FEEXY - Ferrexpo Suffers On Logistics Constraints

Summary

• Ferrexpo's quarter went pretty well as per iron ore industry performance, limited primarily by logistics bottlenecks.
• Order books are reportedly building in the steel industry led by energy, and this should support the demand in iron ore where China is giving out.
• However, given the particular risks of Ferrexpo, whose entire operations are located on the eastern side of the Dnieper in Ukraine, they're a no-go compared to other iron exposed miners.

Published on the Value Lab 30/8/22

Ferrexpo ( FEEXF ) is a very particular iron ore miner. They have all their operations in Ukraine, on the eastern side of the Dnieper. From a cash flow perspective, they've seen declines in iron ore pricing, not helped by China's travails, but iron ore is not the worst commodity to be exposed to. Logistics is the primary issue, bottlenecking the volumes. Overall, iron ore seems a reasonable commodity to be exposed to, but Ferrexpo is not a good deal considering the specific risks related to Ukraine.

H1 Breakdown

The performance in H1 is well broken down in the following slides.

Production and volume fell. Iron ore prices also fell. Both caused a hit to revenue and operating leverage enhanced it on the EBITDA line.

Volume declines were a more significant detractor from the company's performance on the EBITDA line. It was limited primarily by logistics bottlenecks. These have begun to resolve in other commodity industries like lumber, where flatbed availability was a limiting factor. Some slowdown in the good market could do something to help these volume limits. With declines in consumption already affecting demand for iron ore, especially where China's woes are in full swing , further resolution of bottlenecks will be a positive for the Ferrexpo outlook.

Conclusions

In general, steel and therefore iron ore markets aren't so bad. On the big construction side , things are slowing down, but the markets aren't in total collapse. The other holdouts have been allowing for a buildup of order book after a slow July. Energy has been going very strong, and the orderbook has consequently been building quickly. In the subsea industry , we've been seeing great orderbook buildup, and general infrastructure, especially for LNG facilities like regasification, the only way to make use of imported gas, has similarly seen buildout.

This has been making up for a lot of the slowdown and keeping these businesses' heads above water. Prices don't reflect a long-term expectation of this resilience, as multiples are distinctly late-stage. Ferrexpo trades at a 4.8x forward PE. Rio Tinto ( RTPPF ) is only slightly more at 5.5x PE .

The comparison leads to the final point, which is that while steel and iron ore might be interesting still, despite having to deal with recessionary pressures and recession-period sentiment in markets, Ferrexpo is not so well priced. It trades at less than a 20% discount from Rio Tinto, which is more exposed to resilient commodities other than iron ore, which is a relatively weaker commodity due to construction and China exposure. This minor discount obviously also doesn't reflect the risk that a single missile hitting their plants in Ukraine would literally destroy the company. It's on the east of the Dnieper and is a valuable asset, therefore a potential military target. Who knows how the Russian advance will go. I'd not risk it.

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