Ferrexpo plc (LON:FXPO), producer of premium iron ore pellets for the transition to lower carbon and green steel, has announced its audited financial results for the year ended 31 December 2023.
Lucio Genovese, Executive Chair of Ferrexpo, commented:
“Although the war is now in its third year, the 2023 financial year represents the first full year that we operated during a time of war. The challenges that we continue to face cannot be understated, however, our results demonstrate that we have learnt to be nimble and how to adapt and respond to ever changing circumstances.
It is pleasing therefore, that we can report production and sales of over four million tonnes, equal to the logistics capacity that was available to us during the year, generating revenues of US$652 million. Our cost of sales on a unit basis fell 8% to US$76.5 per tonne, reflecting better availability and prices for consumables, and also efficiency gains and cost saving measures. After positive cash flows from operating activities of US$101 million, we report a firm underlying EBITDA of US$130 million. Even after investing over US$100 million dollars during the year, it is also pleasing that we are able to report a year end net cash position of US$108 million, slightly ahead of the previous year. In our accounts this year, we have recorded a provision of US$131 million, which has been recognised to cover any possible negative outcome that arises from two legal cases that we are challenging. The effect of this provision is that instead of reporting a profit of US$46 million we are instead reporting a loss of US$85 million. With advice from our Ukrainian legal counsel, we believe that the various claims are without merit and that we have strong legal arguments to vigorously defend ourselves in court.
Throughout the year, we worked tirelessly to protect our people and preserve the integrity of our assets. We understand that more than ever, we have an important role to play as a large employer on whom so many people depend, and also the critical need for our contributions to local communities and the national economy.
Finally, I want to highlight that the new year has started well. The increase in demand experienced in December 2023 has continued in to the first quarter of this year. We have seen good demand for our premium products in Europe and elsewhere, which provided us the confidence to start a third pelletiser line. This means that we have more production flexibility than at any other time during the war. It also means that we are able broaden our product mix, including restarting production of DR pellets again.”
Financial highlights
· Revenue 48% lower at US$652 million due to lower realisable sales resulting from logistics constraints and a decrease in average iron ore prices (2022: US$1.2 billion).
· Underlying EBITDAA fell to US$130 million at an EBITDA margin of 20%, heavily influenced by operating foreign exchange gains of only US$31 million for 2023 compared to US$339 million in 2022.
· Net cash flows from operations: remain positive at US$101 million despite the significant challenges posed by the war (2022: US$301 million).
· US$131 million effect from provisions to cover possible negative outcome of ongoing legal proceedings results in a loss of US$85 million.
· Capital investment of US$101 million, including sustaining and optimisation projects (2022: US$161 million).
· Net cash position: improved marginally to US$108 million as at 31 December 2023 (2022: US$106 million).
Financial summary
| US$ million (unless stated otherwise) | 2023 | 2022 | YoY change |
| Total pellet production (kt) | 3,845 | 6,053 | (36%) |
| Sales volumes (kt) | 4,174 | 6,183 | (32%) |
| Iron ore price (65% Fe Index, US$/t) | 132 | 139 | (5%) |
| Revenue | 652 | 1,248 | (48%) |
| C1 cash cost of production (US$/t) | 76.5 | 83.3 | (8%) |
| Underlying EBITDA | 130 | 765 | (83%) |
| Underlying EBITDA margin | 20% | 61% | (41pp) |
| (Loss)/profit for the period | (85) | 220 | (139%) |
| Debt servicing | – | 42 | – |
| Capital investment | 101 | 161 | (31%) |
| Closing net cash | 108 | 106 | +2% |
The Group operates in an evolving political, fiscal and legal environment in Ukraine and the risks associated with this heightened further in 2023 and early 2024. As result, the Group has recognised provisions totalling US$128 million, including US$124 million for one specific ongoing legal dispute. See details in Note 2 Basis of preparation and Note 14 Commitments, contingencies and legal disputes to the Consolidated Financial Statements in respect of the possible impact on the Group’s business activities.
Safety and wellbeing
· Tragically, 14 colleagues were killed serving in the armed forces during 2023, bringing the total to 34 between February 2022 and December 2023.
· Safety performance at Ferrexpo’s operations remains strong, with a third successive fatality-free year and lost time injury frequency rate of 0.32 continues materially below the Group’s historic trailing average.
· The Group’s LTIFR has remained at a relatively low level, ahead of the Group’s historical five-year trailing average of 0.69.
Market factors
· The premium 65% Fe iron ore price added 15% over the year as a whole from January to December 2023, however, the annual average price for 2023 was 5% lower at US$132 per tonne compared to 2022.
· The iron ore pellet market experienced some volatility during the year, with global pellet supply growing only 1%. Direct Reduction (“DR”) pellet premiums fell by a third to an annual average of US$57 per tonne (2022: US$87 per tonne).
· C3 freight index, indicative of global freight rates for iron ore shipments, fell 14% to US$21 per tonne, reflecting weaker demand in China.
Operational factors
· Iron ore pellet and concentrate production of 4.2 million tonnes in 2023 (2022: 6.1 million tonnes), comprising 3.8 million tonnes of premium blast furnace pellets and 0.3 million tonnes of concentrate.
· Operations continued to ship products to customers throughout 2023, by rail, rail and barge to customers in Europe, or rail, barge and ship from alternative Black Sea ports to customers in Europe and MENA.
· Full year iron ore sales of 4.2 million tonnes (2022: 6.2 million tonnes), mirroring available logistics capacity.
· Investment in growth continues with installation of Group’s press filtration complex, which will increase pellet quality and lower natural gas consumption per tonne of production.
· C1 Cash Cost of ProductionA (“C1 costs”) fell 8% to US$76.5 per tonne, due to a reduction in the unit cost of energy such as natural gas and fuel (principally diesel), partially offset by higher electricity costs in Ukraine.
· As of late February 2024, the Group has resumed operations at the third (of four) pelletiser lines, due to improved logistics access to export markets.
ESG factors
· Absolute Scope 1 emissions fell by 27% in 2023, in part reflecting lower production due to war related constraints. Scope 1 emissions on a unit of basis rose 4%, due to an increased utilisation of alternate logistics channels for exports, which resulted in an increased consumption of gasoil.
· Absolute Scope 2 emissions fell by 39%, also due to lower production. On a unit basis, Scope 2 emissions fell by 11% due to an increased proportion of electricity being sourced from cleaner sources including hydro and nuclear power.
· In 2022, DR pellets represented 6% of all production, resulting in lower Scope 3 emissions for that year. However, in 2023 no DR pellets were produced. Consequently, Scope 3 emissions in 2023 on a unit basis increased to 1.33 tCO2/t of pellet production from 1.24 tCO2/t of pellet production in 2022 respectively. Absolute Scope 3 emissions nevertheless decreased 25% year-on-year due to the overall lower production in 2023.
· During the year, the Group completed a Life Cycle assessment and Double Materiality assessment with its environmental consultants, Ricardo plc. The Life Cycle assessment independently verified that when a steel manufacturer uses a Ferrexpo DR pellet, in an electric arc furnace, to produce a tonne of steel billet, 37% less carbon is emitted compared to traditional steel production methods. The Double Materiality assessment combines impact materiality with financial materiality, providing a more in-depth analysis of what issues are material to an organisation. The results demonstrated that topics relating to governance and responsible business were considered the most important by stakeholders, closely followed by our role in enabling the transition to green steel and how we can ensure ongoing employment for our workforce.
· The Group also published its 8th Responsible Business Report.
Corporate governance topics
· On 31 December 2023, Graeme Dacomb resigned as an Independent Non-Executive Director and as Chair of the Audit Committee. On 1 January 2024, fellow Non-executive Director, Stuart Brown was appointed as Chair of the Audit Committee.
· On 22 October 2023, Stuart Brown was appointed as an Independent Non-executive Director of the Company and as a member of the Audit Committee.
· On 1 August 2023, Fiona MacAulay stepped down as a member of the Audit Committee.
· On 1 July 2023, Lucio Genovese transitioned from Non-executive Chair to Executive Chair on an interim basis following the resignation and departure of Jim North as Group CEO on 30 June 2023.
· On 25 May 2023, Jim North resigned as Executive Director of the Company.
· On 25 May 2023, Ann-Christin Andersen resigned from the Board as a Non-executive Director and Chair of the Health, Safety, Environment and Community (“HSEC”) Committee. On 25 May 2023, fellow Non-executive Director, Natalie Polischuk was appointed as Chair of the HSEC Committee.
· On 25 May 2023, Nikolay Kladiev, Group CFO, was appointed as an Executive Director of the Company.
Principal legal issues and provision
On 7 December 2022, Ferrexpo Poltava Mining (“FPM”) received a claim in the amount of UAH4,727 million in respect of contested sureties. These contested sureties relate to Bank Finance & Credit which the Group previously used as its main transactional bank in Ukraine. Bank Finance & Credit is still going through the liquidation process after having been declared insolvent by the National Bank of Ukraine and put under temporary administration on 18 September 2015. The counterparty in this claim alleges that it acquired rights under certain loan agreements originally concluded between the Bank Finance & Credit and various borrowers by entering into the assignment agreement with the State Guarantee Fund on 6 November 2020. The counterparty further claims that FPM provided sureties to Bank Finance & Credit to ensure the performance of obligations under these loan agreements. On 26 January 2024, the Ukrainian court of appeal has confirmed a claim against FPM in the amount of UAH4,727 million (approximately US$124 million). On 30 January 2024, FPM filed an appeal to the Supreme Court of Ukraine. The first hearing scheduled for 20 March 2024 was delayed and was rescheduled for 17 April 2024. The Supreme Court hearing on 17 April 2024 considered primarily procedural matters and the next court hearing is scheduled for 27 May 2024. Although the Group remains of the view that FPM has compelling arguments to defend its positions, the Group has recognised a full provision totalling US$124 million for this ongoing legal dispute.
On 25 March 2024, Ferrexpo was made aware of a court order dated 18 January 2024 in the Ukrainian Register of Court Decisions regarding restrictions on certain corporate rights in all of Ferrexpo’s Ukrainian subsidiaries. These restrictions are imposed on 49.5% of the shares in all of Ferrexpo’s Ukrainian subsidiaries except for TIS-Ruda LLC and Nova Logistics LLC, where the relevant percentages frozen are 24.7% and 25.2% respectively. The restrictions do not affect ownership of the shares but prohibit their transfer and restrict the right to use corporate rights for the abovementioned percentages, including the right to vote. Ferrexpo is not a party to the proceedings in which the restrictions have been imposed, and these restrictions were imposed without even notifying Ferrexpo. The Group plans to file an appeal to cancel these restrictions.
Stakeholder engagement activities
Due to the ongoing war in Ukraine, the Group’s management team will not be hosting an open access call with investors. The Group’s management team will, however, be hosting an analyst briefing at 11:00 UK time today. For those interested in attending, please contact [email protected]. A presentation will be published here. The Group expects to host its Annual General Meeting in May 2024 and will provide an update at this event.
