Interim Results

RNS Number : 1629C
Ferrexpo PLC
28 August 2008
 




28 August 2008



Interim Results for the Six Months ended 30 June 2008


Financial highlights


  • Revenue up by 58% to US$519.5m 

  • EBITDA for the period up by 101% to US$228.0m

  • Profit for the period up by 288% to US$157.7m

  • Underlying earnings up by 106% to US$138.8

  • Net cash from operating activities increased 70% to $141.8m 

  • Interim dividend of 3.2 US cents per share


Operating highlights


  • Stable iron ore output and total pellet production

  • 8% increase in production of high quality (65% Fe) pellets from Company's own ore 

  • Price increases of over 90% achieved from 1 April

  • Efficiency improvements partially offsetting cost inflation

  • Expansion of existing operations on schedule and within budget

  • Procurement of own rail cars on schedule

  • Definitive Feasibility Study for new Yeristovskoye mine near completion

  • Definitive Feasibility Study for projects to upgrade product quality and optimise existing beneficiation plants near completion

  • Actively seeking strategic partner for joint venture of major growth projects


Financial and production highlights 


 (US$ '000, unless stated)

Six Months ended 30 June 2008

Six Months ended 30 June 2007

% Change

Pellet production (kt)

4,504

4,450

+1%

Of which 65% Fe content (kt)

1,920

1,776

+8%

Revenue

519,498

327,915

+58%

EBITDA

228,023

113,289

+101%

Profit for the period

157,658

40,579

+288%

Underlying earnings

138,783

67,408

+106%

Underlying EPS (USc)

22.76

11.10

+105%



Mike Oppenheimer, CEO of Ferrexpo plc commented:


'We have delivered another strong set of results and we continue to make excellent progress with our growth projectsI am particularly pleased with our strong operational response to the challenges presented by industry and regional cost pressures. Our logistics and favourable location position us as the supplier of choice to some of the most important end markets in the world and we are pleased to have achieved price settlements that reflect this.  Looking forward, strong market outlook, tight cost control in the face of significant inflationary pressures and aggressive management of our growth projects will remain the characteristics of our business. We will continue to updatthe market on our plans to accelerate delivery of value from our strong reserve and resource base with our strategic partner programme.'



For further information, please contact:




Ferrexpo:

Mike Oppenheimer,  CEO

Chris Mawe,  Finance Director

Gavin MackayHead of Investor Relations

+44 207 389 8304


Finsbury:

Robin Walker 

Alex Simmons


+44 207 251 3801



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 currently undertaking a significant growth programme and became listed on the main market of the London Stock Exchange in June 2007 under the ticker FXPO. For further information please visit www.ferrexpo.com. 


  Chairman's Statement 


I am pleased to present another set of excellent results for Ferrexpo plc. Throughout the first half of 2008, the Group has continued to build on the track record of strong financial and operational delivery that it established in 2007. 


Results


The Group's results over the past six months reflect the continuing strength of our business in the face of a challenging global economic environment. Once again, the Group achieved significant growth in both revenues and profits as a result of very strong contract pricing outcomes and the continuing positive impact of the Business Improvement Programme on operating efficiency. Revenues in the first half of 2008 were $519.5 million, 58% above those achieved in the same period last year ($327.9 million). Despite substantial inflationary pressures on the Group, its EBITDA for the period increased by 101% to $228.0 million ($113.3 million), and Group pre-tax profit increased by 269% to $201.4 million ($54.5 million).


Market Environment


The global market for iron ore, and in particular iron ore pellets, remains strong, driven principally by demand for iron and steel from industrialising nations such as China, and despite record benchmark iron ore price settlements in the first half of 2008. Seaborne benchmark prices in Europe and Asia increased by between 65% and 96.5% for fine and lump ores, and a record premium paid for blast furnace pellets resulted in an 86.7% benchmark increase for these pellets as of 1 April 2008. Importantly for Ferrexpo, demand for blast furnace pellets continues to rise in our traditional markets as steel companies seek to improve performance and reduce emissions. The Group was able to achieve a premium to the pellet benchmark, realising price increases of over 90% on average across all of its long-term supply contracts compared with the twelve months to 31 March 2008. The new prices resulted in very strong earnings growth in the second quarter of the year, and contributed to the 58% increase in the Group's average price per tonne achieved in the first six months of 2008, as compared with the same period last year.


Operations


At the time of our preliminary results in April, we announced that the Group had suffered two fatal accidents at its Poltava site at the beginning of 2008, and regrettably we had another in July. To further reinforce Group's ongoing efforts to enhance its safety standards, Du Pont Safety Resources were engaged early in the year to implement a cultural and behavioural change throughout Ferrexpo's operations, and tangible progress has been made in this regard. The management of health, safety and the environment remains an absolute priority for the Group.


This year, the Group's production operations have continued to perform well, and Ferrexpo remains the largest Ukrainian iron ore exporter. Iron ore extraction was comparable with the same period last year and in line with our expectations following substantial increases in production in prior periods. The volume of pellets produced from the Group's own raw materials increased by 1.2% to 4.50 million tonnes compared to the first six months of 2007 (4.45 million tonnes), and this was accompanied by a 8.0% increase in the volume of higher quality 65% Fe pellets, to 1.92 million tonnes (1.78 million tonnes). The Group has all but ceased to produce iron ore pellets from third party concentrate due to lack of availability of concentrate supply, which resulted in a marginal decline in overall pellet production over the period. This has had negligible financial impact on the Group due to the increasingly low margin nature of this business. 


The Group has faced significant cost pressures in the first six months of 2008. Inflation in Ukraine has risen substantially, with Producer Price Inflation (PPI) reaching 29.4% by the end of the period. There were also substantial increases in the costs of cyclically priced commodities, a theme common to most of the global mining industry. These increases were principally for steel grinding media and energy including diesel fuel, which collectively account for 58% of the Group's C1 cash costs of production. The price of the Group's grinding media increased by 48% in the first six months of 2008, and diesel by 31%, with natural gas and electricity increasing by 55% and 30% respectively. The Ukrainian Hryvnia has been permitted to appreciate to an average rate for the period of UAH5.017/$, which has also increased the dollar costs of certain inputs in the period to June. However, our Business Improvement Programme continued to drive efficiency and reduce the utilisation of cost inputs per tonne of production, thereby mitigating some of these inflationary pressures. Nonetheless, the Group's cash production costs rose by 37.0% compared with the average production cost per tonne in the first half of 2007. This compares favourably against the Ukrainian Producer Price Inflation over the period between 1 July 2007 and 30 June 2008 of 43.7%.


The Group will continue to pursue further improvements in efficiencies and productivity via the Business Improvement Programme and other initiatives, but increasing cost pressures on key input prices are likely to remain a feature of our business for at least the remainder of the year.


The Group's marketing department has delivered a very successful first six months of 2008, having secured record price settlements during the period. Marketing and distribution remain critical to our business, and our focus is now firmly on ensuring that the Group's extensive growth plans are matched by expanded logistical capabilities. 


Investing Activities


The Group has a pipeline of significant growth projects, and our increasingly strong cash flow generation has given us the financial capacity to accelerate our investment in this growth programme. The Group's operating cash flow in the first half of 2008 has increased by 70% to $141.8 million, when compared to the same period last year ($83.3 million). These funds are being used to execute our strategy to accelerate the commercialisation of our vast iron ore resource. During the first half of 2008, the Group invested $51 million in the project to expand and extend our existing operations, and $43 million for the development of the new Yeristovskoye mine.


The Group's investment policy remains focused on our organic growth projects. The project to expand and extend the existing mining operation that was announced in November last year is proceeding on schedule and within budget. Development plans for the new mines to be built on the Yeristovskoye and Belanovskoye deposits are well advanced and these remain the Group's major growth projects, with expected total development costs of approximately $5 billion. The Yeristovskoye Definitive Feasibility Study and Belanovskoye Preliminary Feasibility Assessment are expected to be completed in September, and the Board expects to review and, if appropriate, approve the capital commitment for the entire Yeristovskoye project in October. By this time, the initial draglines and mining fleet purchased with the $103 million of capital expenditure committed to the project last year will be on site and assembled in preparation for the commencement of stripping works. The first two of these draglines are already on site in the early stages of assembly.


Significant progress has also been made on plans to upgrade existing pellet quality and to further enhance the efficiency and productivity of our existing beneficiation plants. The definitive feasibility study for the various projects intended to achieve these objectives will also be completed in September and will be reviewed by the Board in October.


Dividend


The Group is declaring an interim dividend of 3.2 US cents per share for the first six months of 2008 (H1 2007: nil), in line with the policy of the Board to pay a dividend which reflects the cash flow of the business and the growth profile of the Group. The Board is committed to maintaining a dividend which enables the Group to invest in the substantial growth projects within its portfolio. The full year dividend will be split approximately equally between the interim and final dividend.


The Board is also considering further returns of capital or dividends in the coming months, in view of the high prices and significant cash generation of the Group in the first half of the year. This is consistent with sound capital management, as cashflows have exceeded both expectations and the funding requirements of the Group. 


People


The Group has continued to evolve as a listed company in the first six months of 2008, and the Board would like to thank all the employees of Ferrexpo, who continue to make this positive development possible. We continue to build our organisation, adding capability in project execution and consolidating our strengths in best practice mining and marketing. 


Corporate Governance and Social Responsibility


I am proud to say that the Group is delivering on its promise, and is substantially compliant with the Combined Code within the first year of listing. Ferrexpo has a strong and experienced Board dedicated to the highest standards of corporate governance and capable of providing continuing best practice management and strategic guidance to the company. 


The Board has established a Corporate Social Responsibility Committee to fulfil its commitment to the ongoing health and safety of the Group's employees, active engagement with local communities and environmental awareness. Corporate Social Responsibility remains the first priority of the management of the Group. 


Strategy


The Board remains committed to its strategy of maximising the value of the Group through the accelerated commercialisation of its extensive undeveloped iron ore deposits, increasing the productivity of its existing operations, and improving product quality. Planning for the new mines at Yeristovskoye and Belanovskoye is now at an advanced stage, and the Group is actively seeking the involvement of other industry participants to form a joint venture to assist it in the development of these mines. The Board believes the formation of such a joint venture to be the best strategy to accelerate the exploitation of these assets through access to additional funding capability, project execution expertise and a significant reduction of the risks associated with project execution


Outlook


Favourable iron ore market conditions are expected to continue for at least the next eighteen months and potentially far beyond, driven by China and the developing countries of Asia and Europe. We believe the Group is extremely well positioned to benefit further from this positive environment. Most importantly for Ferrexpo, very strong demand growth is forecast in the markets closest to our Poltava operations, which will enable the Group to sell the majority of its expanded production to our traditional and natural customer base. Our unique logistical advantages in supplying these customers will result in sustained high margins for growth. 


The principal risks and uncertainties facing the Group over the next six months relate to costs, in particular those concerned with energy, and Ukrainian inflation. Cost pressures on the Group are expected to remain significant for the rest of 2008, but given that the prices for the Group's products have been set at record highs for the 2008/2009 contract year, we nonetheless expect the Group to achieve very strong growth in revenues and profits in 2008. We will continue to drive the development of our growth projects to extract maximum value from our extensive reserves and resource base. 


Michael Abrahams CBE DL

Chairman

  OPERATING & FINANCIAL REVIEW


Operating Highlights 


  • Average pellet prices increased by over 90% from 1 April

  • Product quality improved, 8% increase in production of higher grade 65% Fe pellets 

  • 330 own rail cars delivered and operating with remaining 220 expected by year end

  • Project to expand and extend existing operations proceeding on schedule and within budget

  • Definitive Feasibility Study for new Yeristovskoye mine near completion

  • First equipment for Yeristovskoye development delivered to site

  • Preliminary Feasibility Study for new Belanovskoye mine near completion

  • Actively seeking strategic partner for joint venture of major growth projects


Financial Highlights


  • Revenue increased by 58% to $519.5 million (H1 2007: $327.9 million) 

  • EBITDA increased by 101%, to $228.0 million (H1 2007: $113.3 million)

  • Profit after tax increased by 288%, to $157.7 million (H1 2007: $40.6 million) 

  • Net cash flow from operating activities $141.8 million (H1 2007: $83.3 million)


OPERATING REVIEW


Key Statistics 


 

UOM

6 months ended 30 June 2008

6 months ended 30 June 2007

% Change






Iron ore mined

000't

  14,361 

  14,446  

(0.6)

  Average Fe content

%

  30.06

  29.80  

0.9






Produced concentrate

000't

  5,440  

  5,293  

2.8

  Average Fe content

%

  63.41  

  63.44  

(0.1)






Purchased concentrate 

000't

  52  

  223  

(76.7)

  Average Fe content

%

  65.78  

  64.01  

2.8






Purchased iron ore 

000't

  149

  19

684

  Average Fe content

%

  33.01

  33.00

0.0






Total pellet production (BFP)  

000't

  4,596  

  4,653  

(1.2)







From produced concentrate 

000't

  4,504  

  4,450  

1.2


  - Higher grade

000't

  1,920  

  1,778  

8.0


  Average Fe content

%

  65.01  

  65.13  

(0.2)


  - Lower grade

000't

  2,584  

  2,672  

(3.3)


  Average Fe content

%

  62.26 

  62.26  

-








From purchased raw materials

000't

  92  

  203  

(54.7)


  - Lower grade

000't

  92  

  203  

(54.7)


  Average Fe content

%

  62.26  

  62.26  

-






Pellet sales volume

000't

  4,517  

  4,511  

0.1






Gravel production

000't

  1,637  

  1,604  

2.1


Existing Operations


Ferrexpo Poltava Mining ('FPM') continued to improve its operational performance during the first six months of 2008, focussing on product quality improvement and accelerating stripping operations for the Gorishne-Plavninskoye Lavrikovskoye (GPL) Expansion Project. This will in due course form the basis of future production increases from the Group's existing GPL mine. Ore extraction volumes were comparable to the equivalent period in 2007, but through selective mining, FPM was able to increase the proportion of richer ore mined (48% versus 45% in the equivalent period last year). The greater proportion of higher quality ore enabled FPM to increase the yield during the beneficiation process, resulting in an increase in the production of iron ore concentrate to 5,440kt, a 3% increase over the equivalent period last year. The quality of the concentrate produced in the first six months of 2008 was also improved, which enabled FPM to increase production of higher grade 65% Fe pellets by 8% to 1,920kt, enabling further sales in the higher quality markets to be made.


Pellet production from produced concentrate increased by 1% in the period. A sharp decline in the availability of third party concentrate at acceptable prices meant overall pellet production volume for the period was 4,596kt, a decline of 1% compared to the first half of 2007. The Group has historically produced a small volume of pellets from purchased concentrate, but this activity has generated low contributions to profitability.


Stripping volumes increased by 14% in the first half of 2008 to 10,550 cubic metres. This was to rectify low stripping in prior years and place the pit in a position to yield higher production when the GPL Expansion Project is completed. Stripping costs of $6.2 million associated with the project to expand the GPL mine were capitalised during the period. 


The ongoing Business Improvement Program ('BIP') has continued to achieve tangible efficiency savings at FPM. The BIP continues to be driven forward by FPM management. FPM is now approximately halfway through a four-year programme. The aim of the BIP is to introduce global best practice in efficiency and productivity into the different areas of operation at FPM. Ongoing BIP initiatives in the first six months of 2008 enabled FPM to reduce the consumption per tonne of pellets produced for both energy and raw materials. More efficient use of mining vehicles and equipment has reduced the consumption of diesel fuel over the period by 2.6% per tonne of ore mined. Use of steel grinding bodies has been similarly reduced by 1.4%, and FPM's largest single cost item, the consumption of electricity per tonne of pellets produced, declined by 6.2%. Gas consumption also declined by 3.3%. 


The increased operating efficiency and associated cost savings demonstrated by FPM in the first half of 2008 are material improvements in the context of the inflationary cost environment and sector in which the Group is operating. Ukrainian Consumer Price Index inflation was 15.5% for the period, increasing unit labour costs. The official Ukrainian Producer Price Inflation ('PPI') was 29.4% over the same period. Overall in the six months to 30 June 2008, the Group incurred a 36.6% increase in the price of diesel fuel and a 47.9% increase in the price of grinding bodies and spare parts. Both diesel and steel price increases were in line with the cyclical trends in those commodities experienced globally in the first half of the year. The price of electricity also increased by 29.8% and that of natural gas by 55.0%.


As a result of these trends, the Group's nominal cash costs of pellet production (С1) was $40.92/t for the six months to 30 June 2008, an increase of 36.9% over that in the equivalent period last year ($29.88/t) and an increase of 28.72% over the C1 cost in FY 2007 ($31.79/t). Placing these increases in context, Ukrainian CPI for the twelve months to 30 June 2008 was 29.3%, and Ukrainian PPI was 43.7% over the same period.


The Group's costs are principally denominated in Ukrainian Hryvnia, which until 2008 was a currency managed in a mid range of UAH5.05/$. Since the middle of May, the currency has been permitted to appreciate to an official rate for the period of UAH4.85/$. This has increased the dollar costs of all inputs, which accounted for $1.82/t in June 2008 and $0.30/t in the six month period to 30 June 2008. 


The Group continued to actively manage its labour costs, introducing further measures to reorganise its key skills and heighten productivity and efficiency during the first half of 2008. The number of personnel on the FPM payroll decreased by 3.9% from 9,008 at the end of 2007 to 8,655 as at 30 June 2008. Average salaries in June 2008 were 20.4% higher than those in December 2007.


Marketing and Distribution


Marketing and distribution skills and routes to market remain a major driver of the value of the Group's business. Demand for Ferrexpo blast furnace pellets was at extremely high levels in the first half of 2008, consistent with continued strong global demand for iron and steel products. Demand for the Group's products has continued to outstrip its ability to supply. Pellet sales in the first six months of the year amounted to 4,517kt, with a similar segment mix to the equivalent period in 2007. This was driven by the fact that 81% of sales were to the Group's highest margin Traditional Markets (Eastern and Central Europe). This trend is set to continue, with strong demand growth forecast in the Group's Traditional and Natural Markets, enabling the Group to continue to sell the majority of its production to higher-margin customers in these regions, while expanding its output. 


Progress continues in the Group's marketing and logistics department in developing a profitable portfolio of customers in a range of global markets to underpin our growth plans. Over the past two years the marketing strategy has focused on structuring a stable customer base, culminating in approximately 90% of planned 2008 sales being made to long term framework contract customers. Deliveries to Turkey commenced in the first half of the year under a new long term contract from TIS Ruda, the Group's joint venture ocean vessel shipping terminal in Yuzhny on the Black Sea. This Turkish contract gives another customer in close proximity to FPM that enables smaller lot 'just in time' delivery to be achieved. This better serves the Group's target customers' needs relative to their other long-haul pellet supply options. A new long term contract also commenced to Russia during the period, marking the return to that market in the Group's sales portfolio. Taking advantage of very high spot market prices, the Group also sold product on a spot basis whenever supply beyond contract requirements was available. Further evidence of the Group's efforts in its Traditional Markets was the honour of receiving a 'Supplier of the Year - 2007' award from US Steel in the first quarter of the year.


Annual contract pricing for 2008/9 was largely completed in the first half of the year with the average price increase exceeding 90% as compared to 2007/8 contracted prices. This result was well above global benchmark blast furnace pellet price outcomes, reflecting the Group's continuing efforts to maximize value by focusing on value in use to customers based on quality, reliability and logistics service. 


Heightened focus on logistics chain management continued in the first half of 2008 in response to significant increases to rail tariffs imposed by the Ukrainian state railways during the period. Tariffs rose by 46%. This was the major contributing factor to the 41% increase in distribution costs per tonne of pellets sold in the first six months of the year, to $14.77/t ($10.46/t). The Group took delivery of and deployed a further 330 rail wagons in the first half. This initiative underscores the Group's commitment to mitigate such cost increases and add further reliability into the supply chain to its customers. The Group plans to have 550 of its own rail cars in operation during the second half of 2008, all of which incur a discounted tariff when used on the Ukrainian state rail network. The Group also increased throughput in its joint venture TIS Ruda terminal, and commenced detailed assessments of further potential investments in logistics, which will enhance the reliability of the Group with its core customers. Investments to upgrade inbound rail capacity to the TIS Ruda terminal and channel dredging were committed in the period under review and will be undertaken in the second half of the year.


Capital Expenditure and Growth Projects


The Group's total capital expenditure during the first half of 2008 was $131.2 million, an increase of 145% over the equivalent period in 2007. $19.5 million of this was invested in the GPL Expansion Project, and includes $6.2 million of capitalised stripping. The project is proceeding according to schedule and remains within budget. A further $21 million was spent on mining equipment for the Yeristovskoye mine, much of which has already arrived on site. The Definitive Feasibility Study for this project is expected to be completed in September, along with the Preliminary Feasibility Study on Belanovskoye, the Group's other major growth project. Stripping at the Yeristovskoye deposit is expected to commence in the fourth quarter of this year. Subject to Board approval, the final capital commitment for the project should follow before the end of the year. Scoping studies continue at the Galeshina deposit, and technical activities continue on the Group's northern deposits in line with its licence commitments.


In the fourth quarter the Board will also consider a series of upgrade projects for the GPL processing facilities. The most material of these relate to the upgrade of the first concentrator line such that it will be able to produce higher quality (65% Fe) blast furnace pellets from the Group's leaner ore, and an upgrade of the second concentrator line to enable the production of a low-silica Direct Reduction pellet with an iron content of approximately 68%. These projects include an upgrade to concentrate mixing and filter systems in the pellet plants. If both of these concentrator projects are approved and executed in parallel, the likely capital expenditure will be approximately $350 million. Definitive Feasibility Studies for both of these projects will be completed in September.


Principal risks and uncertainties


The principal risks and uncertainties facing the Group's business for the remainder of the year relate to production costs. The Group has experienced substantial increases to most of its cost inputs in the first half of the year, as stated elsewhere in this report, and there is a risk that these increases may continue in the second half.


As a mining company, the Group is also subject to the ordinary risks associated with large-scale mining operations.

 


 FINANCIAL REVIEW


 Summary of Financial Results

   

US$ 000

6 months to 30 June 2008

6 months to 30 June 2007

% Change

Revenue

519,498

327,915

58.4





EBITDA

228,023

113,289

101.3

As % of revenue

44%

34%






Profit before taxation

201,350

54,484

269.6





Income tax

43,692

13,905

214.2





Profit for the period 

157,658

40,579

288.5





Underlying earnings

138,783

67,408

105.9





Underlying earnings per share

22.76

11.10

105.0





Earnings per share

23.20

6.03

284.7


The Group increased its revenues by 58% to $519.5 million in the period under review compared to the first six months of 2007 ($327.9 million). This excellent performance was due to strong pellet prices, particularly in the second quarter of the year, when the Group was successful in achieving an average price increase of over 90%. Growth in sales volume of higher grade 65% Fe pellets also contributed to improved margins.


C1 Cost, defined as cash cost of production, increased by 36.9% over the first half of 2007. Production costs were impacted by domestic Ukrainian inflation and increases in the costs of energy including diesel, steel and spare parts. These increases were partly mitigated by ongoing efficiency improvements.


The table below sets out the breakdown of the Group's C1 Cost of Sales.


 

 
6 months to 30 June 2008
6 months to 30 June 2007
 
US$ 000
% of total
US$ 000
% of total
Materials
34,641
19
30,921
23
Electricity
44,010
24
34,030
26
Personnel costs
28,199
15
21,099
16
Spare parts and consumables
26,216
14
18,317
14
Fuel
22,568
12
11,985
9
Gas
17,883
10
12,488
9
Royalties and levies
3,739
2
3,911
3
Other
7,073
4
-
-
C1 Cost Of Sales
184,329
100%
132,751
100%
 
 
 
 
 
C1 Cost per tonne
40.92
-
29.88
-
 
 
 
 
 
Depreciation
16,317
-
11,298
-
Cost Of Sales
207,508
-
160,287
-
 
[1] Defined in Notes to Accounts

[2] After IPO costs of $30 million

[3] Defined in Notes to Accounts

Selling and Distribution costs increased by 42% to $67.1 million in the first half (H1 2007: $47.2 million), primarily as a result of increases to rail tariffs in Ukraine imposed by the state railway authority. General and Administrative Expenses in the first half of 2008 increased, reflecting increases in costs as a result of the full 6 month period as a listed company compared to pre IPO operations in 2007.


The strong revenue growth was reflected in increased EBITDA for the first six months of the year. EBITDA rose by 101% to $228.0 million, with the Group's EBITDA margin increasing from 34.5% in the first half of 2007 to 43.9% in the current period.


As price rises were effective from the first of April, the group enjoyed significantly enhanced margins in the second quarter. As a result, the EBITDA margin of 22.4% in the first quarter of 2008 increased to 53.6% in the second quarter, demonstrating the effect of the Group's improved sales contracts.


The Group experienced an increase in its effective tax rate in the first half of 2008 to 21.7% (FY 2007: 16.6%) due to increased profitability in the Ukraine as a result of strong price rises. 


The delays experienced historically by the Group's Ukrainian operations in recovering VAT from the government on a timely basis have been resolved, and this additional working capital requirement was removed as at 30 June 2008. 

 

These strong results together with a considerable increase in net cash flow from operating activities have enabled the Group to continue to strengthen its Balance Sheet. The Group increased its net cash flows from operating activities to $141.8 million from $83.3 million in the comparable prior period. The Group's debt to equity ratio (Net Debt divided by Net Debt plus Equity) was 14% as at 30 June 2008 (16% as at 31st December 2007).  


Dividend


The group is declaring an interim dividend of 3.2 US cents per share for the first six months of 2008 (H1 2007: nil). The interim dividend will be paid in Pounds Sterling, but those shareholders who have in the past elected to receive dividends in US dollars will continue to do so. Other shareholders wishing to receive dividends in US dollars should obtain a Currency Election Form from the Ferrexpo website and return the completed form to the Company's registrars by 5 September 2008. The dividend is payable on 17 October 2008 to shareholders on the register on 5 September 2008. 


 

Independent Review Report to Ferrexpo plc 


Introduction 


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 2008 which comprises the Consolidated Income Statement, Consolidated Balance Sheet, Consolidated Cash Flow Statement, Consolidated Statement of Changes in Equity, and the 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 guidance contained in ISRE 2410 (UK and Ireland) 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our 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 and Transparency Rules of the United Kingdom's Financial Services 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 Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, 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 Ireland) 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 2008 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. 



Ernst & Young LLP

1 More London Place

28 August 2008


  Statement of Directors' Responsibilities


The Directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34, Interim Financial Reporting, as adopted by the European Union and that the half-yearly report included a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely: 


  • an indication of important events that have occurred during the first six months of the financial year and their impact on this condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and 

  • material related party transactions in the first six months of the year and any material changes in the related party transactions described in the Ferrexpo plc Annual Report 2007. 


The Directors of Ferrexpo plc are listed in the Ferrexpo Annual Report 2007. 


  Consolidated income statement

US$'000

Notes

6 months ended 30.06.08

(unaudited)

6 months ended 30.06.07

(unaudited)

Year ended 31.12.07

(audited)

Revenue

3, 4

519,498

327,915

698,216

Cost of sales

5

(207,508)

(160,287)

(335,936)

Gross profit


311,990

 167,628

362,280

Selling and distribution expenses

6

(67,113)

(47,178)

(100,614)

General and administrative expenses

7

(32,438)

(19,962)

(44,308)

Other income


2,736

1,680

4,844

Other expenses 


(5,916)

(3,203)

(5,096)

Operating profit from continuing operations before adjusted items


209,259

  98,965 

217,106

Write-offs and impairment losses 

8

(94)

(1,101)

(1,568)

Share of gains / (losses) of associates


1,420

(118)

687

Initial public offering costs


(3,897)

(30,142)

(34,004)

Negative goodwill generated on rights issue


5,077

-

-

Gain on disposal of available-for-sale investments


1,547

-

4,714

Profit before tax and finance


213,312

67,604 

186,935

Finance income


1,214

854

3,242

Finance expense


(9,110)

(12,985)

(25,950)

Foreign exchange loss


(4,066)

(989)

(3,467)

Profit before tax


201,350

 54,484

160,760

Tax


(43,692)

(13,905)

(26,725)

Profit for the period


157,658

40,579 

134,035

Attributable to:





Equity shareholders of Ferrexpo plc


141,449

36,634

124,076

Minority interest


16,209

3,945

9,959



157,658

40,579

134,035






Earnings per share





Basic (US cents)

10

23.20

6.03

20.41

Diluted (US cents)

10

23.14

6.00

20.33




Consolidated balance sheet

US$'000

Notes

As at 30.06.08

(unaudited)

As at 30.06.07

(unaudited)

As at 31.12.07

(audited)

Assets





Property, plant and equipment

11

474,742

322,769

364,545

Goodwill and other intangible assets 


157,443

156,534

156,827

Investments in associates


19,267

16,832

17,637

Available-for-sale financial assets


35,962

36,040

47,134

Deferred tax asset


10,494

-

8,107

Other non-current assets


39,131

3,699

15,179

Total non-current assets

 

737,039

535,874

609,429






Inventories


75,234

55,383

56,545

Trade and other receivables


78,447

49,951

43,575

Prepayments and other current assets


21,543

10,310

10,773

Income taxes recoverable and prepaid 


15

118

5,350

Other taxes recoverable and prepaid


45,855

46,812

52,362

Available-for-sale financial assets


8,768

95

2,941

Short term deposits with banks

12

-

1,460

-

Cash and cash equivalents 

13

62,600

71,904

86,966

Total current assets

 

292,462

236,033

258,512






Total assets

 

1,029,501

 771,907

867,941






Equity and liabilities





Share capital

14

121,628

121,628

121,628

Share premium


183,387

180,887

188,566

Other reserves


33,339

7,903

14,258

Retained earnings


338,616

130,908

216,616

Equity attributable to equity shareholders of the parent

 

676,970

 441,326

541,068

Minority interest


60,693

39,840

45,854

Total equity

 

737,663

 481,166

586,922






Interest-bearing loans and borrowings

16

111,386

178,667

146,091

Trade and other payables


1,705

4,994

2,583

Shares redemption liability 

15

-

9,532

-

Defined benefit pension liability


16,746

15,136

16,169

Provision for site restoration


1,955

440

1,746

Deferred tax liability


4,521

2,613

1,025

Total non-current liabilities

 

136,313

211,382

167,614






Interest-bearing loans and borrowings 

16

73,693

15,350

54,537

Trade and other payables 


42,849

29,002

25,127

Accrued liabilities and deferred income


15,496

27,331

13,812

Shares redemption liability

15

10,998

-

10,036

Income taxes payable


11,073

2,579

7,717

Other taxes payable


1,416

5,097

2,176

Total current liabilities

 

155,525

 79,359

113,405






Total liabilities

 

291,838

 290,741

281,019






Total equity and liabilities

 

1,029,501

 771,907

867,941


Consolidated cash flow statement 

US$'000

Notes

6 months ended 30.06.08

(unaudited)

6 months ended 30.06.07

(unaudited)

Year ended 31.12.07

(audited)

Net cash flows from operating activities

18

141,805

83,324

188,846

Cash flows from investing activities





Purchase of property, plant and equipment


(131,200)

(53,430)

(104,352)

Proceeds from sale of property, plant and equipment


46

14,870

1,896

Purchase of intangible assets 


(545)

-

(435)

Deposits lodged at banks


-

7,475

9,011

Purchases of available for sale securities


-

-

(12,126)

Proceeds from sale of financial assets


59

139

5,704

Interest received


493

329

4,805

Loans provided to associates


-

(5,000)

(5,000)

Net cash flows used in investing activities

 

(131,147)

(35,617)

(100,497)

Cash flows from financing activities





Proceeds from borrowings and finance 


-

175,244

175,244

Repayment of borrowings and finance


(22,049)

(267,749)

(276,084)

Dividends paid to equity shareholders of the parent


(19,449) 

-

-

Dividends paid to minority interests


(232)

(465)

(786)

Distribution under 50/50 tax ruling


-

(5,000)

(5,000)

Proceeds from issue of share capital in Ferrexpo plc:





Initial public offering proceeds


-

202,072

202,072

Non initial public offering proceeds


-

-

99

Initial public offering costs


-

(32,250)

(48,648)

Share buy back in previous parent


-

(64,055)

(64,055)

Net cash flows (used in)/from financing activities

 

 (41,730)

7,797

(17,158)

Net increase/(decrease) in cash and cash equivalents


(31,072)

55,504

71,191

Cash and cash equivalents at the beginning of the period 


86,966

16,236

16,236

Currency translation differences


6,706

164

(461)

Cash and cash equivalents at the end of the period

13

62,600

71,904

86,966

    



Consolidated statement of changes in equity (unaudited)


Attributable to equity shareholders of the parent


$000

Issued capital

Share Premium

Uniting of interest reserve

Employee Benefit Trust reserve

Net unrealised gains reserve

Translation reserve

Retained earnings

Total reserves

Minority interests

Total equity

At 1 January 2007

-

-

137,296

-

-

186

163,164

300,646

36,146

336,792

Profit for the period

-

-

-

-

-

-

36,634

36,634

3,945

40,579

Total income and expense for the period recognised in equity

-

-

-

-

-

-

36,634

36,634

3,945

40,579

Items recognised directly in equity:











Distribution under 50/50 tax ruling

-

-

-

-

-

-

(4,835)

(4,835)

-

(4,835)

Equity dividends paid by subsidiary undertakings to minority shareholders

-

-

-

-

-

-

-

-

(251)

(251)

Share issue in parent company

121,628

215,275

-

-

-

-

-

336,903

-

336,903

Transaction costs associated with issue of shares

-

(34,388)

-

-

-

-

-

(34,388)

-

(34,388)

Uniting of interest elimination

-

-

(105,516)

-

-

-

-

(105,516)

-

(105,516)

Share buyback of previous parent of Group

-

-

-

-

-

-

(64,055)

(64,055)

-

(64,055)

Shares issued to Employee Benefit Trust

-

-

-

(29,216)

-

-

-

(29,216)

-

(29,216)

Share based payments

-

-

-

5,153

-

-

-

5,153

-

5,153












At 30 June 2007

121,628

180,887

31,780

(24,063)

-

186

130,908

441,326

39,840

481,166

Deferred tax on transaction costs

-

5,179

-

-

-

-

-

5,179

-

5,179

Revaluation of available-for-sale assets

-

-

-

-

2,384

-

-

2,384

-

2,384

Profit for the period

-

-

-

-

-

-

87,442

87,442

6,014

93,456

Total income and expense for the period recognised in equity

-

5,179

-

-

2,384

-

87,442

95,005

6,014

101,019

Items recognised directly in equity:











Distribution under 50/50 tax ruling

-

-

-

-

-

-

(1,734)

(1,734)

-

(1,734)

Transaction costs associated with issue of shares


2,500

-

-

-

-

-

2,500

-

2,500

Share-based payments

-

-

-

3,971

-

-

-

3,971

-

3,971












At 31 December 2007

121,628

188,566

31,780

(20,092)

2,384

186

216,616

541,068

45,854

586,922

Profit for the period

-

-

-

-

-

-

141,449

141,449

16,209

157,658

Realised gains on financial assets available for sale

-

-

-

-

(1,530)

-

-

(1,530)

-

(1,530)

Unrealised losses on financial assets available for sale

-

-

-

-

(4,447)

-

-

(4,447)

(618)

(5,065)

Deferred tax

-

-

-

-

1,040

-

-

1,040

144

1,184

Write-off of deferred tax asset on IPO costs

-

(5,179)

-

-

-

-

-

(5,179)

-

(5,179)

Foreign currency translation adjustments

-

-

-

-

-

19,094

-

19,094

2,879

21,973

Total income and expense for the period recognised in equity

-

(5,179)

-

-

(4,937)

19,094

141,449

150,427

18,614

169,041

Items recognised directly in equity:











Equity dividends paid to shareholders of Ferrexpo plc

-

-

-

-

-

-

(19,449)

(19,449)

-

(19,449)

Equity dividends paid by subsidiary undertakings to minority shareholders

-

-

-

-

-

-

-

-

(324)

(324)

Share based payments

-

-

-

4,924

-

-

-

4,924

-

4,924

Adjustments relating to the increase in minority interest

-

-

-

-

-

-

-

-

(3,451)

(3,451)








-




At 30 June 2008

121,628

183,387

31,780

(15,168)

(2,553)

19,280

338,616

676,970

60,693

737,663


Notes to the consolidated financial information

Note 1: Corporate information

Organisation and operation

Ferrexpo plc (the 'Company') is incorporated in the United Kingdom with registered office at 2 - 4 King Street, LondonSW1Y 6QLUK. Ferrexpo plc and its subsidiaries (the 'Group') operate a mine and processing plant near Kremenchuk in Ukraine. The Group's operations are vertically integrated from iron ore mining through to iron ore concentrate and pellet production. In addition, the Group owns a 49.9% interest in TIS Ruda, a port on the Black Sea. The Group's mineral properties lie within the Kremenchuk Magnetic Anomaly and are currently being exploited at the Gorishne-Plavninsky and Lavrikovsky deposits. These deposits are being jointly mined as one mining complex.


The Group's operations are largely conducted through Ferrexpo plc's principal subsidiary, Ferrexpo Poltava GOK Corporation. The Group is comprised of Ferrexpo plc and its consolidated subsidiaries and associate as set out below:




Equity interest owned at

Name

Country of incorporation

Principal activity

30.06.08

%

30.06.07

%

31.12.07

%







Ferrexpo Poltava GOK Corporation*

Ukraine

Iron ore mining

87.8

85.9

85.9

Ferrexpo AG**

Switzerland

Sale of iron ore pellets

100.0

100.0

100.0

DP Ferrotrans***

Ukraine

Trade, transportation services

100.0

100.0

100.0

United Energy Company LLC***

Ukraine

Holding company

100.0

100.0

100.0

Ferrexpo UK Limited*

England

Finance

100.0

100.0

100.0

Ferrexpo Services Limited*

Ukraine

Management services & procurement

100.0

100.0

100.0

Ferrexpo Yeristova GOK LLC

Ukraine

Iron ore mining

100.0

100.0

100.0

TIS Ruda ****

Ukraine

Port

49.9

49.9

49.9


* The Group's interest in these entities is held through Ferrexpo AG.

**Ferrexpo AG was the holding company of the Group until, as a result of the pre-IPO restructuring, Ferrexpo plc became the holding company on 24 May 2007.

*** The Group's interest in these entities is held through Ferrexpo Poltava GOK Corporation.

**** Accounted for using the equity method of accounting.


Note 2: Summary of significant accounting policies

The interim consolidated financial statements for the six months ended 30 June 2008 have been prepared in accordance with International Accounting Standard ('IAS') 34 Interim Financial Reporting. The interim 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.


The interim consolidated financial statements do not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The financial information for the full year is based on the statutory accounts for the financial year ended 31 December 2007. 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 up to 31 December 2007, has been delivered to the Register of Companies. The auditors' report under section 235 of the Companies Act 1985 in relation to those accounts was unqualified.


Changes in accounting policy

The accounting policies adopted in the preparation of the interim consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2007, except for the adoption of the following IFRIC interpretation mandatory for annual periods beginning on or after 1 January 2008:


International Financial Reporting Interpretations Committee (IFRIC)         Effective date 

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

funding requirements and their Interaction                1 January 2008


The adoption of this IFRIC interpretation did not affect the Group results from operations or financial positions.


Foreign currency translation

The following exchange rates have been applied:


Currency rates (US$1)

Average HY 2008

30 June 2008

Average HY 2007

30 June 2007

Average FY 2007

31 Dec 2007








Ukrainian Hryvnia 

5.017

4.8489

5.050

5.050

5.050

5.050


Note 3: Segmental information


A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.  


The Group's activity is primarily the processing and sale of iron ore and only one business segment is therefore identified as a reportable segment. As a result, we have not presented the segment information in respect of the Group's business segment.


Note 4: Revenue

Revenue for the six months ended 30 June 2008 consisted of the following:

US$'000

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07

Revenue from sales of ore pellets:




Export

439,753

265,454

560,805

Ukraine

75,905

59,527

128,731

 

515,658

324,981 

689,536





Revenue from sales of services

680

150

3,005

Revenue from other sales

3,160

2,784

5,675

 

519,498

327,915 

698,216


Export sales by geographical destination were as follows:

US$'000

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07

Austria

115,987

84,037

160,324

Serbia

95,295

48,163

83,708

China

83,827

45,185

103,223

Slovakia

59,154

30,254

81,516

Czech Republic

36,116

22,676

55,617

Russia

18,341

-

-

Turkey

11,526

5,849

9,777

Bulgaria

9,833

13,368

27,389

Poland

9,674

5,466

23,766

Romania

-

7,038

7,038

Japan

-

-

5,029

Italy

-

3,418

3,418

 

439,753

 265,454

560,805


Note 5: Cost of sales

Cost of sales for the period ended 30 June 2008 consisted of the following:

US$'000

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07





Materials

47,624

34,165

92,449

Purchased ore and concentrate

8,144

13,196

17,587

Electricity

43,717

35,313

74,621

Personnel costs

29,640

22,981

47,402

Spare parts and consumables

16,922

12,095

14,663

Depreciation and amortisation

14,447

11,603

25,635

Fuel

23,745

12,269

28,086

Gas

18,021

13,315

25,576

Royalties and levies

3,806

4,157

8,570

Other

1,442

1,193

1,347

 

207,508

160,287

 335,936

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

US$'000

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07





Cost of sales

207,508

160,287

335,936





Depreciation and amortisation

(13,898)

(11,425)

(25,635)

Purchased ore and concentrate

(8,394)

(14,151)

(19,911)

Production cost of gravel

(709)

(1,240)

(2,101)

Stock movement in the period

5,017

1,536

(6,284)

Pension current service cost

(667)

(927)

(1,877)

Other

(4,528)

(1,114)

(555)





C1 Cost

184,329

132,966

279,573





Own ore produced (tonnes)

4,504,000

4,450,000

8,793,000

C1 cash cost per tonne $

40.92

29.88

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, and costs of purchased ore, concentrate and production cost of gravel.

  Note 6: Selling and distribution expenses

Selling and distribution expenses for the period ended 30 June 2008 consisted of the following:

US$'000

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07





Personnel costs

496 

  533 

  827 

Railway tariffs

43,518 

26,192 

  59,387 

Sea and river freight

16,545 

17,227 

  33,119 

Commission fees

  962 

818 

2,025 

Other distribution costs

4,202 

1,530 

2,865 

Other marketing costs

968 

600 

  1,816 

Depreciation

  422 

278 

575 


67,113 

47,178 

  100,614 


Note 7: General and administrative expenses

General and administrative expenses for the period ended 30 June 2008 consisted of the following:

US$'000

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07





Personnel costs

16,059 

9,886

  19,621

Buildings and maintenance

  1,920 

1,406 

2,361

Communication costs

436 

190 

 700

Security

  641 

305 

769

Consulting and other professional fees

6,968 

1,549 

  8,464

Taxes other than income tax and other charges

  2,141 

1,814 

3,674

Bank charges

335 

195 

  339 

Other

  2,530 

3,873 

6,833 

Depreciation

1,408 

744 

1,547 


32,438 

19,962 

  44,308 


Note 8: Write-offs and impairment losses

Impairment losses relate to adjustments made against the carrying value of assets where this is higher than the recoverable amount. Write-offs and impairment losses for the period comprise:

US$'000

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07

Write-off/(write-up) of inventories

-

112

(544)

Write-off of property, plant and equipment

-

989

2,112

Impairment of available-for-sale investments

94

-

-

 

94

1,101 

1,568


Note 9: EBITDA


The Group calculates EBITDA as profit from continuing operations before tax and finance less foreign exchange gain/(loss) 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

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07

Profit before tax and finance

213,312

67,604

186,935





Write-offs and impairment losses

94

1,101

1,568

Net gain on disposal of available-for-sale investment

(1,547)

-

(4,714)

Initial public offering costs

3,897

30,142

34,004

Share based payments

1,027

-

-

Negative goodwill generated on rights issue

(5,077)

-

-

Depreciation and amortisation

16,317

14,442

28,264

EBITDA

228,023

113,289

246,057


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 number of ordinary shares. The number of shares was assumed to be constant throughout 2007, the year of the Group's Initial Public Offering.


 

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07

Profit for the period attributable to equity shareholders:








Basic earnings per share (US cents)

23.20

6.03

20.41

Diluted earnings per share (US cents)

23.14

6.00

20.33





Underlying earnings for the period:








Basic earnings per share (US cents)

22.76

11.10

24.93

Diluted earnings per share (US cents)

22.70

11.05

24.84


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

 Thousands

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07





Number of shares




Basic number of ordinary shares outstanding

609,794

607,471

607,796

Effect of dilutive potential ordinary shares

1,492

2,716

2,403

Diluted number of ordinary shares outstanding

611,286

610,187

610,199


Diluted earnings per share is calculated by adjusting the 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

Notes

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07






Profit attributable to equity holders


141,449

36,634

124,076






Write offs/impairments

8

94

1,101

1,568

IPO costs


3,897

30,142

34,004

Negative goodwill generated on rights issue


(5,077)

-

-

Gain on sale of available-for-sale investment


(1,547)

-

(4,714)

Tax on adjusted items


(23)

(275)

(3,217)

Minority interests


(13)

(155)

(220)

Tax on minority interests


3

(39)

48






Underlying earnings


138,783

67,408

151,545


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.

Dividends paid and proposed

US$'000

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07

Declared and paid 




Final dividend for 2007: 3.2 US cents per ordinary share

19,449

-

-

Total 

19,449

-

-


Note 11: Property, plant and equipment

During the six months ended 30 June 2008, the Group acquired property, plant and equipment with a cost of $118,524,000 (31 December 2007: $95,370,00030 June 2007: $50,992,000).



Note 12: Short term deposits with banks

At 30 June 2008 the Group held no interest bearing term deposits with a maturity term of less than one year (31 December 2007: $nil; 30 June 2007: $1,460,000).


Note 13: Cash and cash equivalents

The cash and cash equivalents of the Group at the end of the period comprised:

US$'000

As at 30.06.08

As at 30.06.07

As at 31.12.07

Cash at bank

62,599

71,861

86,963

Petty cash

1

43

3


62,600

71,904 

86,966


Note 14: Share capital

The share capital of the Company consists of 613,967,956 ordinary shares of £0.10 each, giving a nominal value of $121,628,000 which is unchanged since the Group's Initial Public Offering in June 2007.  


Note 15: Shares redemption liability

In October 2003, JSC Poltava GOK sold 15 per cent of its shares to DCM Decometal International Trading GmbH ('DCM') subject to a deferred obligation to repurchase these shares at a fixed price of $11.0 million. The share redemption liability represents the present value in respect of this contractual obligation. The movement in the shares redemption liability comprised:

US$'000

 

Balance as at 1 January 2007

9,062

Interest expense

470

Balance as at 30 June 2007

9,532

Interest expense

504

Balance as at 31 December 2007

10,036

Interest expense

962

Balance as at 30 June 2008

10,998


  Note 16: Interest bearing loans and borrowings

Borrowing and repayment of debt

During the period ended 30 June 2008 the amount of $18,182,000 was repaid on the major bank debt facility (31 December 2007 and 30 June 2007: $35,000,000), a $335,000,000 pre-export finance facility (31 December 2007: $335,000,000; 30 June 2007: $275,000,000). At the period end $135,000,000 of the facility was unutilised (31 December 2007: $135,000,000; 30 June 2007: $145,000,000). 

All other loan balances relate to Ferrexpo Poltava GOK Corporation.

Note 17: Related party disclosure

During the periods presented the Group entered into arm's length transactions with entities under common control of the majority owner of the Group, Kostyantin Zhevago 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. 


Excluding the associated company TIS Ruda, the related party transactions undertaken by the Group during the periods presented are summarised below:



6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07

US$'000

Entities under common control

Other related parties

Entities under common control

Other related parties

Entities under common control

   Other

related

parties

Iron ore pellet sales

-

-

-

46

-

-

Other sales

519

1,686

32

1,562

3,013

4,336

Total revenue

519

1,686

32

1,608

3,013

4,336








Purchase of materials

9,996

8,858

113

7,207

18,417

13,731

Purchase of services

162

270

1,912

718

2,460

767

General and administration expenses

1,212

34

-

-

361

19

Selling and distribution

-

5,347

-

822

1,801

1,797

Other expenses

6

6

-

-

202

76

Total expenses

11,376

14,515

2,025

8,747

23,241

16,390








Finance income

141

-

303

-

415

212

Finance costs

378

-

109

-

141

-

Net finance costs/(income)

237

-

(194)

-

(274)

(212)



Finance income and finance costs


The financing of the Group is principally undertaken with third party financial institutions outside of Ukraine. The Group also has transactional banking arrangements with Finance & Credit Bank in Ukraine which is under common control.


  Sale and purchases of property, plant and equipment and investments



6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07

US$'000

Entities under common control

Other related parties

Entities under common control

Other related parties

Entities under common control

   Other

related

parties

Sale of investments (i)

1,849

-

-

-

5,613

-

Purchase of investments (ii)

-

-

-

-

11,994

-

Sale of property, plant and equipment (iii)

-

-

-

-

690

-

Purchase of property, plant and equipment (iv)

77

-

179

61

5,450

61


(i)   In May 2008 the Group disposed of 2.054% of its share in Vostock Ruda, an available-for-sale investment, to entities under common control for a consideration of $1,849,000 resulting in a gain on disposal of $16,000 (31 December 2007: The Group sold a 6.2% interest in Vostock Ruda, for consideration of $5,613,000, resulting in a gain on disposal of $4,714,000; 30 June 2007: $nil).

(ii)   During 2007 the Group acquired 9.91%, ex rights, of the share capital in OJSC Stahanov, a quoted rail car manufacturing business located in the Luhansk region of Ukraine for consideration of $11,994,000 from an entity under common control. Following successful completion of the capital reorganisation in May 2008, this holding was reduced to 3.3%.

(iii)  During 2007 land and buildings not used by the Group were disposed to an entity under common control for $690,000.

(iv)   During 2008 the Group purchased property, plant and equipment from entities under common control for a consideration of $77,000 (2007: $5,450,000 of which $4,965,000 was for the purchase of 110 railcars from OJSC Stahanov).

On 15 July 2008 the company subscribed for additional capital amounting to $270,000 in OJSC Stahanov as part of the rights issue of that company.


The outstanding investments/balances with related parties for the periods presented are as follows:



As at 30.06.08

As at 30.06.07

As at 31.12.07

US$'000

Entities under common control

Other related parties

Entities under common control

Other related parties

Entities under common control

   Other

related

parties








Investments available for sale

35,962

3

35,884

97

47,023

97

Total non-current assets

35,962

3

35,884

97

47,023

97








Investments available for sale

8,768

-

-

-

2,839

-

Promissory notes issued

-

-

218

-

218

12

Trade and other receivables

2,671

243

10,859

1,123

793

581

Prepayments and other current assets

4

110

-

-

-

-

Short term deposits with banks

-

-

1,460

-

-

-

Cash and cash equivalents

10,740

-

4,015

-

8,727

-

Total current assets

22,183

353

16,552

1,123

12,577

593








Trade and other payables

388

740

874

1,597

2,185

1,099

Accrued liabilities and deferred income

367

-

-

-

-

-

Current liabilities

755

740

874

1,597

2,185

1,099


As of 30 June 2008 available for sale investments included $35,962,000 in LLC Atol (31 December 2007: $34,530,000), $7,737,000 in OJSC Stahanov (31 December 2007: $12,493,000) and $1,031,000 in Vostock Ruda (31 December 2007: $2,839,000).


As of 30 June 2008 trade and other receivables included outstanding amounts relating to the disposal of Vostock Ruda of $1,925,000, including exchange rate difference (31 December 2007: $nil).

As of 30 June 2008 Cash and cash equivalents with Finance & Credit Bank were $10,740,000 (31 December 2007: $8,727,000).


Note 18: Reconciliation of profit before income tax to net cash flow from operating activities

US$'000

6 months ended 30.06.08

6 months ended 30.06.07

Year ended 31.12.07

Profit before income tax

201,350

54,484

160,760

Adjustments for:




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

16,317

14,442

28,265

Interest expense

7,473

9,762

24,488

Interest income

(1,214)

(849)

(3,242)

Share of (income)/losses of associates

(1,420)

118

(687)

Movement in allowance for doubtful receivables

121

-

336

(Gain)/loss on disposal of property, plant and equipment

677

(140)

-

Write off and impairment losses 

94

1,101

1,568

Site restoration provision

243

-

1,269

(Gains)/ losses on disposal of investments available for sale and other financial instruments

(1,546)

294

(4,714)

Employee benefits

1,394

1,562

3,915

IPO costs

3,897

30,142

34,004

Share based payments

1,027

-

-

Negative goodwill generated on rights issue

(5,077)

-

-

Foreign exchange (gain)/loss

4,066

34

3,467

Operating cash flow before working capital changes

 227,402

110,950

249,429





Changes in working capital




(Increase)/decrease in trade accounts receivable and other receivables

(45,372)

16,110

13,951

(Increase)/decrease in inventories

(18,689)

(7,904)

(7,840)

Increase/(decrease) in trade and other accounts payable

19,391

(7,722)

6,534

(Increase)/decrease in other taxes receivable

5,747

-

(14,411)

Cash generated from operating activities

188,479

111,434

247,663





Interest paid

(7,487)

(9,743)

(24,525)

Income tax paid

(37,711)

(17,439)

(32,018)

Post employment benefits paid

(1,476)

(928)

(2,274)

Net cash flows from operating activities

141,805

83,324

188,846


Note 19: Commitments and contingencies


US$'000

As at 30.06.08

As at 30.06.07

As at 31.12.07

Operating lease commitments

21,776

13,863

13,744

Capital commitments on purchase of property and equipment

79,420

16,348

60,904

Guarantees provided

316,818

275,000

335,000


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.  


Tax and other regulatory compliance

Ukrainian legislation and regulations regarding taxation and custom regulations continue to evolve. Legislation and regulations are not always clearly written and are subject to varying interpretations and inconsistent enforcement by local, regional and national authorities, and other Governmental bodies. Instances of inconsistent interpretations are not unusual.  


The uncertainty of application and the evolution of Ukrainian tax laws, including those effecting cross border transactions, create a risk of additional tax payments having to be made by the Group, which could have a material effect on the Group's financial position and results of operations. The Group does not believe that these risks are any more significant than those of similar enterprises in Ukraine.


Note 20: Subsequent events

No material adjusting or non-adjusting events have occurred subsequent to the year-end that warrant disclosure in these financial statements.



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