the fourth quarter we therefore increased spot sales to mitigate the effect of the deferrals from contract customers, although these sales were made at lower prices than those under contract. We expect that the proportion of sales that will be made under long term contracts in 2009 may be lower than in 2008, as a result of weaker steel demand in the first quarter. We nevertheless remain committed to the strategy of maintaining a high level of the Group's sales under long term contract. 

We are well positioned to increase market share in 2009 particularly with our contract customers in our Traditional Markets, as a result of our proximity to these customers. Our ability to provide small-packet 'just-in-time' deliveries to these customers is an attractive quality to those companies that are engaged in careful inventory management. Ferrexpo will continue to sell aggressively into these markets and as a small supplier aims to maintain output by improving market share in these key regions.

We will also continue to focus on achieving higher prices through enhanced pellet quality and a better understanding of our customers' requirements of our products. This is necessary in order to capture the maximum price relative to our competitors' delivered cost to the customer on a 'value to the customer' basis.

Traditional Markets

Our 'Traditional Markets' are those markets that we have supplied historically, and in which we enjoy a competitive advantage based on our location. These include Austria, Ukraine, Poland, Slovakia, Romania, Bulgaria and Russia. The former CIS countries within the Traditional Markets have been particularly affected by the adverse conditions in global commodities markets, with Ukraine the worst affected, given its steel export focus and relatively high steel production costs. We believe that continued growth in per capita steel consumption in many of these markets is likely to resume once stability returns to the global economy, as most of them are effectively re-industrialising. Total sales to Traditional Markets in 2008 were 5,780.8kt, a decrease of 2.0% compared to 2007.

Natural Markets

'Natural Markets' are relatively new markets for us in regions where we believe we have a competitive advantage which is yet to be exploited. This segment includes Western Europe, Turkey and the Middle East. Turkey has plans to significantly increase its steel making capacity, and FPM's proximity across the Black Sea affords a significant mutual advantage to both the Group and iron ore buyers in Turkey. We agreed our first long-term supply contract with a steel mill in Turkey in 2008, and this segment represents a major target for future sales growth. We are building commercial and technical relationships in the Middle East as a base for our future planned sales as we continue to improve product quality. 

Growth Markets

'Growth Markets' are those which offer to add new and significant tonnage expansion potential to our customer portfolio. Currently China is the major target, where five long term contracts are in place providing a solid base for future sales growth. We have a shorter shipping distance to these markets than competitor iron ores from Brazil. The region also provides the primary source of demand for spot market business, which began to see activity again in December 2008 following a period of de-stocking by Chinese steel mills. 

Logistics

In 2008, we made significant progress in expanding our delivery chain logistics capability in order to meet current and future growing customer demands. This is a critical contributor to our long term market shares and margins. Our 49.9%-owned dry bulk minerals Panamax terminal on the Black Sea (the 'TIS-Ruda Terminal-Yuzhny') is functioning well, and has proven an asset critical to our efforts to increase seaborne sales in the face of Traditional Market demand weakness. We will also continue our programme of railcar purchases once development capital expenditure is resumed.

Our logistics strategy is to manage as much of the delivery chain to our customers as possible in order to ensure on-time supply of the contracted quality of product at the lowest cost. The total scope of our delivery logistics chain includes rail, trans-shipment (loading and unloading), barge and ocean vessels. We expect that little material capital will be expended in this area until general economic conditions improve. 

Pricing

We achieved an average DAF/FOB price for the pellets we sold in 2008 of US$124.6 per tonne, an increase of 72% over the average achieved price for 2007 (US$ 72.3 per tonne). Most of our export sales are based on annually negotiated prices contained in supplements to our long term supply contracts. A proportion of sales tonnage is linked to the international seaborne traded iron ore benchmark price ('Benchmark Price') movement agreed between the major iron ore producers and specific Western European or Asian steel producers for a given year. In 2008 we realised a premium to the Benchmark Price, after adjustments for the impact of freight, quality, proximity and logistics. The Benchmark Price settlement in April 2008 reflected an 86.7% increase on the prices for iron ore pellets in the previous year. Variations in our achieved price stem from price variations of pellets sold into different geographical segments, as well as the mix between our 62% Fe pellets and our 65% Fe pellets (which attract a premium). In the fourth quarter of 2008, in order to maintain production and margins, we made a higher proportion of spot market sales than previously planned. These sales were at prices below the contract price level, which also affected the 2008 average achieved price.

Pellet premium

The iron ore pellet premium is the price paid by purchasers to producers of iron ore pellets such as the Group in excess of the price of iron ore sinter fines, to reflect the fact that pellets have undergone some processing. The Group's pellets are therefore an intermediate product between raw ore and iron, providing productivity gains in blast furnaces. Our pellets require less coke in the steelmaking production process, beneficial when this is in tight supply or relatively highly priced. The pellet premium also reflects other benefits of using pellets, most notably their advantages for transporting and increased environmental concerns with sinter production, particularly for blast furnace operators in the European Union. 

The iron ore pellet premium reached a record high in Europe of US$0.86 per dry metric tonne unit (dmtu) following the price settlements in April 2008. We expect the premium for our pellets to decline in 2009, as pellets tend to trade at a very significant premium to iron ore fines only when the industry is in a state of undersupply as was the case in the first part of 2008. The efficiency gained through the use of pellets becomes less of a factor when blast furnaces are not running at full capacity, as is the case currently. Nonetheless, any decline in the pellet premium is likely to be moderated by the transport and environmental benefits of using our pellets.

2009 Marketing strategy

Demand in 2009 will depend on the continued growth of steel output in China, the resumption of steel production in Ukraine, and the end to the de-stocking of iron ore inventories by steel mills and a return of global steel output to sustainable levels. We remain well placed to continue to produce close to capacity and to supply our key customers because of our proximity to them. We have made significant progress already in increasing our market share to these customers.

Economic conditions are also likely to result in decreased costs in the industry, as inflationary pressures ease. This will be a partial reversal of the changes to the cost structure of the iron ore industry witnessed over the past five years as a result of declining availability of direct-charge lump ore and the fact that incremental iron ore can only be supplied by increasingly distant and relatively lower-quality ore bodies. The cost of the marginal tonne is therefore expected to fall in 2009, providing some relief to the industry. In keeping with this trend, the Group's cash costs in December were 18.0% lower than the average for the year.

In contrast to past economic slowdowns and mining industry contractions, the supply response to the current crisis has been swift and decisive. This bodes well for an equally swift recovery, as it avoids the build up of inventories which have historically prevented the recovery of commodity prices once growth conditions resume. In the final quarter of 2008, steel producers reduced the amount of iron ore that they purchased in an effort to de-stock their inventories. Once this process is complete, reduced supply and low inventories should give support to stronger iron ore prices.

Our sales strategy in 2009 will differ from that in 2008, as we react to deal with the downturn in the global economy. We will maintain our strong customer relationships and, where possible, use them to increase our market share position in our Traditional and Natural Markets to capitalise on smaller lot deliveries to customers. We believe that, for customers throughout Central Europe, our products represent an attractive alternative to those of major seaborne suppliers due to the lower costs of transporting pellets over a shorter distance from Ukraine, together with an ability to provide many customers with a continuous small-parcel delivery chain. We will also seek to maximise sales volumes where possible by taking advantage of potential opportunities for seaborne spot sales.

Corporate social responsibility

In 2008, we set out to entrench a behavioural safety culture at FPM. Notwithstanding three tragic deaths during the year, considerable progress has been made in this regard. Our goal in 2009 is to continue to strive for improvements across all areas of CSR and especially safety. We continue to work with Du Pont Safety Resources to achieve these priority objectives.

  FINANCIAL REVIEW

Highlights

• Revenue up by 60.0% to US$1,116.9 million
• EBITDA up by 104.8% to US$503.9 million

• Underlying earnings1 up by 129.0% to US$347.4 million 

• December C1 cash costs of production US$34.7/t - 18.0% below 2008 average of US$42.3/t

• Free cash flow of US$300.3 million 

• Sufficient headroom: US$87.8 million of cash available at year end

• Dividend of 3.3 US cents per share

Revenues

The Group's revenue for 2008 increased by US$418.7 million to US$1,116.9 million, reflecting growth of 60.0% compared with 2007. This strong performance was due to increased production of 65% pellets (up 241kt) and better average pellet prices which rose by 72.3% to US$124.6 per tonne on a DAF / FOB basis compared with US$72.3 per tonne in 2007. Sales demand reduced in the fourth quarter of 2008 and sales volumes for the year were 8,711kt (2007: 9,261kt). The proportion of sales of our higher priced 65% Fe pellets increased to 44.6% for 2008 from 40.7% in 2007.

Costs and margins

C1 cost per tonne of pellets produced is the principal measure of operating performance of the business. C1 cost is defined as the cash production cost from own ore divided by the total volume of production. The majority of our C1 costs are incurred in Ukrainian Hryvnia. C1 costs are expressed in dollars using the weighted average exchange rate which applied in the year. In 2008 we achieved an average C1 cash cost of production from own ore of US$42.34 per tonne compared with US$31.79 per tonne in 2007.

During 2008, C1 costs increased for the first 10 months of the year, principally as a result of domestic inflation, rising oil costs and increasing commodity prices, particularly steel which is used in grinding media. In the later part of the year, costs fell significantly as lower oil and commodity prices fed through from our suppliers from September onwards. 

The Ukrainian Hryvnia depreciated during 2008 from 5.05 to the US dollar at the beginning of 2008 to 7.70 at the year end. The majority of this decrease occurred in November and December 2008. As a result our C1 costs of production fell significantly in December to US$34.7 per tonne from the peak of US$51.0 per tonne reached in October 2008.

Selling and Distribution and Administration Costs

Selling and Distribution costs represent principally the cost of freight in bringing the goods to the domestic Ukraine border. For certain sales, the Group incurs additional costs to bring the product to the customer. Selling and Distribution costs increased in 2008 on broadly flat volumes as a result of an increased proportion of sales made on CFR terms and increases in domestic freight tariffs, principally rail tariffs in Ukraine. Rail tariffs increased by 76% during 2008 in local currency terms and by 16% in US dollar terms.

General and Administration costs include one off charges as a result of the IPO in 2007 and reorganisation costs incurred in the later part of 2008. Excluding these one off items, these costs now reflect the new sustainable level post the Initial Public Offering.

Other income and expenses

Additional provisions for uncollectable debts or slow moving receivables have been made at the end of 2008, principally from customers in the CIS resulting from the downturn in the steel market increasing costs in this area.

Currency translation 

The functional currency of FPM is the Ukrainian Hryvnia. It is required that the gains and losses on foreign currency denominated operating assets that result from exchange rate movements are recorded as a separate item in the profit and loss account. As a result of the weakening Hryvnia FPM made gains of US$29.3 million on foreign currency denominated net assets.

FPM has incurred foreign currency denominated financial liabilities to finance its expansion. The assets acquired are valued in local currency at historical costs and have not been revalued as a result of the weakening currency. The associated revaluation of financial liabilities at the year end resulted in pre-tax losses of US$72.8 million. 

Write Offs and Impairment Losses

Investments by the Group in ATOL, an oil and gas exploration company, and Stakhanov, a rail car manufacturer have been reflected in the books at current market value at 31st December 2008. Due to the low level of the markets

generally and the low values currently attaching to oil and gas companies in Ukraine, this resulted in combined impairments on these assets of US$27.3 million.

Negative Goodwill

During November and December 2008 FPM exercised its call option to repurchase 6.2% of its issued share capital at a cost of US$11.0 million from DCM Decometal International Trading GmbH ('DCM'). This resulted in an increase in the Group's ownership of FPM from 90.9% to 97.1%. As a result the value of the net assets previously owned by minorities was credited to the profit and loss account of the Group in accordance with IFRS and resulted in US$35.0 million of negative goodwill. 

Finance costs and Borrowings

Net finance costs reflect lower average debt during 2008 and lower average LIBOR rates which attach to the majority of the Group's borrowing facilities. In October, the Group drew down all but US$5.0 million of its available financing in order to ensure availability of funding. This resulted in gross indebtedness of US$307.9 million, leaving the Group holding US$87.8 million in cash and on deposit as at the year end. Under the terms of the Group's principal loan facility (a US$335 million pre-export finance facility), it is required to repay US$6.1 million per month in 2009. At the 2009 year end this facility will have partly amortised and it will continue to amortise through to December 2010 when it expires. 

In line with its treasury policy, the group currently places up to a maximum of 50% of its surplus cash on deposit within Ukraine in US dollars depending on market conditions.

Taxation

The Group generates taxable income mainly in Switzerland and Ukraine. The tax charge to profits in the year was 16.6%, the same level as in 2007. Full details of the deferred tax movements are contained in note 18 to the accounts. 

Earnings

As a result of the strong operational performance described above, underlying earnings increased by 129.0% to US$347.4 million (2007: US$151.7 million). Along with the lower number of shares in issue following the share buyback, this improved EPS significantly. Fully diluted EPS rose to 48.46 US cents per share in 2008 (2007: 20.33 US cents per share). Underlying EPS was similarly higher at 57.58 US cents per share in 2008 (2007: 24.86 US cents per share). 

Share repurchase

In September 2008, the company repurchased 25.3 million of its own shares at an average price (including applicable costs and duties) of 170p per share. Total consideration including costs amounted to US$77.3 million. These shares are held in treasury.

Balance sheet and cash flow

The cash flow of the business is summarised in the table below:

US$ millions	Year ended 31.12.08	Year ended 31.12.07
EBITDA	503.9	246.1
Working capital movements	(33.8)	(1.8)
Net financial payments	(15.4)	(24.0)
Income tax paid	(67.2)	(32.0)
Movement in provisions and other non-cash items	(16.6)	0.5
Net cash flow from operating activities	370.9	188.8
Sustaining capital expenditure	(70.6)	(49.8)
Free cash flow	300.3	139.0
(Paid for)/received from:    Expansionary projects	(205.8)	(54.6)
Purchase of available for sale investments	(0.3)	(12.1)
Loans to associates	(4.0)	(5.0)
Distributions including to minorities and share repurchases Net IPO proceeds	(126.3) -	(69.8) 153.4
Other receipts	2.5	10.2
Currency Translation Differences	(68.9)	(0.5)
Movement in Debt	(102.5)	160.6

The strong operating results increased EBITDA by 104.8% to US$503.9 million, reflecting an increase in EBITDA margin to 45.1 % in 2008 from 35.2% in 2007.

Net cash flow from operating activities amounted to US$370.9 million in 2008 (2007: US$188.8 million). Net Financial Indebtedness has increased to US$220.1 million at 31 December 2008 from the low levels of indebtedness in 2007 (31 December 2007: US$117.9 million). Operating cash flow was invested in new mining equipment for the existing operations amounting to US$70.6 million, and in the Yeristovskoye development project and stripping operations for the GPL mine which together amounted to US$205.8 million.

The Group's share buyback referred to above, together with distributions to shareholders of the Group, the payment of US$11.0 million for the repurchase of FPM shares from DCM and distributions to FPM minorities of US$1.2 million amounted to $126.3 million in total. 

At the year end the Group held cash balances of US$87.8 million and had undrawn credit facilities of US$5.0 million.

  ACCOUNTS

Consolidated income statement

US$ 000	Notes	Audited Year ended 31.12.08	Year ended 31.12.07
Revenue	3	1,116,854	698,216
Cost of sales	4	(434,238)	(335,936)
Gross profit		682,616	362,280
Selling and distribution expenses		(152,528)	(100,614)
General and administrative expenses		(67,185)	(44,308)
Other income		6,387	4,844
Other expenses		(38,040)	(5,096)
Operating foreign exchange gain		29,309	-
Operating profit from continuing operations before adjusted items		460,559	217,106
Write-offs and impairment losses		(27,326)	(1,568)
Share of gains of associates		1,003	687
Negative goodwill		35,049	-
Initial public offering costs		(4,120)	(34,004)
Gain on disposal of available-for-sale investment		1,571	4,714
Profit before tax and finance		466,736	186,935
Finance income	5	2,467	3,242
Finance expense	5	(20,834)	(25,950)
Non-operating foreign exchange loss		(72,788)	(3,467)
Profit before tax		375,581	160,760
Tax	6	(62,533)	(26,725)
Profit for the year		313,048	134,035
Attributable to:
Equity shareholders of Ferrexpo plc		292,436	124,076
Minority interest		20,612	9,959
		313,048	134,035
Earnings per share:
Basic (US cents)	7	48.60	20.41
Diluted (US cents)	7	48.46	20.33

Dividends:
Proposed ordinary dividend per share (US cents)	7	3.3	3.2
Proposed aggregate dividend (US$ 000)	7	20,000	19,449

Consolidated balance sheet

US$ 000	Notes	Audited As at 31.12.08	As at 31.12.07
Assets
Property, plant and equipment		412,440	364,545
Goodwill and other intangible assets		103,755	156,827
Investments in associates		18,640	17,637
Available-for-sale financial assets		4,435	47,134
Other non-current assets		10,116	15,179
Deferred tax asset		14,043	8,107
Total non-current assets		563,429	609,429
Inventories		61,270	56,545
Trade and other receivables		58,157	43,575
Prepayments and other current assets		19,587	10,773
Income taxes recoverable and prepaid		5,835	5,350
Other taxes recoverable and prepaid		57,285	52,362
Available-for-sale financial assets		650	2,941
Cash and cash equivalents	9	87,822	86,966
Total current assets		290,606	258,512
Total assets		854,035	867,941
Equity and liabilities
Share capital		121,628	121,628
Share premium		185,112	188,566
Other reserves		(330,714)	14,258
Retained earnings		470,098	216,616
Equity attributable to equity shareholders of the parent		446,124	541,068
Minority interest		11,769	45,854
Total equity		457,893	586,922
Interest bearing loans and borrowings	9	231,373	146,008
Trade and other payables		570	2,666
Defined benefit pension liability		12,940	16,169
Provision for site restoration		1,071	1,746
Deferred tax liability		5,298	1,025
Total non-current liabilities		251,252	167,614
Interest bearing loans and borrowings	9	74,523	54,284
Trade and other payables		35,033	25,380
Accrued liabilities and deferred income		14,470	13,812
Shares redemption liability		-	10,036
Income taxes payable		14,439	7,717
Other taxes payable		6,425	2,176
Total current liabilities		144,890	113,405
Total liabilities		396,142	281,019
Total equity and liabilities		854,035	867,941

Consolidated cash flow statement 

US$ 000	Notes	Audited Year ended 31.12.08	Year ended 31.12.07
Net cash flows from operating activities	10	370,943	188,846
Cash flows from investing activities
Purchase of property, plant and equipment		(276,264)	(104,352)
Proceeds from sale of property, plant and equipment		2,016	1,896
Purchase of intangible assets		(1,597)	(435)
Deposits lodged at banks		-	9,011
Purchases of available-for-sale securities		(266)	(12,126)
Proceeds from sale of financial assets		-	5,704
Interest received		2,472	4,805
Acquisition of minority interest in subsidiaries		(11,048)	-
Loans provided to associates		(4,000)	(5,000)
Net cash flows used in investing activities		(288,687)	(100,497)
Cash flows from financing activities
Proceeds from borrowings and finance		172,143	175,244
Repayment of borrowings and finance		(69,412)	(276,084)
Dividends paid to equity shareholders of the parent		(38,954)	-
Dividends paid to minority interest		(1,186)	(786)
Distribution under 50/50 tax ruling		-	(5,000)
Proceeds from issue of share capital to minorities		2,123	-
Proceeds from issue of share capital in Ferrexpo plc:
Initial public offering proceeds		-	202,072
Non-initial public offering proceeds		-	99
Initial public offering costs		-	(48,648)
Share buy back		(77,260)	(64,055)
Net cash flows used in financing activities		(12,546)	(17,158)
Net increase/(decrease) in cash and cash equivalents		69,710	71,191
Cash and cash equivalents at the beginning of the year		86,966	16,236
Currency translation differences		(68,854)	(461)
Cash and cash equivalents at the end of the year		87,822	86,966

  Notes to the Consolidated Financial Information

Note 1: General information

The financial information for the year ended 31 December 2008 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The audited statutory accounts for the year ended 31 December 2007 have been delivered to the Registrar of Companies and those for 2008 will be delivered following the Company's annual general meeting convened for Tuesday, 19 May 2009.

The auditor has reported on the statutory accounts for year ended 31 December 2008. The auditor's report was unqualified.  

Note 2: Summary of significant accounting policies

Whilst the preliminary announcement has been prepared in accordance with International Financial Reporting Standards ('IFRS') and International Financial Reporting Interpretation Committee ('IFRIC') interpretations adopted for use by the European Union and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The Board approved the full financial statements that comply with IFRS on Monday, 23 March 2009. The financial statements have been prepared under the historical cost convention as modified by the recording of pension assets and liabilities and the revaluation of certain financial instruments.

The accounting policies applied are consistent with those adopted and disclosed in the Group's annual financial statements for the year ended 31 December 2007 except for the following.

The Group has adopted the following new and amended IFRS and IFRIC interpretations as of 1 January 2008.

International Financial Reporting Interpretations Committee (IFRIC)         Effective date 

• IFRIC 11    (IFRS 2) Group and treasury share transactions                        1 January 2008

• IFRIC 14     (IAS 19) The limit on a defined benefit asset, minimum             1 January 2008

                    funding requirements and their interaction                

Adoption of these standards did not have any effect on the financial performance or position of the Group. 

Changes occurring as a result of improvements to IFRSs

In May 2008 the IASB issued its first omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The Group has early adopted the following amendments to standards:

• IAS 1 'Presentation of financial statements'

• IAS 16 'Property, plant and equipment'

• IAS 23 'Borrowing costs'

• IAS 28 'Investment in associates'

• IAS 31 'Interest in joint ventures'

• IAS 36 'Impairment of assets'

• IAS 38 'Intangible assets'

The Group amended its accounting policies where applicable however the adoption of the above standards did not have an impact upon the financial position or performance of the Group.

 Note 3: Revenue

Revenue for the year ended 31 December 2008 consisted of the following:

US$ 000	Audited Year ended 31.12.08	Year ended 31.12.07
Revenue from sales of ore pellets:
Export	973,420	560,805
Ukraine	134,413	128,731
	1,107,833	689,536
Revenue from services provided	1,229	3,005
Revenue from other sales	7,792	5,675
	1,116,854	698,216

Export sales by geographical destination were as follows:

US$ 000	Audited Year ended 31.12.08	Year ended 31.12.07
Austria	298,209	160,324
Serbia	170,972	83,708
China	173,761	103,223
Slovakia	117,093	81,516
Czech Republic	80,746	55,617
Russia	42,606	-
Poland	31,708	23,766
Turkey	30,649	9,777
Bulgaria	12,189	27,389
Italy	10,340	3,418
Japan	34	5,029
Romania	-	7,038
Other	5,113	-
	973,420	560,805

During the year ended 31 December 2008 sales made to three customers accounted for approximately 52.5% of the net sales revenue (2007: 53.9%).

  Note 4: Cost of sales

Cost of sales for the year ended 31 December 2008 consisted of the following:

US$ 000	Audited Year ended 31.12.08	Year ended 31.12.07
Materials	98,020	98,733
Purchased ore and concentrate	47,491	17,587
Electricity	92,021	74,621
Personnel costs	68,781	47,402
Spare parts and consumables	32,034	14,663
Depreciation and amortisation	28,860	25,635
Fuel	41,517	28,086
Gas	34,106	25,576
Royalties and levies	6,764	8,570
Stock movement	(19,596)	(6,284)
Other	4,240	1,347
	434,238	335,936

Cost of sales is reconciled to 'C1' costs in the following manner:

US$ 000	Audited Year ended 31.12.08	Year ended 31.12.07
Cost of sales	434,238	335,936
Depreciation and amortisation	(28,860)	(25,635)
Purchased ore and concentrate	(47,491)	(17,587)
Processing costs for purchased ore and concentrate	(5,418)	-
Production cost of gravel	(375)	(2,101)
Stock movement in the period	19,596	(6,284)
Pension service costs	(5,058)	(1,877)
Other	(2,214)	(2,879)
C1 cost	364,418	279,573
Own ore produced tonnes	8,607,500	8,793,000
C1 cash cost per tonne $	42.34	31.79

'C1' costs represent the cash costs of production of own ore divided by production volume of own ore, and excludes non cash costs such as depreciation, pension costs and stock movement, costs of purchased ore, concentrate and production cost of gravel and excludes one-off items which are outside the definition of EBITDA.

  Note 5: Finance income/expense

Finance income and expenses for the year ended 31 December 2008 consisted of the following:

US$ 000	Audited Year ended 31.12.07	Year ended 31.12.07
Finance income
Interest income on bank deposits	1,448	2,457
Other finance revenue	1,019	785
	2,467	3,242
Finance expense
Interest expense on financial liabilities measured at amortised cost	(15,002)	(21,493)
Interest on defined benefit plans	(1,776)	(1,490)
Bank charges	(336)	(1,642)
Other finance costs	(3,720)	(1,325)
	(20,834)	(25,950)
Net finance expense	(18,367)	(22,708)

Other finance costs includes the unwinding of the discount on the site restoration provision, discounting of the share redemption liability and other costs.

Note 6: Income tax expense 

The income tax expense for the year ended 31 December 2008 consisted of the following:

US$ 000	Audited Year ended 31.12.08	Year ended 31.12.07
Current income tax	79,016	31,163
Deferred income tax	(16,483)	(4,438)
	62,533	26,725

The effective income tax rate differs from the corporate income tax rates. The weighted average of the statutory rate was 18.2% for 2008 (2007: 17.6%). This is calculated as the average of the statutory tax rates applicable in the countries in which the Group operates, weighted by the profit/(loss) before tax of the subsidiaries in the respective countries as included in the consolidated financial information. The effective tax rate is 16.6% (2007: 16.6%).

The changes in the weighted average income tax rate are largely due to a change in the profit/(loss) before tax in the various jurisdictions in which the Group operates.

  A reconciliation between the income tax charged in the accompanying financial information and income before taxes multiplied by the weighted average statutory tax rate for the year ended 31 December 2008 is as follows:

US$ 000	Audited Year ended 31.12.08	Year ended 31.12.07
Profit before tax	375,581	160,760
Notional tax computed at the weighted average statutory tax rate of 18.2% (2007: 17.6%)	68,496	28,234
50/50 Swiss tax ruling	-	(472)
Derecognition of deferred tax asset	4,359	-
Inflation related indexation of fixed assets for tax	(12,456)	(6,084)
Expenses not deductible for tax purposes	9,669	4,675
Tax effect on asset impairment and negative goodwill	(7,849)	-
Tax related to prior years	(286)	32
Other	600	340
Income tax expense	62,533	26,725

Note 7: Earnings per share and dividends paid and proposed

Basic EPS is calculated by dividing the net profit for the year attributable to ordinary equity shareholders of Ferrexpo plc by the weighted average number of ordinary shares. The number of shares was assumed to be constant throughout 2007, the year of the Group's Initial Public Offering.

	Audited Year ended 31.12.08	Year ended 31.12.07
Profit for the year attributable to equity shareholders:
Basic earnings per share (US cents)	48.60	20.41
Diluted earnings per share (US cents)	48.46	20.33
Underlying earnings for the year:
Basic earnings per share (US cents)	57.74	24.96
Diluted earnings per share (US cents)	57.58	24.86

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

Thousands	Audited Year ended 31.12.08	Year ended 31.12.07
Weighted average number of shares
Basic number of ordinary shares outstanding	601,697	607,796
Effect of dilutive potential ordinary shares	1,717	2,403
Diluted number of ordinary shares outstanding	603,414	610,199

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

Diluted earnings per share is 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 included in the calculation of diluted earnings per share.

'Underlying earnings' is an alternative earnings measure, which the directors believe provides a clearer picture of the underlying financial performance of the Group's operations. Underlying earnings is presented after minority interests and excludes adjusted items. The calculation of underlying earnings per share is based on the following earnings data:

US$ 000	Audited Year ended 31.12.08	Year ended 31.12.07
Profit attributable to equity holders	292,436	124,076
Write offs/impairments	27,326	1,568
IPO costs	4,120	34,004
Negative goodwill generated on rights issue	(35,049)	-
Gain on disposal of available-for-sale investment	(1,571)	(4,714)
Non-operating foreign exchange losses	72,788	-
Tax on adjusted items	(12,619)	(3,217)
Underlying earnings	347,431	151,717

Adjusted items are those items of financial performance that the Group believes should be separately disclosed on the face of the income statement to assist in the understanding of the underlying financial performance achieved by the Group. Adjusted items that relate to the operating performance of the Group include impairment charges and reversals and other exceptional items. Non-operating adjusted items include gains and losses on disposal of investments and businesses and non-operating foreign exchange gains and losses.

Dividends paid and proposed

US $000	Audited Year ended 31.12.08
Dividends proposed
Final dividend for 2008: 3.3 US cents per ordinary share	20,000
Total	20,000
Dividends paid during the period
Interim dividend for 2008: 3.2 US cents per ordinary share	19,505
Final dividend for 2007: 3.2 US cents per ordinary share	19,449
Total	38,954

  Note 8: EBITDA

The Group calculates EBITDA as profit from continuing operations before tax and finance plus depreciation and amortisation (included in cost of sales, administrative expenses and selling and distribution costs) and non-recurring cash items included in other income, non-recurring cash items included in other costs plus the net gain/(loss) from disposal of subsidiaries and associates. The Group presents EBITDA because it believes that EBITDA is a useful measure for evaluating its ability to generate cash and its operating performance.  

US$'000	Audited Year ended 31.12.08	Year ended 31.12.07
Profit before tax and finance	466,736	186,935
Write-offs and impairment losses	27,326	1,568
Gain on disposal of available-for-sale investment	(1,571)	(4,714)
Initial public offering costs	4,120	34,004
Share based payments	1,495	-
Negative goodwill generated on rights issue	(35,049)	-
Severance payments	6,764	-
Depreciation and amortisation	34,125	28,264
EBITDA	503,946	246,057

The severance payments disclosed above relate to the amounts paid to the former CEO and the Director of Business Development upon their resignation.

Note 9: Net financial indebtedness

US$ 000	Audited Year ended 31.12.08	Year ended 31.12.07
Cash and cash equivalents	87,822	86,966
Current borrowings	(74,523)	(54,284)
Non-current borrowings	(231,373)	(146,008)
Current commodity loans	(1,446)	(1,664)
Non-current commodity loans	(570)	(2,569)
Net financial indebtedness	(220,090)	(117,559)

Net financial indebtedness as defined by the Group comprises cash and cash equivalents, term deposits, interest bearing loans and borrowings and amounts payable for equipment.

Payables for equipment comprised balances due to foreign suppliers for mining equipment denominated in USD and EUR which are interest-bearing.

  Note 10: Reconciliation of profit before income tax to net cash flow from operating activities

US$ 000	Audited Year ended 31.12.08	Year ended 31.12.07
Profit before income tax	375,581	160,760
Adjustments for:
Depreciation of property, plant and equipment and amortisation of intangible assets	34,125	28,265
Interest expense	18,496	24,488
Interest income	(2,467)	(3,242)
Share of income of associates	(1,003)	(687)
Movement in allowance for doubtful receivables	19,095	336
Write/reversal of payables	(1,043)	-
Loss on disposal of property, plant and equipment	1,280	-
Assets received free of charge	(325)	-
Write offs and impairment losses	27,325	1,568
Site restoration provision	269	1,269
Gains on disposal of investments available for sale and other financial instruments	(1,571)	(4,714)
Employee benefits	7,715	3,915
IPO costs	4,120	34,004
Share based payments	1,495	-
Negative goodwill generated on rights issue	(35,049)	-
Non-operating foreign exchange gain	(29,309)	-
Non-operating foreign exchange loss	72,788	3,467
Operating cash flow before working capital changes	491,522	249,429
Changes in working capital
(Increase)/decrease in trade accounts receivable and other receivables	(36,167)	13,951
(Increase)/decrease in inventories	(5,070)	(7,840)
Increase/(decrease) in trade and other accounts payable	8,094	6,534
(Increase)/decrease in other taxes receivable	(673)	(14,411)
Cash generated from operating activities	457,706	247,663
Interest paid	(15,443)	(24,525)
Income tax paid	(67,217)	(32,018)
Post employment benefits paid	(4,103)	(2,274)
Net cash flows from operating activities	370,943	188,846

 

END

 

 

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