Interim Results

RNS Number : 5622Q

Ferrexpo PLC

05 August 2010

 



5 August 2010

Ferrexpo plc

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

Interim Results

Ferrexpo, the FTSE 250 iron ore producer, today announces its results for the six months ended 30 June 2010.

Highlights

Operations

Record production and significant price increases

·      Production at record levels up 18% to 4.886 million tonnes (1H 2009:4.139 million tonnes)

·      Sales volumes up 13% to 4.738 million tonnes (1H 2009: 4.194 million tonnes)

·      Significant price increases of 90% to 120% achieved in 2Q 2010 compared to 2009/10 annual benchmark

Financial

Strong financial performance with increased profitability 

·      Revenue up 74% to US$526 million (1H 2009: US$302 million)

·      EBITDA up 257% to US$215 million (1H 2009: US$60 million)

·      Underlying PBT up 393% to US$183 million¹ (1H 2009: US$37 million)

·      PBT up 340% to US$166 million (1H 2009: US$38 million)

·      Net Debt US$257 million at period end in-line with 31 December 2009

·      Interim dividend maintained at 3.3 US cents per share

Outlook

·      Industry pricing mechanism continues to evolve

·      Maintain a flexible marketing strategy

·      Continue to produce at full capacity and to manage cost position

·      Re-evaluating costs and schedule for Yersistovo project with aim of doubling production in medium term

·      Prudent financial management to ensure sustainability through all economic cycles

Michael Abrahams, Chairman said:

"These results reflect the considerable progress the Company has made during the first six months of the year. We reacted quickly to capitalise on improved demand in our Traditional markets. Production was at full capacity through-out the period achieving record levels of pellet volumes while cost increases were contained. The Group is confident that it can continue to produce at full capacity and place all of its output through its established market presence thus underpinning our expectations for a strong financial performance for the rest of the year. "

Ferrexpo will be hosting an analyst presentation today at 8.30am. The presentation will be available live on the company's website at www.ferrexpo.com

^{1 Excludes exceptional write down on VAT receivable of US$15 million}

For further information, please contact:

Ferrexpo:
Ingrid Boon	[phone]
Pelham Bell Pottinger
Charles Vivian	[phone]

Notes to Editors:

Ferrexpo 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 approximately 9 million tonnes, most of which is exported to steelmakers around the world. The 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 Statement

Summary

I am delighted to report that for the six months ended 30 June 2010, Ferrexpo responded to improved industry fundamentals with record production and robust cost control. Following the cessation of annual benchmark pricing as of 31 March, the industry, led by the major producers, achieved significant price increases for iron ore and iron ore pellets. These factors resulted in a substantially improved financial performance in the first half of 2010 compared with the first half of 2009.

Results

Sales volumes increased 13% to 4.7 million tonnes (1H 2009: 4.2 million tonnes) while revenues increased 74% to US$526 million (1H 2009: US$302 million). The Group produced at full capacity through-out the period which allowed for full absorption of the fixed cost base. This underpinned a 257% increase in EBITDA for the period to US$215 million (1H 2009: US$60 million) resulting in an EBITDA margin of 41% (1H 2009: 20%). Underlying Group profit before tax increased by 393% to US$183 million (1H 2009: US$37 million). A US$15 million exceptional charge was taken to reflect an estimated discount in the market value of the VAT bond to be issued to Ferrexpo by the Ukrainian government. This is part of the government's industry wide solution to repay outstanding VAT to the Ukrainian business sector. Profit before tax for the period was US$166 million an increase of 340% over the comparable period (1H 2009: US$38 million).

Pricing Environment and Marketing

In the first six months of 2010, European steel mills continued to re-stock iron ore pellets following very low inventory levels in 2009 and to operate at higher levels, while Chinese iron ore requirements continued to underpin world demand. Due to the reduction of capacity by the major iron ore pellet suppliers during 2009 demand for pellets outstripped supply in the first half of the year. This proved an ideal scenario for iron ore demand and pellet price recovery.

We believe, however, there is currently a growing divergence of pricing horizons applied by producers who had negotiated quarterly price agreements in the first half of the year. We anticipate it will take some time for the transparency which existed under the annual pricing system to return as the market's pricing mechanism continues to evolve. 

Ferrexpo has historically been a price follower of major global seaborne pellet producers and it intends to continue with this strategy once the industry establishes a generally accepted pricing mechanism.

Meanwhile Ferrexpo has continued to execute its proven marketing strategy. This is based on an established logistics infrastructure and close geographic proximity to its core customer base in Central and Eastern Europe. This provides Ferrexpo with a significant advantage to competitively deliver via rail and barge direct to the customer from the mine. The Group's 49% owned TIS-Ruda port terminal on the Black Sea provides preferential access to the seaborne Growth markets in Asia as well as to our Natural markets in Western Europe, Turkey and the Middle East. This ensures that Ferrexpo is less dependent on its Traditional customer base for pricing and product demand. 

Ferrexpo's geographic proximity to its Traditional and Natural markets allows the Group to deliver on a just-in-time (JIT) basis to its customers thereby providing working capital flexibility to clients who would prefer smaller continuous lot sizes rather than delivery of large shipments. This strategy enabled the Group to increase its market share to these customers during the 2009 downturn when customers were reluctant to commit to large shipments. In the first half of 2010, Ferrexpo maintained those gains in market share as its sales mix returned to a more normal sales pattern following a recovery in the European steel industry. 67% of the Group's sales volume went to Traditional customers as opposed to 38% in the first half of 2009. This reflects once again the advantages of our geographic location and established logistics infrastructure which allowed us to react swiftly to changes in regional demand.

In the first half of 2010 over 90% of the Group's sales volumes were based on long-term volume framework agreements compared with 44% in the first half of 2009. It is Ferrexpo's ongoing strategy to allocate approximately 10% of sales to potential new customers through trial cargos. Indeed the Group was successful in signing a new long term volume framework agreement, during the period, with a highly regarded major Asian steel mill.

Production

The Ferrexpo Poltava Mine ("Poltava") has been producing iron ore pellets reliably for the last 30 years. In the first six months of 2010 the mine produced record levels of pellets as it operated at full capacity through-out the period and increased purchases of third party concentrate.

Through ongoing production improvements at the Poltava mine, Ferrexpo is becoming increasingly competitive in the market place. Its cost of production is placed towards the lower end of the global cost curve which provides the Company with flexibility to respond to lower iron ore prices relative to its higher cost peers as was demonstrated in 2009.

Total production increased 18% over the period to approximately 4.9 million tonnes of pellets compared with 4.1 million tonnes of pellets produced in the first half of 2009. Production of own ore increased 8% to 4.4 million tonnes for the six months ended 30 June 2009 while processing of third party concentrate increased substantially to meet higher demand.  Ferrexpo will continue to purchase third party concentrate provided it can ensure an acceptable return.

The Group produces a mix of 62% and 65% iron content pellets. Of the total 4.9 million tonnes of pellets produced during the period, 49.3% were higher grade 65% iron content pellets an increase compared with the first half of 2009 where 65% iron content pellets comprised 48.4% of total production.

Costs

In the first six months of 2010, local PPI inflation was 14.3% while there was also cost increases associated with a stronger commodity price environment. Approximately 70% of costs are in Ukrainian hryvnia while all revenues are received in US dollars. The hryvnia has remained broadly stable on average since the end of 2009 at around UAH8.0 to the US dollar.  This has resulted in slightly higher production costs in the period under review compared to the second half of 2009.

Ferrexpo is continually focused on containing operating cost increases and these were partially offset by the Business Improvement Programme ("BIP"). During the period under review, the Poltava mine was able to reduce the consumption per tonne of pellets produced of both energy and raw material inputs by between 1.5% and 5%.

Overall the average C1 cash cost of production was US$37.81 per tonne for the first half of 2010 in line with the Company's expectations. This represented a 9% increase compared to the December 2009 C1 cash cost of US$34.80 per tonne but it was, however, lower than the local inflation rate of 14% for the period.

Strategy

Ferrexpo has a clear strategy, its capital expenditure projects are aimed at the expansion and upgrade of the existing mine and processing facilities and to unlock the substantial value in the Group's under exploited reserves and resources, starting with the Yeristovo deposit. These projects are discretionary and can be undertaken when the Group's cash flows and funding capabilities allow, minimising the execution risk to the financial position of the Company.  As such the speed of development will depend on the performance of the business. Ferrexpo believes this balanced approach will allow the Group to benefit from incremental production while maintaining financial prudence for the long term viability of the Company.

The finalisation of the estimated budgets and timings of these projects are subject to Board approval which is anticipated in the latter part of 2010.

Dividend

It is the stated strategy of the Company that it should pay modest and consistent dividends based on continuing profitability and cash generation through the economic cycle.

The Board believes that the business has sufficient operational flexibility to respond to the demands it will face in the second half of 2010, and as a result, it is appropriate to continue with a dividend in line with prior years. The Directors therefore recommend an interim dividend in respect of profits generated for the Group in the first half of 2010 of 3.3 US cents per Ordinary Share for payment on 17 September 2010 to shareholders on the register at the close of business on 13 August 2010. The dividend will be paid in UK pounds sterling with an election to receive US dollars.

People

Ferrexpo has a talented international team committed to the continuing success of the business. On behalf of the Board I would like to thank them all for their hard work and dedication.

Corporate Governance and Social Responsibility

Ferrexpo understands there is a clear relationship between high quality corporate governance and creation of shareholder value. The Board's primary responsibility is to ensure committed and continued compliance with the UK Corporate Governance Code. Ferrexpo has a balanced and experienced Board dedicated to fostering a culture of the highest standards of corporate governance throughout the Company.

The Board's Corporate Safety and Social Responsibility ('CSR') Committee monitors the management of the Group's health, safety, environmental and community programmes on a regular basis in line with best practice for mining companies. Awareness of safety-conscious behaviour has improved markedly during the period under review we are able to report that, as with 2009, there were no production-related fatalities at our operations during the period under review. CSR is a priority within our business and we are pursuing our initiatives to ensure a culture of continuing improvement.

Principal Risks and Uncertainties

In the second half of 2010, the pricing environment may be volatile as the industry looks to establish a generally accepted pricing mechanism while differences in geographic demand may emerge. As the Group demonstrated in 2009 it will continue to react flexibly to changes in geographic demand and increased variability in pricing. The Group will at all times practice financial prudence in order to mitigate these risks.

Outlook

The Group is confident that it can continue to produce at full capacity and place all of its output through its established market presence thus underpinning our expectations for a strong financial performance for the rest of the year. 

Michael Abrahams CBE DL

Chairman

OPERATING & FINANCIAL REVIEW

Operating Highlights

·      Production at record levels up 18% to 4.886 million tonnes (1H 2009:4.139 million tonnes)

·      Sales volumes up 13% to 4.738 million tonnes (1H 2009: 4.194 million tonnes)

·      Significant price increases of 90% to 120% achieved in 2Q 2010 compared to 2009/10 annual benchmark

Financial Highlights

·      Revenue up 74% to US$526 million (1H 2009: US$302 million)

·      EBITDA up 257% to US$215 million (1H 2009: US$60 million)

·      Underlying PBT up 393% to US$183 million (1H 2009: US$37 million)¹

·      PBT up 340% to US$166 million (1H 2009: US$38 million)

·      Net Debt of US$257 million at period end (Year end 2009: US$258 million)

·      Dividend maintained at 3.3 US cents per share

OPERATING REVIEW

Key Statistics

		UOM	Six months ended   30 June 2010	Six months ended 30 June 2009	% Change
Iron ore mined		000't	14,203	13,694	3.7
Average Fe content		%	30.21	30.30	(0.3)
Concentrate produced from own ore		000't	5,510	4,991	10.4
Average Fe content		%	63.21	63.35	(0.2)
Purchased concentrate		000't	509	17	2894
Average Fe content		%	66.50	65.56	1.4
Total pellet production (BFP)		000't	4,886	4,139	18.1
	From produced concentrate	000't	4,441	4,123	7.7
	- Lower grade	000't	2,384	2,120	12.5
	Average Fe content	%	62.19	62.15	0.1
	- Higher grade	000't	2,057	2,003	2.7
	Average Fe content	%	64.99	64.89	0.2
	From purchased raw materials	000't	445	15	2867
	- Lower grade	000't	91	15	507
	Average Fe content	%	62.19	62.15	0.1
	-Higher grade	000't	354	-	-
	Average Fe content	%	64.99	-	-
Pellet sales volume		000't	4,738	4,194	13.0
Gravel production		000't	1,437	1,478	(2.8)

 ^{1 Excludes exceptional write down on VAT receivable of US$15 million}

Existing Operations

The Group's operations performed strongly in the first six months of the year producing and selling record volumes. Total production of pellets, including from own ore and purchased third party concentrate, was at record levels in March 2010 (848,300 tonnes), May 2010 (860,300 tonnes) and June 2010 (864,200 tonnes). The previous high for production was in August 2008 (840,900 tonnes). 

Iron ore mined during the period increased 3.7% to 14,202,600 tonnes (1H 2009: 13,693,500 tonnes), while production of concentrate from own ore increased 10.4% to 5,509,600 tonnes (1H 2009: 4,990,500 tonnes) as the Group drew down on existing stocks in storage. Total pellets produced from own ore increased 7.7% which consisted of a 2.7% increase in production of higher quality 65% iron content pellets and a 12.4% increase of 62% iron content pellets compared to the first half of 2009.

Pellet production from purchased concentrate increased significantly to meet higher demand. The Group produced 444,600 tonnes pellets from third party concentrate compared with only 15,000 tonnes produced in the first half of 2009. The Group plans to continue to purchase third party concentrate during the remainder of 2010, provided acceptable margins can be realised, in order to maximise production and reduce the effect of its fixed cost base.

Overall, total pellet production increased 18% to 4,886 kilotonnes in the first half of 2010 (1H 2009: 4,139 kilotonnes).

Stripping volumes at the Poltava mine increased 2.5% in the first half of 2010 to 12,285 cubic metres. Approximately 40% of the stripping volumes were capitalized during the period. This work allows for preparation of the mine area in order to expose more of the richer ore which enables the production of increased quantities of higher quality 65% Fe pellets.

The Poltava management continues to drive the Business Improvement Program ("BIP") forward. During the period under review, the Poltava mine was able to reduce the consumption of electricity per tonne of pellets produced by 5% as well as the consumption of fuel and grinding bodies per tonne of pellets produced by 2% respectively compared to the first half of 2009.

Ferrexpo's average C1 cash cost increased 8.6% to US$37.81 per tonne in the first six months of 2010 compared with the December 2009 C1 cash cost of US$34.80 per tonne and 9.5% compared with the C1 cash cost of US$34.50 per tonne for the six months ended 30 June 2009. 

The Ukrainian PPI inflation rate from January to June 2010 was 14.3% while year on year PPI inflation was 21.1% to June 2010. The Group's costs are principally denominated in Ukrainian hryvnia. The hryvnia has remained broadly stable on average since the end of 2009 resulting in higher local production costs compared to the second half of 2009. Over 50% of Ferrexpo's C1 cash cost are energy related. Electricity tariffs increased 4.4% in the second quarter. There were no other government regulated tariff increases during the period. Costs for grinding media, which are 10% of the C1 cash cost, increased 12.5% in the second quarter due to higher steel prices. The increase in steel prices was more than reflected in higher sales prices for our iron ore pellets during the period under review.

Overall, the Group once again, benefitted from producing at full capacity through-out the period under review. This ensured full absorption of the fixed cost base and helped mitigate inflationary cost pressures.

The number of personnel on the Ferrexpo Poltava's payroll decreased slightly over the first six months of the year, with 7,985 people employed at the 30 June 2010 compared to 8,028 at 31 December 2009. While the number of personnel employed at Ferrexpo Yeristovo increased to 187 employees compared to 78 at 31 December 2009. Overall, average salary costs have increased in line with domestic inflation.

The Group recorded an exceptional item for a US$15 million write down of the VAT receivable. This reflects an estimated discount in the market value of the VAT bond to be issued by the Ukrainian government to Ferrexpo for the repayment of outstanding VAT. This exceptional charge was fully reflected in the income statement for the period. The issue of VAT bonds is an industry wide solution proposed by the Ukrainian government for the repayment of overdue VAT to the Ukrainian business sector. A full discussion is disclosed in the Financial Statements note 13.

Marketing and Distribution

The global recession, that began in the final quarter of 2008 and commenced a slow recovery in the latter part of 2009, has had a marked effect on industry fundamentals, specifically on annual iron ore benchmark pricing arrangements. Customer reliance on iron ore spot market prices during the downturn increased dramatically notwithstanding agreed benchmark pricing between steel producers and iron ore suppliers. As a result, the largest iron ore producers substantially agreed quarterly pricing with their customer base from 1 April 2010. This represents a fundamental change to the previous annual pricing system which had been in place for 40 years.

In spite of the change to shorter term pricing horizons there is a lack of clarity with respect to the frequency with which price settlements will occur going forward. Ferrexpo expects that it could take some time for a generally accepted methodology to evolve and for the pricing transparency that existed under annual benchmark price arrangements to return.

Robust demand and provisional price settlements in the first six months of 2010 allowed the Group to achieve significant price increases of 90% to 120% in the second quarter of the year. Ferrexpo will continue set provisional prices with customers at current market levels going forward. 

The recovery in the European steel industry can be seen in the first half results. Ferrexpo's geographic sales mix reverted to more normal patterns with 67% of total pellet sales volumes to its Traditional markets, 23% to Growth markets and 10% to Natural markets. By comparison in the first half of 2009, only 38% of sales were made to Traditional markets, 5% to Natural markets and the remaining 57% of sales went to Growth markets.

Ferrexpo's Traditional markets are those that it has supplied historically. Many of its customers within Central and Eastern Europe operate steel plants that were designed to use its iron ore pellets and the Poltava mine has been supplying some of these customers for more than 20 years. Moreover, Ferrexpo has a well established logistics infrastructure to these markets by barge and rail. Traditional markets include Austria, Bulgaria, Poland, Romania, Russia, Czech Republic, Serbia and Slovakia.

Natural markets are those in which, due to the Group's location, Ferrexpo has potential freight advantages and JIT delivery flexibility over more distant producers. Natural markets include Turkey, the Middle East and Western Europe.

Growth markets include China and other Asian markets that are fuelling increasing demand for iron ore, offering significant expansion for Ferrexpo's future production growth. The Group's TIS Ruda JV port terminal on the Black Sea provides Ferrexpo with preferential access to the seaborne Natural and Growth markets. Ferrexpo positions itself in these markets as an independent, alternative and reliable supplier. The Group's ongoing strategy to establish relationships with potential new customers through trial cargos led to a new long term volume framework agreement during the period with a well regarded major Asian steel mill. 

Capital Expenditure and Growth Projects

The Group placed all significant capital expenditures on hold in October 2008 in response to the global financial crisis. In the first six months of 2010 we did, however, continue to modestly invest in our growth projects so as to progress critical path items and maintain value.

The Group spent US$42.3 million on capital expenditure in the first half of 2010, in-line with the first half of 2009 (1H 2009: US$43.2 million). US$21.3 million of the capex spend was for the Yeristovo project which included US$16.1 million for payment of CAT equipment. During the period four CAT trucks were delivered to the Yeristovo site with a further truck delivered at the end of July. Four draglines are in operation at Yeristovo with three in the pit and one on the boundary of the pit loading rock and gravel.

With the subsequent material improvement in iron ore markets and current pricing levels the Group is in a position to increase its level of expenditure and is actively engaged in a process of re-evaluation of project budgets and schedules.

It is Ferrexpo's strategy to develop the projects described below from the Group's own internal generated free cash flow. To allow this, the projects can, if required be developed in stages. This approach will enable Ferrexpo to prudently manage its financial exposure while at the same time allow the Group to benefit from incremental increases in the production of pellets and concentrate.

Northern Pushback and mine life extension of existing pit (Ferrexpo Poltava mine)

The Northern Pushback project focuses on extending the current pit to access additional high quality K22 ore at the northern end of the Lavrikovskoe deposit. The extension is expected to increase mine capacity by approximately 3.5 million tonnes per annum of ore which, after processing, should convert into approximately 1.2 million tonnes per annum of 65% iron content pellets. The project primarily involves an additional mining fleet as well as mine stripping operations.

The Northern Pushback project was initiated in 2007 and subsequently put on hold in October 2008 before any significant level of stripping activity had been undertaken. The Group is engaged in revaluating the project's schedule and budgets.

Ferrexpo is also conducting a program of additional stripping to extend the life of the existing pit. Combined with the Northern Pushback project, management estimates this could deliver production of 32 million tonnes per annum of iron ore compared to current level of approximately 28.5 million tonnes per annum, and extend the life of the Poltava mine until approximately 2038. The additional mining fleet is expected to be delivered in the second half of 2010, following which Ferrexpo Poltava will re-initiate stripping operations.

Quality upgrade at current processing facilities (Ferrexpo Poltava mine)

Ferrexpo is planning to upgrade the existing concentrating facilities at the Poltava mining facility to allow it to increase the proportion of 65% iron content pellets to 100% of total pellet production. Currently approximately half of the Group's production is split between 65% iron content pellets and 62% iron content pellets. Development will include additional grinding facilities within the current concentrator plant to achieve a finer grade as well as a second flotation plant to allow the concentrate to be processed through the flotation stage producing a single grade suitable for 65% iron content pellets. The expected timeframe for this project is three years. It is envisaged that until this project is completed, production of 65% and 62% iron content pellets will remain at around current levels.

Developing the Yeristovo deposit

Ferrexpo holds a licence to mine the Yeristovo iron ore deposit, which is adjacent to the current Poltava mine. The deposit has probable reserves of approximately 632 million tonnes of iron ore, with an average total iron content of approximately 34%. Yeristovo will be managed and operated independently from the existing mine, although its proximity to the existing pit will facilitate the sharing of certain facilities and resources, particularly during the early stages of operation, and should allow current best practice being used in the Poltava mine to be introduced immediately at the Yeristovo mine.

In terms of minimising the execution risk to the financial position of the Group, Yeristovo will be developed in stages, first by stripping and developing the mine, then adding concentrating and processing capacity and finally pelletising capacity. This will provide both investment flexibility should market conditions or the Group's cash flow position vary from plan, and allow the Group to benefit from increases in incremental production.

Accordingly, it is anticipated that the project will increase the production of pellets initially processed by the existing Poltava mining facility from the current 9.0 million tonnes to 12.0 million tonnes per annum. This will be due to additional ore from the new Yeristovo mine supplemented by ore from the Northern Pushback expansion project currently planned at the Poltava mining facility.

Once completed, it is anticipated that the Yeristovo open pit mine will produce up to 30 million tonnes of iron ore which can be processed into merchant concentrate or iron ore pellets depending on market demand.

Financial Review

Summary of Financial Results

US$ 000	6 months to 30 June 2010	6 months to 30 June 2009	% Change
Revenue	525,833	301,759	74.3
EBITDA	215,172	60,295	256.9
As % of revenue	41%	20%
Exceptional VAT write down	(15,000)	Nil	n/a
Underling profit before taxation	183,011	37,111	393.1
Reported profit before taxation	166,164	37,792	339.7
Income tax	(27,458)	(9,084)	202.3
Underlying earnings	154,964	27,848	456.5
Reported profit for the period	138,706	28,708	383.2
Underlying earnings per share	26.50	4.76	456.7
Reported earnings per share	23.62	4.88	384.0

Revenue increased by 74.3% to US$525.8 million for the six months ended 30 June 2010 (1H 2009: US$301.8 million). This was driven by the global economic recovery following the downturn in 2009, with improved demand from our core customer base in our Traditional markets in Central and Eastern Europe. Sales volumes increased 13.0% to 4,738 kilotonnes in the first six months of 2010 compared with 4,194 kilotonnes in the in the equivalent 2009 period.

Pricing for the first quarter of 2010 was largely based on the annual benchmark price to 31 March 2010. In the second quarter the Group agreed quarterly pricing with its customer base with an achieved Q2 price increase of between and 90% and 120% based on the 2009/10 annual benchmark price.

The mix of pellet sales volumes between Growth and Traditional markets returned to normal in the first half of 2010 compared with the first half of 2009. In the first half of 2009, 57% of pellet sales volumes were made to Growth markets as sales were diverted to Asia to offset poor demand in Europe. In the first half of 2010 only 23% of sales volumes went to Growth markets and 67% went to Traditional markets. 

Cost of sales

The C1 cash cost of production per tonne is defined as the cash costs of production of iron ore divided by production volume of iron ore. This excludes costs such as depreciation, pension costs, stock movement, costs of purchased ore and concentrate, production cost of gravel, and one-off items.

For the six months ended 30 June 2010, Ferrexpo's average C1 cash cost increased 9.5% to US$37.81 per tonne compared with US$34.54 for the comparable 2009 period. The Group experienced cost increases from cyclical inputs such as oil and steel. The C1 cash cost per tonne once more benefitted from producing at full capacity through-out the period under review. This allowed full absorption of the fixed cost base which along with the Business Improvement Programme helped mitigate inflationary cost pressures. As a result, the increase in C1 cash costs was lower than the local PPI inflation rate from January to June 2010 of 14.3%.

Just over half of the C1 cash costs are denominated in Ukrainian hryvnia. The hryvnia has remained broadly flat on average since the end of 2009 resulting in higher local production costs compared to the second half of 2009.

Approximately half of Ferrexpo's C1 cash cost are energy related. Electricity tariffs increased 4.4% in the second quarter. There were no other government regulated tariff increases during the period. Costs for grinding media, which are 10.0% of the C1 cash cost, increased 12.5% in the second quarter due to higher steel prices. The increase in steel prices was more than reflected in higher sales prices for our iron ore pellets during the period under review.

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

	6 months to 30 June 2010		6 months to 30 June 2009
	US$ 000	% of total	US$ 000	% of total
Electricity	44,589	26.6	37,480	26.3
Gas	20,014	11.9	18,573	13.0
Fuel	16,113	9.6	11,076	7.8
Materials	34,856	20.8	31,128	21.2
Spare parts and consumables	27,646	16.5	23,318	16.4
Personnel costs	21,467	12.8	18,803	13.2
Royalties and levies	3,231	1.8	3,044	2.1
C1 Cost Of Sales	167,916	100%	142,422	100%
C1 Cost per tonne	37.81	-	34.54	-
Own ore pellet production	4,441		4,123

Overall, cost of sales for the six months ended 30 June 2010 was US$216.3 million (1H 2009: US$159.7 million). Apart from the impact of C1 cash costs discussed above cost of sales also includes third-party iron ore concentrate purchases. The Group purchased 445 thousand tonnes of pellet equivalent third party concentrate during the period (1H 2009: 15 thousand tonnes). The Group will continue to purchase third party concentrate provide adequate margins can be achieved.

Selling and distribution expenses

The main components of Ferrexpo's marketing and distribution costs are railway freight costs to the Ukrainian border as well as port charges and international freight expenses for pellets shipped by sea and ocean vessels to customers on a DES/CFR basis.

The following table highlights the selling and distribution expenses for the periods indicated:

	6 months to 30 June	6 months to 30 June
(US$ million unless otherwise stated)	2010	2009
Railway transportation	42,702	30,590
Port charges	15,774	18,083
International freight	19,238	21,634
Other (commissions, insurances, personnel, depreciation, advertising…)	7,140	5,499
Total Selling and Distribution expenses	84,854	75,806
Total Sales volume, kt	4,738	4,194
Cost per tonne of pellets sold (incl international freight)	17.9	18.1
DAF/FOB per tonne of pellets sold	13.1	12.1

Total selling and distribution expenses increased 11.9% to US$84.9 million, compared to US$75.8 million in the six months ended 30 June 2009. The increase was a function of 13.0% higher sales volumes, local inflation and a return of our geographic sales mix to more normal patterns.

The following table shows the geographic split of pellet sales by volume:

	6 months to 30 June 2010	6 months to 30 June 2009
Traditional1	67%	38%
Natural2	10%	5%
Growth3	23%	57%
Total	100%	100%

 
¹Traditional markets include Austria, Czech Republic, Poland, Slovakia, Romania, Bulgaria, Ukraine and Russia

²Natural markets include Western Europe, Turkey and the Middle East

³Growth markets include China, India, Japan and South Korea

Of the volumes sold, 67.0% was sold to our Traditional customers in Central and Eastern Europe compared with 38.0% in the first half of 2009. The increased volumes resulted in a 40.0% increase in railway transportation costs to US$42.7 million in the first half of 2010 (1H 2009: US$30.6 million), as our Traditional customers largely receive their product by rail.

Port charges reduced 12.8% to US$15.8 million (1H 2009: US$18.1 million), reflecting lower seaborne sales to Growth markets as their share of sales volume fell to 22.7% in the first half of 2010 compared with 57.0% in the first half of 2009.

International freight costs decreased 11.1% to US$19.2 million (1H 2009: US$21.6 million) reflecting a normalised level of shipments to Growth markets. The Group increased barge shipments in Central Europe during the period as well as increased volumes to Natural markets, which accounted for 10.3% of sales volumes for the period compared to 4.5% in the first half of 2009.

General and administrative expenses

General and administrative expenses increased 8.1% to US$24.1 million for the six months ended 30 March 2010 (1H 2009: US$22.3 million). The increase was due to inflation in Ukraine and higher activity related to projects and business development.

Other income and expense

Other income was US$0.5 million for the six months ended 30 June 2010 (1H 2009: US$2.9 million).The decrease is due to a US$1.0 million reimbursement of social security costs included in the prior year balance as well as lower gains from the sale of current assets in the first six months of 2010. Other expenses were US$2.1 million compared to US$1.6 million for the six months ended 30 June 2009. The difference was largely due to a US$1.1 million reversal of a doubtful debt in the first six months of 2009. 

EBITDA

Ferrexpo defines 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 and other expenses plus the net gains and losses from disposal of investments and property, plant and equipment.

EBITDA increased materially by 256.7% to US$215.1 million for the six months ended 30 June 2010 compared with US$60.3 million for the six months ended 30 June 2009. The increase was due to 13.0% higher sales volumes and a 61.5% higher average DAF/FOB sales price. This was partially offset by a 9.5% increase in C1 cash costs per tonne. The EBITDA margin for the first half of 2010 was 41.3% compared with 20.0% for the first half of 2009.

Write down of VAT receivable

The Ukrainian Cabinet of Ministers published on 1 June 2010 that the government intends to convert outstanding overdue VAT balances into government bonds with a coupon interest rate of 5.5% per annum paid semi annually with 10 half-yearly principal repayments.

On 18 June 2010, the Group applied to convert all of the VAT outstanding as of 31 December 2009 into government bonds amounting to US$81.3 million. It is anticipated that the conversion will take place in the second half of 2010.

Accounting standards require such financial instruments, when issued, to be marked to market, or, if no market exists, an estimate to be made as to the fair value. Market yields on Ukrainian domestic hryvnia debt currently range between 12.0% to 16.0% and have recently been volatile. If these yields were to continue at these levels, they would be higher than the coupon interest rate on the proposed new bond issue. As a result, a fair value adjustment could be realised on the initial recognition of this financial instrument. Whilst it is not possible to value this instrument exactly prior to its issue, an estimated gross charge, before any tax deductions of US$15.0 million, has been recorded in the income statement to reflect management's estimate of the difference between the amount of the VAT receivable that is refundable and the expected fair value of the government bond to be issued in settlement of this debt. This estimate will be revised when the final terms, conditions and features of the new financial instrument are known.

This is an exceptional item and the write-down has accordingly been disclosed as a separate line item in the Group's consolidated income statement.

Finance income and expense

Finance income decreased to US$0.7 million for the six months ended 30 June 2010 (1H 2009: US$1.6 million) due to lower average cash balances. At the end of the first half of 2010 the Group had a cash balance of US$60.2 million compared with US$74.3 million at the end of the first half of 2009. Finance expense increased to US$16.9 million for the six months ended 30 June 2010 (1H 2009: US$10.4 million) due to higher interest rates under the new pre-export financing facility (US LIBOR +7.0% as compared with US LIBOR + 2.4% under the old facility). Gross borrowings as of 30 June 2010 were US$317.0 million compared to US$295.0 million as of 30 June 2009 and US$269.5 million as of 31 December 2009.

Foreign exchange gain/(loss)

Operating foreign exchange gains and losses result from the re-valuation of monetary items on the balance sheet, such as trade receivables and trade payables, which are denominated in a currency other than the Group reporting currency.

The change in the operating foreign exchange differences is related to the fluctuations in the UAH/US$ over the comparable periods. The Ukrainian hryvnia slightly appreciated against the US dollar from UAH 7.985 to UAH 7.907 during the six month period ended 30 June 2010 compared with UAH 7.700 to UAH 7.630 in the equivalent 2009 period.

The operating foreign exchange loss was US$0.7 million for the six months ended 30 June 2010 compared with an operating foreign exchange loss of US$0.8 million for the six months ended 30 June 2009.

Non-operating foreign exchange gains and losses result from the re-translation of non-operating items on the balance sheet, such as financial liabilities, loans, taxes and dividends, which are denominated in a currency other than the Group reporting currency.

Non-operating foreign exchange gains decreased to US$0.8 million for the six month period ended 30 June 2010 (1H 2009: US$3.7 million). The change primarily related to CHF/US$ exchange rate movements and translation of Ferrexpo AG liabilities, which are denominated in Swiss francs, as well as the foreign exchange effect from the GBP/US$ movements related to the dividend payable in Ferrexpo plc. The average US$ exchange rate depreciated against the Swiss franc and the British pound by 4.2% and 2.2% respectively for the six months ended 30 June 2010 compared to the equivalent 2009 period.

Income tax expense

Reported profit before tax was US$166.2 million for the six months ended 30 June 2010, compared with US$37.8 million for the six months ended 30 June 2009. The effective income tax rate for the period was 16.5% compared with 24.0% for the equivalent 2009 period. 

Statement of financial position and cash flow

The Group's cash flow from operating activities increased 45% to US$67.3 million (1H 2009: US$46.3 million). This was after a working capital outflow of US$135.8 million (1H 2009: US$15.9 million working capital inflow). The working capital outflow was largely due to a US$28 million increase in trade receivables due to second quarter price increases, a US$67 million increase in VAT outstanding and a US$37 million working capital outflow due to the purchase of third party concentrate which will reverse in the third quarter.

During the six month period to 30 June 2010, the VAT receivable increased from US$81.3 million as of 31 December 2009 to US$138.5 million. The increase in VAT receivable was due to VAT paid for local purchases of goods and services in Ukraine and the import of equipment during the period.

Total cash flow for capital expenditure during the first half of 2010 was US$42.3 million, in-line with the first half of 2009 (1H 2009: US$43.2 million). Of the total 2010 spend, US$11.6 million was for sustaining capital expenditure at the Ferrexpo Poltava mine. Total development capital expenditure amounted to US$30.7 million. This consisted of US$7.9 million for the Poltava mine which included capitalised stripping for the mine life extension programme and the quality upgrade programme. US$21.3 million was for the development of the Yeristovo deposit, which included US$16.1 million for payment of CAT equipment. US$1.5 million was spent on development of the northern deposits.

Borrowings

Net financial indebtedness ("NFI") was US$256.9 million at 30 June 2010. This was in-line with NFI at 31 December 2009 (US$257.7 million). NFI increased 15.6% compared to 30 June 2009 US$222.3 million.

The Group's primary source of financing is a pre-export facility of US$230 million. The new facility was available from 1 January 2010 and was drawn down in full to repay the previous pre-export finance facility. The new facility matures 36 months from 1 January 2010 and is to be repaid in 24 equal monthly installments with the first installment falling due in January 2011.

The following table analysis the net financial indebtedness of the Group:

US$ 000	As at 30.06.10 (unaudited)	As at 30.06.09 (unaudited)
Cash and cash equivalents	60,172	74,303
Current borrowings	(117,784)	(105,080)
Non-current borrowings	(199,238)	(189,959)
Current commodity loans	(53)	(1,467)
Non-current commodity loans	-	(61)
Net financial indebtedness	(256,903)	(222,264)

Risk section

Risks to Ferrexpo

The Group's Executive Committee has put in place a formal process to assist it in identifying and reviewing risks. Plans to mitigate known risks are formulated and the effectiveness of, and progress in, implementing these plans is reviewed regularly, in accordance with the Turnbull Guidance. Despite the Group's best efforts to factor these known risks into its business strategy, inevitably risks will exist of which the Group is currently unaware.

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

Risks relating to the Group's operations
Iron ore prices and market
Description: Despite an improvement in industry fundamentals in the first six months of 2010, uncertainty remains regarding future changes in the iron ore price and global demand. The Group's business is dependent on price developments in the international iron ore market, which is influenced by large international mining companies. Sale prices and volumes in the worldwide iron ore market depend predominantly on the prevailing and expected level of demand for iron ore.			Impact: A fall in iron ore price or demand may damage Ferrexpo's financial result, as the Group's revenue is solely derived from the sale of iron ore pellets. Mitigation: Developments in the market are closely monitored by the management and Board of Directors in order that Ferrexpo can react quickly to changes in iron ore prices and demand. The Group successfully reacted to adverse market conditions during the 2009 financial year by recognising the importance of cost reductions and marketing flexibility at an early stage.
Ukrainian VAT receivable
Description: Ferrexpo Poltava Mining, as an exporter, and Ferrexpo Yeristovo Mining, as an investor, do not receive substantial amounts of VAT on revenues to offset against VAT incurred on purchases. The Group relies on the timely repayment of VAT from the Ukrainian government to ensure sufficient cash flows. During part of the 2009 financial year and the first half of the 2010 financial year, the Ukrainian government did not make repayments of outstanding VAT balances.			Impact: The delayed VAT payments resulted in increased working capital funding requirements. This could mean increased borrowing costs or a temporary reduction in levels of investment in the Group's major growth projects. Mitigation: Funding plans, including the commitment to capital expenditure, are maintained so as to manage temporary increases in outstanding VAT receivable balances. Outstanding overdue VAT balances to 31 December 2009 are expected to be converted into government bonds in the second half of the 2010 financial year. The development of the current VAT situation in Ukraine is closely monitored by management.
Mining risks and hazards
Description: The Group's operations are subject to risks and hazards, including industrial accidents, equipment failure, unusual or unexpected geological conditions, environmental hazards, labour disputes, changes in the local regulatory environment, extreme weather conditions (especially in winter) and other natural phenomena. Hazards associated with open-pit mining include accidents involving the operation of open-pit mining and rock transportation equipment and the preparation and ignition of large scale open-pit blasting operations, collapses of the open-pit wall and flooding of the open pit.			Impact: The Group may experience material mine or plant shutdowns or periods of reduced production as a result of any of the before mentioned factors, and any such events could negatively affect the Group's results of operations as well as its reputation in the market. Mitigation: The Group is committed to a zero-harm objective, and the mitigation of mining risk is one of the primary operational goals of the Group. However, given the nature of mining operations there is no guarantee that accidents and fatalities will not occur in the future, despite all the safety initiatives undertaken and processes put in place. There were no operational fatalities in the first half of 2010 and the full year 2009, compared with three in 2008 and one in 2007.
Costs and reliance on State monopolies
Description: In January 2009 Ukraine and Russia entered into a dispute relating to the supply of natural gas. The dispute concerned the price to be paid to Russia by Ukraine for the use of Russian gas and the distribution of Russian gas across Ukraine to Western Europe. The dispute resulted in a two-week period in which the gas supply to Ukraine and Western Europe was disrupted. It was settled on 20 January 2009, and resulted in Ukraine being required to pay significantly more for natural gas than was previously the case. Despite a recent agreement in 2010 regarding discounted gas deliveries from Russia to Ukraine, there can be no assurance that such a dispute will not recur again in the future and adversely affect the operating result of the Group. In addition, the Group currently relies substantially on the rail freight network operated by Ukrzaliznytsya, the Ukrainian State-owned southern railway authority, for transportation of its raw materials and finished products. Railway tariffs for freight increase periodically, and there can be no assurance that further increases will not occur in the future.			Impact: Higher gas prices will affect the Group's costs and, if gas supplies are disrupted in future for any substantial period of time, this may have a detrimental effect on the Group's ability to conduct its operations. Changes in the Group's mining and processing costs could occur as a result of unforeseen events, leading to reduced profitability or an adverse effect on the feasibility and cost expectations in mining existing reserves. Many of these changes may be beyond the Group's control, such as those input costs controlled by Ukrainian state regulation, including railway tariffs, energy costs and royalties. Mitigation: The factors affecting the Group's future cost structure are closely monitored and reported to the Board of Ferrexpo. During the gas dispute between Russia and Ukraine the Group was able to buy gas from independent suppliers in Ukraine. In addition, the Group has taken steps to increase its energy efficiency and so help to minimize the impact of future increases in gas and other energy prices.
Logistics
Description: The Group is dependent for transporting its product on logistics services provided by third parties and State-owned organisations:  the rail freight network, port facilities, and barge operators. Any logistical bottleneck could impair the Group's ability to expand its operations. The Ukrainian rail fleet is aging, and insufficient capital expenditure could result in a shortage of available working rolling stock or a disruption in transportation.			Impact: The identified potential logistical bottlenecks, if left unmanaged, could affect the ability of the Group to distribute its products on time and possibly also its future growth strategy. Mitigation: The Group has embarked upon a programme of investing in its own railcars and making further investments at its TIS-Ruda port facility for dredging operations, in order to reduce its exposure to these potential bottlenecks. As an example, the investment in TIS-Ruda enabled the Group at all times throughout 2009 to meet delivery commitments requiring shipment from the port of Yuzhny. In addition, the Group is considering other investments to support expected future logistical demand levels.
Labour relations
Description: The Group does not have individual contracts with its employees in Ukraine other than with its senior managers. Approximately 85% of Ferrexpo Poltava's employees are members of the Poltava Trade Union.				Impact: Any work slowdown, strike or other labour related developments could impact the Group's production levels and financial results. Mitigation: Ferrexpo is in regular dialogue with its employees and their representatives to ensure a good working relationship.
Licences
Description: Licences are critical to the Group's operations located in Ukraine, and there is no guarantee of their renewal or reconfirmation in the future, nor is there a guarantee that the Group will be able to obtain any additional licences.			Impact: The lapse of licences held by the Group as well as any failure to obtain any additional licences may adversely affect the Group's ability to meet future growth targets. Mitigation: The Group continues to monitor and review its commitments under its various licences, and continues to work to ensure that the conditions contained within the licences are fulfilled or the appropriate waivers obtained.
Risks relating to finance
Exchange rate risk
Description: The Group receives the majority of its income in US dollars. A large proportion of the Group's costs are denominated in Ukrainian hryvnia and are thus exposed to the variation in the exchange rate between the US dollar and the Ukrainian hryvnia.			Impact: Variations in the exchange rate can have a significant impact on the profitability of the Group. Mitigation: As a depreciation of the Ukrainian hryvnia compared with the US dollar results in lower costs and improvement of the operating results, there is currently no need to enter into foreign currency hedging agreements. However, the exposure to foreign currency fluctuation is closely monitored by the Group in order to make appropriate decisions on a timely basis, if needed.
Interest rate risk
Description: The majority of the Group's borrowings are linked to US$ LIBOR rates so the Group is exposed to interest rate changes.			Impact: An increase in interest rates will have a negative impact on the financial results of the Group. Mitigation: Conditions in the financial markets, existing financing facilities, and financing opportunities are regularly reviewed by management in order to minimise finance costs and maximise the profitability of the Group. The Group did not enter into derivative financial instruments such as interest rate swaps in the first half of 2010.
Financing risk
Description: Development projects may require additional funding above the cash generation capabilities of the existing operations; such funding may need to be covered with specific finance arrangements. The Group's principal loan facility contains covenants relating to Earnings Before Interest, Tax, Depreciation and Amortisation ('EBITDA') as well as the normal short and long-term cover ratio requirements.			Impact: There is a risk that cancellation of contracts as a result of force majeure events and/or low price outcomes in subsequent price negotiations would require the Group to seek the lenders' permission to assign additional contracts under this facility to meet certain ratios. Mitigation: The Group's financing risk has been mitigated by the new loan facility that was secured in November 2009. The draw-down of the new loan in January 2010 was used to repay the previous pre-export finance facility. The new loan matures 36 months from 1 January 2010, and is to be repaid in 24 equal monthly instalments with the first instalment falling due in January 2011. The Group expects to have sufficient liquidity to operate successfully throughout 2010 and 2011, with sufficient long-term contracts to meet the requirements of all debt covenants.
Customer concentration risk
Description: Approximately 55% of sales are to two customers. Ferrexpo has entered into framework agreements with these customers on terms that are customary for the industry and has been supplying one of these customers for more than 20 years.			Impact: The loss of any one or both of these customers could have a material adverse affect on the financial results of the business. Mitigation: The Group part-owns the TIS-Ruda port on the Black Sea. The port provides preferential access to the seaborne markets. In 2009 Ferrexpo shifted significant volumes to Asia to offset weak demand from these customers. The Group's sales strategy is to sell at least 30% of sales to markets outside Central and Eastern Europe.
Risks relating to the Group's strategy
Development growth projects
Description: The Group has several growth projects which it may commit significant capital expenditure to.			Impact: As with all major capital projects of this kind, there is a risk of insufficient controls and cost overruns which could delay completion or result in cancelation of these projects reducing the return on the capital invested. There is also a risk that there may not be sufficient capital financing available. Mitigation: Rigorous project planning and capital expenditure approval processes are in place to ensure that capital expenditure commitments do not exceed the Group's cash generation capabilities. The projects are discretionary and can be undertaken when funding and market conditions allow. Monthly reviews occur on site, and investment risks are periodically reviewed by the Board of Directors.
Risks relating to operations in Ukraine
Ukrainian inflation
Description: Ukraine experienced very high inflation in the years up to and including 2008 as a result of high government spending and rapid economic growth. Ukrainian inflation was lower in 2009, partly due to the severe economic recession. Inflation, however, has increased in the first half of 2010 and a failure by the Ukrainian government to achieve political consensus for economic reform may result in further increases.			Impact: If not mitigated by further devaluation of the Ukrainian currency and efficiency improvements, an inflationary environment poses a risk to the costs and profitability level of the Group's business. Mitigation: Ukrainian inflation is closely monitored and relevant conclusions are made by the management of the Group in order to assess and address the implications for the Group in a timely manner.
Ukrainian economic and social risks
Description: Ukraine has been adversely affected by the global financial crisis and by continuing government instability in 2008 and 2009. Further to that, the Ukrainian steel industry, the largest industry in the country, collapsed in late 2008. In response the Ukrainian government depreciated the local currency, which was informally tied to the US dollar, in late 2008 to assist the country in recovering from the economic crisis and to offset high Ukrainian inflation. This benefited the Group, as a large proportion of its costs are denominated in hryvnia. However, a future decline of the economic environment in Ukraine may result in business failures, repossessions and social unrest in Ukraine owing to extensive borrowing in foreign currencies by the Ukrainian private sector.			Impact: The uncertainties in the Ukrainian economic and political environment could have an adverse effect on the Group's business and financial results. Mitigation: The presidential elections in February 2010 restored the stability of the country and it is expected that the situation will further normalise if certain local economic and financial structural reforms can be successfully implemented. The Board is closely monitoring any developments and changes and maintains regular contact with regional and national government authorities.
Legal challenges to mining rights
Description: Title to Ferrexpo's mining rights is granted by the state as is normal industry practise around the world.			Impact: In the event that any title to Ferrexpo's mining rights may be challenged, and the Group is unable to defeat such claim, it could materially adversely affect the financial results and prospects of the business. Mitigation: The Group fulfils all its obligations with regards to its mining rights and it maintains a proactive and open relationship with governmental authorities.

Going Concern

The Group's business activities, together with the risk factors likely to affect its future development, performance and position are set out in the Financial Review on pages 10 to 18. The financial position of the company, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 10 to 18. In addition, notes 41 of our 2009 Annual Report & Accounts include the Group's objectives, policies and processes for managing its capital; its financial risk management objectives and details of its financial instruments; and its exposures to credit risk, liquidity risk as well as currency risk and interest rate risk.

The Group's forecasts and projections, taking into account possible changes in the iron ore market and general economic environment, show that the Group generates sufficient operating cash flows to comply with the amortisation schedule for the existing major debt facility and to finance the anticipated development projects. After making enquiries, the Directors have a reasonable expectation that the Group has adequate financial resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis of accounting in preparing the financial statements of the Group.

 

 

Interim consolidated income statement

US$'000	Notes	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Revenue	4	525,833	301,759	648,667
Cost of sales	5	(216,335)	(159,653)	(341,067)
Gross profit		309,498	142,106	307,600
Selling and distribution expenses	6	(84,854)	(75,806)	(162,266)
General and administrative expenses	7	(24,106)	(22,319)	(43,161)
Other income		510	2,924	4,102
Other expenses		(2,109)	(1,604)	(3,418)
Operating foreign exchange (loss) / gain	8	(718)	(817)	2,534
Operating profit from continuing operations before adjusted items		198,221	44,484	105,391
Write-down of VAT receivable	13 / 21	(15,000)	-	-
Asset impairments	9	(2,124)	(1,870)	(2,757)
Share of profit from associates		1,069	664	1,304
Negative goodwill		-	-	503
Initial public offering costs		(55)	(372)	(427)
(Loss) / gain on disposal of property, plant and equipment		(627)	-	213
Profit before tax and finance		181,484	42,906	104,227
Finance income		709	1,601	2,893
Finance expense		(16,864)	(10,410)	(23,718)
Non-operating foreign exchange gain / (loss)	8	835	3,695	(2,552)
Profit before tax		166,164	37,792	80,850
Tax		(27,458)	(9,084)	(9,852)
Profit for the period / year		138,706	28,708	70,998
Attributable to:
Equity shareholders of Ferrexpo plc		138,117	28,529	70,627
Non-controlling interests		589	179	371
		138,706	28,708	70,998
Earnings per share:
Basic (US cents)	10	23.62	4.88	12.08
Diluted (US cents)	10	23.57	4.87	12.05

Interim consolidated statement of comprehensive income

US$ 000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Profit for the period / year	138,706	28,708	70,998
Exchange differences on translating foreign operations			-
Exchange differences arising during the period / year	5,652	3,361	(20,842)
Exchange differences arising on hedging of foreign operations	1,288	1,451	(3,697)
Available-for-sale investments
Gain arising on revaluation during the period / year	637	-	400
Income tax effect	(486)	(363)	2,895
Other comprehensive income for the period / year, net of tax	7,092	4,449	(21,244)
Total comprehensive income for the period / year, net of tax	145,798	33,157	49,754
Total comprehensive income attributable to:
Equity shareholders of Ferrexpo plc	145,066	32,869	49,633
Non-controlling interests	732	288	121
	145,798	33,157	49,754

Interim consolidated statement of financial position

US$'000	Notes	As at 30.06.10 (unaudited)	As at 30.06.09 (unaudited)	As at 31.12.09 (audited)
Assets
Property, plant and equipment	12	478,439	445,271	452,100
Goodwill and other intangible assets		101,395	104,849	100,354
Investments in associates		20,209	19,308	19,915
Available-for-sale financial assets		2,178	2,579	2,917
Deferred tax asset		16,154	12,193	13,673
Other non-current assets		10,603	11,220	9,824
Total non-current assets		628,978	595,420	598,783
Inventories		84,090	60,176	59,636
Trade and other receivables		81,885	44,117	38,117
Prepayments and other current assets		36,621	15,991	19,394
Income taxes recoverable and prepaid		185	10,037	9,741
Other taxes recoverable and prepaid	13	123,721	56,415	81,284
Available-for-sale financial assets		-	655	626
Cash and cash equivalents	14	60,172	74,303	11,991
Total current assets		386,674	261,694	220,789
Total assets		1,015,652	857,114	819,572
Equity and liabilities
Share capital	15	121,628	121,628	121,628
Share premium		185,112	185,112	185,112
Other reserves		(340,053)	(324,820)	(347,858)
Retained earnings		620,003	478,366	501,175
Equity attributable to equity shareholders of the parent		586,690	460,286	460,057
Non-controlling interest		12,119	12,057	11,387
Total equity		598,809	472,343	471,444
Interest-bearing loans and borrowings	16 /17	199,238	189,959	18,143
Trade and other payables		-	61	-
Defined benefit pension liability		16,307	14,152	14,529
Provision for site restoration		1,361	1,145	1,268
Deferred tax liability		2,842	5,453	3,739
Total non-current liabilities		219,748	210,770	37,679
Interest-bearing loans and borrowings	16 / 17	117,784	105,080	251,379
Trade and other payables		23,743	39,359	27,926
Accrued liabilities and deferred income		13,036	10,684	12,146
Income taxes payable		34,341	8,505	11,105
Other taxes payable		8,191	10,373	7,893
Total current liabilities		197,095	174,001	310,449
Total liabilities		416,843	384,771	348,128
Total equity and liabilities		1,015,652	857,114	819,572

The financial statements were approved by the Board of Directors on 4 August 2010.

Interim consolidated statement of cash flow

US$ 000	Notes	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Net cash flows from operating activities	19	67,302	46,297	76,869
Cash flows from investing activities
Purchase of property, plant and equipment		(42,323)	(43,215)	(85,823)
Proceeds from sale of property, plant and equipment		-	403	213
Purchase of intangible assets		(219)	(298)	(598)
Proceeds from sale of intangible assets		-	-	-
Interest received		435	1,752	2,104
Loans provided to third parties		(3,820)
Proceeds from loans from associates		-	4,000	6,450
Net cash flows used in investing activities		(45,927)	(37,358)	(77,654)
Cash flows from financing activities
Proceeds from borrowings and finance	16	274,005	27,131	35,637
Repayment of borrowings and finance	16	(227,643)	(37,219)	(73,168)
Dividends paid to equity shareholders of the parent		(19,289)	(13,417)	(36,325)
Dividends paid to non-controlling interest		(16)	(231)	(234)
Net cash flows from financing activities		27,057	(23,736)	(74,090)
Net increase / (decrease) in cash and cash equivalents		48,432	(14,797)	(74,875)
Cash and cash equivalents at the beginning of the period / year		11,991	87,822	87,822
Currency translation differences		(251)	1,278	(956)
Cash and cash equivalents at the end of the period / year	14	60,172	74,303	11,991

Interim consolidated statement of changes in equity

For the financial year 2009 and the six months ended 30 June 2010	Attributable to equity shareholders of the parent
US$ 000	Issued capital		Share premium		Uniting of interest reserve		Treasury share reserve		Employee Benefit Trust reserve		Net unreali-sed gains reserve	Trans-lation reserve		Retained earnings		Total capital and reserves		Non-controlling interests		Total equity
At 1 January 2009	121,628		185,112		31,780		(77,260)		(15,443)		813	(270,604)		470,098		446,124		11,769		457,893
Profit for the period	-		-		-		-		-		-	-		70,627		70,627		371		70,998
Other comprehensive income	-		-		-		-		-		301	(21,295)		-		(20,994)		(250)		(21,244)
Total comprehensive income for the period	-		-		-		-		-		301	(21,295)		70,627		49,633		121		49,754
Equity dividends paid to shareholders of Ferrexpo plc	-		-		-		-		-		-	-		(39,550)		(39,550)		-		(39,550)
Share based payments	-		-		-		-		3,850			-		-		3,850		-		3,850
Adjustments relating to the increase in non-controlling interests	-		-		-		-		-		-	-		-		-		(503)		(503)
At 31 December 2009 (audited)	121,628		185,112		31,780		(77,260)		(11,593)		1,114	(291,899)		501,175		460,057		11,387		471,444
Profit for the period														138,117		138,117		589		138,706
Other comprehensive income											474	6,475		-		6,949		143		7,092
Total comprehensive income for the period	-		-		-		-		-		474	6,475		138,117		145,066		732		145,798
Equity dividends paid to shareholders of Ferrexpo plc	-		-		-		-				-	-		(19,289)		(19,289)		-		(19,289)
Share based payments	-		-		-		-		856		-	-		-		856		-		856
At 30 June 2010 (unaudited)	121,628		185,112		31,780		(77,260)		(10,737)		1,588	(285,424)		620,003		586,690		12,119		598,809
For the six months ended 30 June 2009	Attributable to equity shareholders of the parent
US$ 000	Issued capital	Share premium		Uniting of interest reserve		Treasury share reserve		Employee Benefit Trust reserve		Net unrealised gains reserve			Trans-lation reserve		Retained earnings		Total capital and reserves		Non-controlling interests		Total equity
At 1 January 2009	121,628	185,112		31,780		(77,260)		(15,443)		813			(270,604)		470,098		446,124		11,769		457,893
Profit for the period	-	-		-		-		-		-			-		28,529		28,529		179		28,708
Other comprehensive income	-	-		-		-		-		-			4,340		-		4,340		109		4,449
Total comprehensive income for the period	-	-		-		-		-		-			4,340		28,529		32,869		288		33,157
Equity dividends paid to shareholders of Ferrexpo plc	-	-		-		-		-		-			-		(20,261)		(20,261)		-		(20,261)
Share based payments	-	-		-		-		1,554		-			-		-		1,554		-		1,554
At 30 June 2009 (unaudited)	121,628	185,112		31,780		(77,260)		(13,889)		813			(266,264)		478,366		460,286		12,057		472,343

Notes to the interim condensed consolidated financial statements

Note 1:  Corporate information

Organisation and operation

Ferrexpo plc (the 'Company') is incorporated in the United Kingdom with registered office at 2-4 King Street, London, SW1Y 6QL, UK. Ferrexpo plc and its subsidiaries (the 'Group') operate a mine and processing plant near Kremenchuk in Ukraine, an interest in a port in Odessa and a sales and marketing company in Switzerland and Kiev. The Group's operations are vertically integrated from iron ore mining through to iron ore concentrate and pellet production. 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 comprises of Ferrexpo plc and its consolidated subsidiaries as set out below:

			Equity interest owned
Name	Country of incorporation	Principal activity	30.06.10 %	30.06.09 %	31.12.09 %
Ferrexpo Poltava GOK Corporation*	Ukraine	Iron ore mining	97.3	97.1	97.3
Ferrexpo AG**	Switzerland	Sale of iron ore	100.0	100.0	100.0
DP Ferrotrans***	Ukraine	Trade, transportation services	97.3	97.1	97.3
United Energy Company LLC***	Ukraine	Holding company	97.3	97.1	97.3
Ferrexpo Finance plc (formerly 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 Hong Kong Limited*	China	Marketing services	100.0	100.0	100.0
Ferrexpo Yeristova GOK LLC***	Ukraine	Iron ore mining	98.6	98.5	98.6
Ferrexpo Belanovo GOK LLC****	Ukraine	Iron ore mining	98.6	-	98.6

*              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.

****         The Group's interest in this entity is held through both Ferrexpo AG and Ferrexpo Poltava GOK Corporation.

At 30 June 2010, the Group also holds through Ferrexpo Poltava GOK Corporation an interest of 48.6% (30 June 2009: 48.5%; 31 December 2009: 48.6%) in TIS Ruda, a Ukrainian port located on the Black Sea. As this is an associate, it is accounted for using the equity method of accounting.

Note 2:  Summary of significant accounting policies

Basis of preparation

The interim consolidated financial statements for the six months ended 30 June 2010 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 435 of the Companies Act 2006. The financial information for the full year is based on the statutory accounts for the financial year ended 31 December 2009. 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 2009, has been delivered to the Register of Companies. The auditors' report under section 495 of the Companies Act 2006 in relation to those accounts was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Financing and going concern

At the period end, the Group has a major debt facility of US$230,000,000 in place which amortises over the period from 1 January 2011 to 31 December 2012. The Group is of the view that it will be able to generate sufficient cash flows to fully repay the debt by the end of this period, in compliance with the terms of the facility agreements, and to operate the current operation with the budgeted sustaining and developing capital expenditures. The Group faces several risks to its business and strategy, which are included in the Financial Review section of this report.

The Directors are of the view that the Group is a going concern and the interim consolidated financial statements have been drawn up on this basis. Further information to the going concern assessment of the Directors is given in the Financial Review of this report.

Changes in accounting policies

The accounting policies and methods of computation adopted in the preparation of the interim condensed consolidated financial statements are the same as those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2009, except for the adoption of new standards and interpretations as of 1 January 2010, noted below:

IFRS 2Share-based Payment - Group Cash-settled Share-based Payment Transactions (amendments)

The standard has been amended to clarify the accounting for group cash-settled share-based payment transactions. This amendment also supersedes IFRIC 8 and IFRIC 11. The adoption of this amendment did not have any impact on the financial position or performance of the Group.

IFRS 3 Business combinations (revised) and IAS 27 Consolidated and separate financial statements (revised)

The revised standards were issued in January 2008 and become effective for financial years beginning on or after 1 July 2009. The changes will affect future acquisitions or loss of control and transactions with non-controlling interests. The adoption of these revised standards did not have any impact on the financial position or performance of the Group.

IAS 28 Investments in associates (revised)

The principle adopted under IAS 27 (2008) that a loss of control is recognised as a disposal and re-acquisition any retained interests at fair value is extended by consequential amendment to IAS 28. The adoption of this revised standard as of 1 January 2010 did not have any impact on the financial position or performance of the Group.

IFRIC 17 Distributions of Non-cash Assets to Owners

This interpretation is effective for annual periods beginning on or after 1 July 2009. It provides guidance on how to account for non-cash distributions to owners. The interpretation clarifies when to recognise a liability, how to measure it and the associated assets, and when to derecognise the asset and liability. The adoption of this interpretation did not have any impact on the financial position or performance of the Group.

Improvements to IFRSs (issued April 2009)

In April 2009 the IASB issued its second 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 adoption of the following amendments resulted in changes to accounting policies but did not have any impact on the financial position or performance of the Group.

The amendments to the following standards below did not have an impact on the accounting policies, financial position or performance of the Group:

·      IFRS 2 Share-based Payments

·      IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

·      IFRS 8 Operating Segment Information

·      IAS 1 Presentation of Financial Statements

·      IAS 7 Statement of Cash Flows

·      IAS 17 Leases

·      IAS 36 Impairment of Assets

·      IAS 38 Intangible Assets

·      IFRIC 9 Reassessment of Embedded Derivatives

·      IFRIC 16 Hedge of Net Investment in a Foreign Operation

Seasonality

The Group's operations are not affected by seasonality.

 

Note 3:  Segment information

The group is managed as a single entity which produces, develops and markets its principal product; iron ore pellets; for sale to the metallurgical industry. Per the requirements of IFRS 8 Operating Segments, the Group presents its results in a single segment which are disclosed in the income statement for the Group.

Note 4: Revenue

Revenue consisted of the following:

US$ 000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Revenue from sales of ore pellet and concentrates:
Export	523,752	276,266	612,829
Ukraine	203	24,976	34,483
	523,955	301,242	647,312
Revenue from services provided	1,113	367	790
Revenue from other sales	765	150	565
Total revenue	525,833	301,759	648,667

Export sales by geographical destination were as follows:

US$'000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Austria	166,991	24,136	105,690
China	102,583	173,057	241,882
Slovakia	72,868	37,320	77,537
Serbia	72,752	13,826	84,193
Czech Republic	45,391	3,465	21,293
Turkey	44,222	12,263	39,272
Germany	13,177	-	5,573
Hungary	4,589	-	6,539
India	-	11,535	21,225
Japan	-	-	5,027
Other	1,179	664	4,598
Total export revenue	523,752	276,266	612,829

During the period ended 30 June 2010 sales made to three customers accounted for approximately 68.3% of the sales revenue (30 June 2009: 36.7%; 31 December 2009: 51.9%).

Sales made to three customers individually amounted to more than 10% of the total sales. These are disclosed below:

US$'000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Customer A	166,991	24,136	105,690
Customer B	145,620	51,146	161,730
Customer C	-	31,788	-

Note 5: Cost of sales

Cost of sales consisted of the following:

US$ 000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Materials	31,279	30,090	60,607
Purchased ore and concentrate	39,615	629	8,914
Electricity	46,015	37,667	81,438
Personnel costs	23,530	20,260	41,670
Spare parts and consumables	8,891	6,561	13,007
Depreciation and amortisation	12,380	11,327	23,370
Fuel	16,030	11,289	23,969
Gas	21,964	18,626	28,744
Repairs and maintenance	19,808	14,492	38,503
Royalties and levies	3,210	2,004	6,484
Stock movement	(8,747)	3,656	10,543
Other	2,360	3,052	3,818
Total cost of sales	216,335	159,653	341,067

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

US$ 000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Cost of sales	216,335	159,653	341,067
Depreciation and amortisation	(12,380)	(11,327)	(23,370)
Purchased ore and concentrate	(39,615)	(629)	(8,914)
Processing costs for purchased ore and concentrate	(4,426)	(117)	(1,206)
Production cost of gravel	(28)	(183)	(357)
Stock movement in the period	8,747	(3,656)	(10,543)
Pension service costs	(1,614)	(914)	(1,857)
Other	898	(405)	1,662
C1 cost	167,916	142,422	296,482
Own ore produced (tonnes)	4,441,200	4,123,700	8,609,200
C1 cash cost per tonne (US$)	37.81	34.54	34.44

"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, amortisation, 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 6: Selling and distribution expenses

Selling and distribution expenses consisted of the following:

US$ 000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Railway transportation	42,702	30,590	69,477
Other transportation and port charges	35,012	39,717	80,998
Agent fees	353	416	799
Custom duties	1,315	422	1,423
Advertising	1,759	1,093	2,757
Personnel cost	607	511	1,055
Depreciation	849	764	1,581
Other	2,257	2,293	4,176
Total selling and distribution expenses	84,854	75,806	162,266

Note 7: General and administrative expenses

General and administrative expenses consisted of the following:

US$ 000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Personnel costs	11,573	11,593	23,933
Buildings and maintenance	1,381	1,102	2,391
Taxes other than income tax and other charges	1,264	1,898	3,930
Professional fees	3,584	1,548	2,731
Depreciation and amortisation	1,847	1,600	2,534
Communication	275	218	529
Vehicles maintenance and fuel	466	362	854
Repairs	274	326	1,041
Half year review fees	184	195	195
Audit fees	506	480	917
Non-audit fees	806	184	184
Security	763	744	1,659
Research	-	1	1
Other	1,183	2,068	2,262
Total general and administrative expenses	24,106	22,319	43,161

Note 8: Foreign exchange gains and losses

US$ 000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Operating foreign exchange (losses) / gains	(718)	(817)	2,534
Non-operating foreign exchange gains / (losses)	835	3,695	(2,552)
Total foreign exchange gains / (losses)	117	2,878	(18)

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

Note 9: Asset impairments

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 six months ended 30 June 2010 consisted of the following:

US$ 000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Write-off of inventories	-	-	(144)
Reversal / (write-off) of property, plant and equipment	-	31	(717)
Impairment of available-for-sale financial assets	(2,124)	(1,901)	(1,896)
Total asset impairments	(2,124)	(1,870)	(2,757)

The impairment of the available-for-sale financial assets in the periods above are related to the investment in LLC Atol.

Note 10:  Earnings per share and dividends paid and proposed

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

Diluted earnings per share 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.

	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Profit for the period / year attributable to equity shareholders:
Basic earnings per share (US cents)	23.62	4.88	12.08
Diluted earnings per share (US cents)	23.57	4.87	12.05
Underlying earnings for the period / year:
Basic earnings per share (US cents)	26.50	4.76	12.80
Diluted earnings per share (US cents)	26.44	4.75	12.77

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

Thousands	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Weighted average number of shares
Basic number of ordinary shares outstanding	584,812	584,493	584,652
Effect of dilutive potential ordinary shares	1,201	1,520	1,361
Diluted number of ordinary shares outstanding	586,013	586,013	586,013

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

'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 calculated before non-controlling interests have been deducted and excludes adjusted items. The calculation of underlying earnings per share is based on the following earnings data:

US$ 000	Notes	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Profit attributable to equity holders		138,117	28,529	70,627
Write-down of VAT receivable	13 / 21	15,000	-	-
Asset impairments	9	2,124	1,870	2,757
IPO costs		55	372	427
Negative goodwill generated on rights issue		-	-	(503)
Loss / (gain) on disposal of PPE		627	-	(213)
Non-operating foreign exchange losses	8	(835)	(3,695)	2,551
Tax on adjusted items		(124)	772	(823)
Underlying earnings		154,964	27,848	74,823

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

US$ 000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Proposed per ordinary share
Interim dividend for 2010: 3.3 US cents	19,289	-	-
Final dividend for 2009: 3.3 US cents	-	-	19,289
Paid per ordinary share
Final dividend for 2009: 3.3 US cents	19,289	-	-
Interim dividend for 2009: 3.3 US cents	-	-	19,289
Final dividend for 2008: 3.3 US cents 1	-	13,417	20,261
Total dividends paid during the period	19,289	13,417	39,550

¹ The final dividend for 31 December 2008 was US$20,261,000, of which US$ 6,844,000 in respect of withholding tax remained unpaid as at 30 June 2009.

Note 11: EBITDA

The Group calculates EBITDA as profit from continuing operations before tax and finance plus depreciation and amortisation (included in cost of sales, general and administrative expenses and selling and distribution costs) and non-recurring cash items included in other income and other expenses plus the net gains and losses from disposal of investments and property, plant and equipment. 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	Notes	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Profit before tax and finance		181,484	42,906	104,227
Write-down of VAT receivable	13 / 21	15,000	-	-
Asset impairments		2,124	1,870	2,757
IPO costs		55	372	427
Negative goodwill		-	-	(503)
Share based payments		801	1,182	3,423
Loss / (gain) on disposal of PPE		627	-	(213)
Depreciation and amortisation		15,081	13,965	28,018
EBITDA		215,172	60,295	138,136

Note 12:  Property, plant and equipment

During the six months ended 30 June 2010, the Group acquired property, plant and equipment with a cost of US$43,381,525 (30 June 2009: US$44,695,000; 31 December 2009: US$86,006,000) and disposed of property, plant and equipment with original costs of US$3,361,456 (30 June 2009: US$2,107,000; 31 December 2009: US$8,179,000).

Note 13:  Other taxes recoverable and prepaid

US$ 000	As at 30.06.10 (unaudited)	As at 30.06.09 (unaudited)	As at 31.12.09 (audited)
VAT receivable	123,448	56,274	81,269
Withholding tax	255	-	-
Other taxes prepaid	18	141	15
Total	123,721	56,415	81,284

The VAT receivable results from VAT paid on domestic purchases of goods and services and on the imports of equipment and where relevant services into Ukraine to the extent that this can not be offset on VAT paid on the sale of goods and services.

During the six month period to 30 June 2010, the VAT receivable increased from US$81,268,909 to US$138,448,896, before the write-down described below, mainly related to Ferrexpo Poltava Mining. As an exporter, Ferrexpo Poltava Mining, the group's principal subsidiary, does not have substantial amounts of VAT received on sales which can be offset against VAT paid for purchases of goods and services. VAT on trading items is due to be repaid three months after it is incurred. Due to the economic downturn and general financial crisis in 2009 allied with the presidential elections in early 2010, the ongoing negotiations for financial aid from the IMF and the late adoption of the state budget for 2010, the Ukrainian government has not been making timely repayments of VAT made on purchases of plant equipment and goods and services to the extent that these can not be offset against VAT charged on sales. The amounts have been classified in the accounts as repayable within one year. None of the VAT receivable amounts are in dispute and measures which will result in the collection of this receivable are well advanced and expected to be converted in a bond in the near term (see below).

Write-down of VAT receivable

As a result of a decision by the Ukrainian Cabinet of Ministers published on 1 June 2010, outstanding overdue VAT balances will be converted into government bonds with a coupon interest rate of 5.5% p.a. paid semi annually with 10 half yearly principal repayments. At the current time uncertainty exists as to the tradability of the bonds, the exact timing and process of conversion. It is expected that the VAT bonds will relate to outstanding VAT receivable as of the end of December 2009 amounting to US$81,268,909.

Accounting standards require such financial instruments, when issued, to be fair valued, or, if no market exists, an estimate to be made as to fair value. Market yields on Ukranian domestic hryvnia debt currently lie in a range of 12% to 16% and have recently been volatile. At the current time this is higher than the coupon interest rate on the proposed new bond issue. As a result, a one off fair value adjustment could be realised on the initial recognition of this financial instrument. Whilst it is not possible to value this instrument exactly at the current time, an estimated gross charge, before any tax deductions of US$15,000,000, has been recorded in the income statement to reflect the directors' estimate of the difference between the amount of the VAT receivable that is refundable and the expected fair value of the government bond to be issued in settlement of this debt. This estimate will be revised when the final terms, conditions and features of the new financial instrument are known.

The Group applied to convert the outstanding VAT balance as of 31 December 2009 into government bonds on 18 June 2010 and it is anticipated that the conversion will take place in the second half of the financial year 2010.

Note 14:  Cash and cash equivalents

As at 30 June 2010 the Group held cash and cash equivalents of US$60,171,631 (30 June 2009: US$74,303,025; 31 December 2009: US$11,990,751). 

Note 15: Share capital and reserves

The share capital of Ferrexpo plc at 30 June 2010 was 613,967,956 (30 June 2009: 613,967,956; 31 December 2009: 613,967,956) ordinary shares at par value of £0.10 paid for cash, resulting in share capital of US$121,628,000 which is unchanged since the Group's Initial Public Offering in June 2007.

This balance includes 25,343,814 shares (30 June 2009: 25,343,814 shares; 31 December 2009: 25,343,814 shares) which are held in treasury, resulting from a share buyback that was undertaken in September 2008.

Note 16: Interest bearing loans and borrowings

During the period ended 30 June 2010, the remaining outstanding balance amounting to US$207,727,272 under the term loan and revolving pre-export finance facility entered into on 27 December 2006 for an amount of $275,000,000 and subsequently amended on 5 July 2007 to an amount of $335,000,000 was fully repaid (The amounts repaid on the same facility in the periods for the 6 months ended 30 June 2009: US$36,364,000; 12 months ended 31 December 2009: US$72,727,272).

The Group entered into a new three year term loan pre-export finance facility on 27 November 2009 in the amount of US$230,000,000. This pre-export finance facility was drawn in full on 8 January 2010 and was used for repayment of the pre-export finance facility entered into on the 27 December 2006 as amended on 5 July 2007.

As at 30 June 2010 the pre-export finance facility was fully drawn (30 June 2009: fully drawn; 31 December 2009: fully drawn, each in respect of the pre-export finance facility then existing) and will be repaid in 24 instalments with the first instalment falling due in January 2011.

The pre-export term loan credit facility is guaranteed and secured as follows:  

·      Ferrexpo Poltava has provided an unlimited financial and performance suretyship covering all of Ferrexpo AG and Ferrexpo Finance plc's obligations under the pre-export finance facility agreement (and related financing documents);

·      Ferrexpo plc has provided a parent company guarantee;

·      Ferrexpo AG has pledged its bank account held with the agent to the banks syndicated into the pre-export finance facility into which all proceeds from the sale of iron ore pellets under certain contracts are required to be paid;

·      Ferrexpo Poltava and Ferrexpo AG have pledged all of their rights under certain contracts for the export of iron ore pellets; and

·      Ferrexpo AG has pledged all its rights under certain contacts for the sale of iron ore pellets and its rights under certain related credit support documents;

In January 2009, Ferrexpo Poltava GOK Corporation concluded a sale and financial leaseback transaction relating to rail cars with a facility amount of US$19,718,000.  During the six month period to 30 June 2010 US$617,000 of the principal was repaid (30 June 2009: US$486,000; 31 December 2009: US$1,099,000).

Note 17: Net financial indebtedness

Net financial indebtedness of the Group is shown in the note below:

US$ 000	Notes	As at 30.06.10 (unaudited)	As at 30.06.09 (unaudited)	As at 31.12.09 (audited)
Cash and cash equivalents	14	60,172	74,303	11,991
Current borrowings	16	(117,784)	(105,080)	(251,379)
Non-current borrowings	16	(199,238)	(189,959)	(18,143)
Current commodity loans		(53)	(1,467)	(124)
Non-current commodity loans		-	(61)	-
Net financial indebtedness		(256,903)	(222,264)	(257,655)

Note 18: 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.

The related party transactions entered into by the Group during the periods presented are summarised below:

Entities under common control are those under control of Kostyantin Zhevago. TIS Ruda, in which the Group holds an interest of 48.6%, is the only associated company of the Group. The other related parties are principally those entities controlled by Olexander Moroz (supervisory board member of Ferrexpo Poltava GOK Corporation until 14 May 2010).

	6 months ended 30.06.10 (unaudited)			6 months ended 30.06.09 (unaudited)			Year ended 31.12.09 (audited)
US$ 000	Entities under common control	Asso-ciated compa-nies	Other related parties	Entities under common control	Asso-ciated compa-nies	Other related parties	Entities under common control	Asso-ciated compa-nies	Other related parties
Iron ore pellet sales	-	-	-	277	-	511
Other sales (1)	492	-	873	-	-	-	506	-	1,480
Total revenue	492	-	873	277	-	511	506	-	1,480
Purchase of materials (2)	52,099	-	5,776	2,219	-	5,942	4,458	-	11,930
Purchase of services (3)	203	-	123	220	-	110	444	-	23
General and administration expenses (4)	2,076	-	1	1,343	-	5	3,315	-	-
Selling and distribution (5)	-	5,301	6,274	-	6,680	3,433	-	11,849	11,736
Other operating expenses (6)	78	-	4	37	-	10	91	-	8
Total expenses	54,456	5,301	12,177	3,819	6,680	9,500	8,308	11,849	23,697
Finance income (7)	254	52	-	891	197	-	1,329	267	-
Finance expenses (7)	(275)	-	-	(347)	-	-	(816)	-	-
Net finance income/(costs)	(21)	52	-	544	197	-	513	267	-

(1)       Other sales to other related parties consist of scrap metal sales made to Ferrolit, a company under control of a supervisory board member of FPM. Other sales to entities under common control are mainly related to sales of power, steam and water and the lease of premises to Kislorod and Vorskla-Steel.

(2)       Purchase of materials from entities under common control consists of purchased concentrate in the amount of US$48,928,000 from Vostock Ruda during the six months period ended 30 June 2010 (30 June 2009: US$ US$769,000; 31 December 2009: US$1,386,000) and the purchase of compressed air and oxygen of US$1,740,000 (30 June 2009: US$ US$2,899,000; 31 December 2009: US$1,414,000) from Kislorod. Purchase of materials from other related parties includes purchased cast iron balls from Ferrolit of US$5,733,000 (30 June 2009: US$5,528,000; 31 December 2009: US$11,286,000), which are used in the production process.

(3)       Kuoni Attorneys at law Ltd. has provided services to the Group of US$123,000 (30 June 2009: US$ nil; 31 December 2009: US$23,000) during the 6 months to 30 June 2010. Wolfram Kuoni who is a partner in the firm is also an independent non-executive Director of Ferrexpo plc. The services were provided on an arm length basis by other members of Kuoni Attorneys at law Ltd.

(4)       The Group paid US$1,663,000 during the six months period ended 30 June 2010 to FC Vorskla under a contract entered into on 1 April 2009 and renewed on 10 December 2009 for advertisement, marketing and general PR related services (30 June 2009: US$1,076,000; 31 December 2009: US$2,631,000).

(5)       Selling and distribution services are purchased from TIS Ruda, an associated company as the Group holds an interest of 49.9%. These services relate to port services including port charges, handling costs, agent commissions and storage costs. Services from other related parties are mainly provided by Slavutich Ruda which is under control of Olexander Moroz, a supervisory board member of FPM until 14 May 2010. Slavutich Ruda provided logistic management services mainly related to custom clearance services and coordination of rail transit. The total billings amounted to US$6,251,000 during the six months period ended 30 June 2010 (30 June 2009: US$3,260,000; 31 December 2009: US$11,507,000) and Slavutich Ruda earned commission income of US$319,000 on these services (30 June 2009: US$416,000; 31 December 2009: US$793,000).

(6)       Other operating expenses mainly relate to communication services provided by TV & Radio Co. In the six month period ended 30 June 2010, these amounted to US$56,000 (30 June 2009: US$19,000; 31 December 2009: US$60,000).

(7)       The Group has transactional banking arrangements with Finance &Credit Bank (F&C), which is under common control of Kostyantin Zhevago. Finance income and expenses relate to these transactional banking arrangements. Further information is provided under transactional banking arrangements in this note.

Sale and purchases of property, plant, equipment and investments

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

	6 months ended 30.06.10 (unaudited)			6 months ended 30.06.09 (unaudited)			Year ended 31.12.09 (audited)
US$ 000	Entities under common control	Asso-ciated compa-nies	Other related parties	Entities under common control	Asso-ciated compa-nies	Other related parties	Entities under common control	Asso-ciated compa-nies	Other related parties
Purchase of property plant and equipment (1)	--	-	-	2,200	-	-	2,200	-	-

(1)       On 31 March 2009, the Group acquired a trial filter press from Progress Plant Company, an entity under common control, for US$2,200,000.

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

	6 months ended 30.06.10 (unaudited)			6 months ended 30.06.09 (unaudited)			Year ended 31.12.09 (audited)
US$ 000	Entities under common control	Asso-ciated compa-nies	Other related parties	Entities under common control	Asso-ciated compa-nies	Other related parties	Entities under common control	Asso-ciated compa-nies	Other related parties
Investments available-for-sale (1)	2,178	-	-	2,576	-	-	2,917	-	-
Prepayments for PPE (2)	972	-	-	-	-	-	-	-	-
Loans (3)	-	-	-	-	3,000	-	-	2,000	-
Total non-current assets	3,150	-	-	2,576	3,000		2,917	2,000	-
Investments available-for-sale (1)	-	-	-	655	-	-	626	-	-
Loans (3)	-	2,550	-	-	2,000	-	-	550	-
Trade and other receivables (4)	2,138	-	9	1,967	43	281	1,999	93	6
Prepayments and other current assets (2)	157	805	50	38	-	2	995	-	1
Short term deposits with banks (5)	-	-	-	-	-	-	411	-	-
Cash and cash equivalents (5)	15,860	-	-	35,218	-	-	1,712	-	-
Total current assets	18,155	3,355	59	37,878	2,043	283	5,743	643	7
Trade and other payables (6)	2,158	2	1,020	335	-	1,548	514	-	1,146
Current liabilities	2,158	2	1,020	335	-	1,548	514	-	1,146

(1)       The investments available-for-sale comprised of shareholdings in LLC Atol (9.95%), OJSC Stahanov (3.14%) and Vostock Ruda (1.10%). The majority ownership of these companies is held by the principal shareholder of Ferrexpo plc and OJSC Stahanov is also listed at the Ukrainian stock exchange. The changes of the values in the table above are related to fair value adjustments made and recorded impairments at the end of the periods respectively year. The shareholdings for all investments remained unchanged during the periods disclosed above. The investment in LLC Atol was subject of an additional impairment of US$2,124,000 as of 30 June 2010 (30 June 2009: US$1,870,000; 31 December 2009: US$ nil) resulting in a full impairment. Further information is provided in note 22 of the Annual Report & Accounts 2009.

(2)       A prepayment for the purchase of press filter equipment in the amount of US$972,000 has been made to Progress Plant Company in the six months period ended 30 June 2010 (30 June 2009: US$ nil; 31 December 2009: US$ nil). The company is  controlled by Kostyantin Zhevago. Prepayments and other current assets consists a dividend receivable amounting to US$781,000 and accrued interest income due from TIS Ruda.

(3)       Loans were granted to TIS Ruda in 2007 and 2008, which have been partially repaid during the financial year 2009. The Group holds an interest of 48.6% in this Ukrainian company operating a port located on the Black Sea. The company provides port services to the Group (see above). TIS Ruda is an associated company of the Group.

(4)       As of 30 June 2010 trade and other receivables included outstanding amounts relating to the disposal of shares in Vostock Ruda of US$1,181,000 (30 June 2009: US$1,223,000; 31 December 2009: US$1,169,000). During the financial year 2008, 2.10% of the Group's interest in Vostock Ruda was sold to Progress Plant Company. Both companies are under common control of Kostyantin Zhevago.

(5)       As of 30 June 2010 cash and cash equivalents with Finance &Credit Bank (F&C) were US$15,860,000 (30 June 2009: US$35,218,000; 31 December 2009: US$1,712,000). Further information is provided under transactional banking arrangements below.

(6)       Trade and other payables due to entities under common control amounted to US$1,545,000 as of 30 June 2010 relate to the concentrate purchased from Vostock Ruda (30 June 2009: US$ nil; 31 December 2009: US$ nil) and to compressed air and oxygen purchased from Kislorod of US$ 377,000 (30 June 2009: US$ nil; 31 December 2009: US$ 368,000). Trade and other payables due to other related parties amounting to US$849,000 as of 30 June 2010 relate to purchased material from Ferrolit (30 June 2009: US$ nil; 31 December 2009: US$989,000).

Transactional banking arrangements

The Group has transactional banking arrangements with Finance & Credit Bank (F&C) in Ukraine which is under common control of the majority shareholder of Ferrexpo plc. Finance income and finance costs are disclosed in the table above.

The Group entered into a multi-currency revolving loan facility agreement in April 2007 with F&C, which expired on 16 April 2010 and has been extended to 16 April 2013 upon the same terms and conditions except for two changes. The maximum facility limit has been increased from UAH50.5 million to UAH80.0 million (US$10.1 million at the exchange rate as of 30 June 2010) and the interest rates increased for UAH advances from 16% pa to 18% pa.

On 19 April 2010, in addition to the original April 2007 loan described above, the Group entered into a further multi-currency revolving loan facility agreement with F&C for a period of one year maturing on 18 April 2011 and with a maximum facility limit of UAH80.0 million (US$10.1 million at the exchange rate as of 30 June 2010). This new loan is offered under the same terms and conditions as the original loan. Additional assets of US$20.1 million have been pledged for the new loan facility. The total value of pledges for the original and new loan facility is US$33.4 million.

Other related party transaction

In August 2009, the Group paid Swiss Withholding Tax of US$984,106 on behalf of Kostyantin Zhevago on costs incurred for the Initial Public Offering completed in June 2007. This was settled in accordance with terms and conditions entered into at the time of the Initial Public Offering of the company.

Note 19: Reconciliation of profit before income tax to net cash flow from operating activities

US$ 000	6 months ended 30.06.10 (unaudited)	6 months ended 30.06.09 (unaudited)	Year ended 31.12.09 (audited)
Profit before tax	166,164	37,792	80,850
Adjustments for non-cash items:
Depreciation of property, plant and equipment and amortisation of intangible assets	15,081	13,965	28,018
Finance expense	16,864	8,784	20,622
Finance income	(709)	(1,601)	(2,893)
Share of income from associates	(1,069)	(664)	(1,304)
Movement in allowance for doubtful receivables	(1,948)	(3,646)	(5,199)
Loss / (profit) on disposal of PPE	627	(57)	(213)
Write-down of VAT receivable	15,000	-	-
Asset impairments	2,124	1,870	2,757
Site restoration provision	93	64	159
Employee benefits	2,587	1,562	5,474
IPO costs	55	372	427
Share based payments	801	1,182	3,423
Negative goodwill generated on rights issue	-	-	(503)
Operating foreign exchange loss / (gain)	718	817	(2,534)
Non-operating foreign exchange (gain) / loss	(835)	(3,695)	2,552
Operating cash flow before working capital changes	215,553	56,745	131,636
Changes in working capital:
(Increase) / decrease in trade and other receivables	(50,899)	18,096	14,961
(Increase) / decrease in inventories	(24,454)	1,094	1,777
Increase / (decrease) in trade and other accounts payable	(3,292)	(8,107)	(6,474)
(Increase)/decrease in other taxes recoverable and prepaid	(57,140)	4,817	(24,038)
Cash generated from operating activities	79,768	72,645	117,862
Interest paid	(12,540)	(8,784)	(19,197)
Income tax credits / (paid)	1,780	(17,215)	(18,899)
Post-employment benefits paid	(1,706)	(349)	(2,897)
Net cash flows from operating activities	67,302	46,297	76,869

Note 20: Commitments and contingencies

Commitments

US$ 000	As at 30.06.10 (unaudited)	As at 30.06.09 (unaudited)	As at 31.12.09 (audited)
Operating lease commitments	19,165	19,548	19,702
Capital commitments on purchase of PPE	54,727	52,118	41,404

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

Note 21: Subsequent events

No material adjusting or non-adjusting events have occurred subsequent to the period end.

 

END

 

 

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