Ferrexpo plc (LON:FXPO) Following the announcement of the resignation of Deloitte LLP as the Group’s Auditors with immediate effect on 26 April 2019, the Directors of Ferrexpo have now had an opportunity to review and consider the Statement of Reasons provided by Deloitte and are publishing these today in full so that all shareholders are informed.
Deloitte Reasons for Resignation
The Directors note Deloitte’s reasons for their resignation (which are attached to this announcement), and in particular Deloitte’s view that the Company delayed in commencing its independent review into the Group’s charitable donations to Blooming Land (the “Independent Review”). The Company formed its own considered view and believes it initiated the formal Independent Review at the appropriate time, given the other steps it was taking and all the surrounding circumstances.
In response to the reasons given by Deloitte for their resignation, Ferrexpo notes the following relevant additional information:
· The Group ceased donations to Blooming Land in May 2018.
· Deloitte were asked by Ferrexpo in June 2018 to review Blooming Land’s 2017 audited financial accounts and report to the Directors on, amongst other things, the reliance that could be placed on those accounts.
· Ferrexpo’s half year results were published on 1 August 2018, following a review by Deloitte. As noted therein, Deloitte’s review did not flag any matters which caused Deloitte to believe that the half year results had not been prepared, in all material respects, in accordance with the relevant accounting standards and the FCA’s Disclosure Guidance and Transparency Rules.
· On 29 August 2018, the Company was informed of the discrepancies in the copy bank statements received by Deloitte as part of their audit work.
· The Company sought to obtain the original bank statements from Blooming Land in September 2018, with a deadline set for 31 October 2018.
· Blooming Land did not provide the original bank statements citing its opinion that it was unable to comply with the request due to local legislation. The Company, through its non-executive directors, thereafter sought to obtain further clarification and information from Blooming Land.
· On 12 November 2018 the Company commissioned Herbert Smith Freehills LLP to start work on preparing a draft scope for an independent review.
· The Board formally considered commencing an independent review on 22 November 2018, but concluded that as a preliminary step the Company would likely achieve better results through a cooperative route taking into account the third party nature of Blooming Land. The Board wrote again to Blooming Land to formally request information and explanations for the discrepancies in the copy bank statements. This letter was prepared by the Company and its advisers, with relevant input from Deloitte, and was sent to Blooming Land on 6 December 2018.
· Whilst awaiting a response from Blooming Land, the Company continued to finalise the scope of an independent review. It agreed a shortlist of potential Ukrainian legal advisers and forensic accountants who could assist with the independent review. The process of engaging Ukrainian legal advisers commenced shortly prior to a response letter received from Blooming Land on 28 December 2018.
· The responses from Blooming Land received on 28 December 2018 were reviewed by the Company, its legal advisers and Deloitte. Some of the explanations received were considered incomplete and unsatisfactory and could not be independently verified. In January 2019 the Company considered whether an independent review should be launched at that stage, with differing views considered, but determined it remained appropriate to seek to engage with Blooming Land outside of a formal independent review. The Company wrote a letter to Blooming Land on 25 January 2019 requesting further clarification.
· On 3 February 2019, and following further discussions with Deloitte and an appraisal of the options available, Ferrexpo resolved by unanimous board decision to formally commence the Independent Review and set up a committee comprised solely of Independent Non-Executive Directors to oversee the process and review its findings (the “Independent Review Committee” or “IRC”). This was announced by the Company on 4 February 2019. The IRC is being advised by Herbert Smith Freehills, as its UK legal adviser, and BDO as independent forensic accountants, together with Ukrainian legal advisers and data collection specialists. The advisers report directly to the Independent Review Committee.
Deloitte has noted that Ferrexpo published its annual report and accounts prior to the conclusion of the Independent Review, and that as a consequence Deloitte was required to qualify its audit opinion. Ferrexpo’s obligations as a listed company under the FCA’s Disclosure Guidance and Transparency Rules, and also the terms of the Group’s banking covenants, required the Group to publish its 2018 full year results by 30 April 2019. Having already delayed publication on two occasions to allow more time for progress with the Independent Review, it was neither possible nor realistic to delay further.
Deloitte Audit
Deloitte undertook an intensive audit of the Group’s 2018 financial statements. Deloitte set out their opinion, as noted on page 80 of the Group’s full year results announcement, that (other than in relation to certain disclosed matters concerning Blooming Land) the financial statements of the Group give a true and fair view of the results of Ferrexpo plc and its subsidiaries. The Directors are confident in the quality of the Group’s accounts, reporting and internal control systems.
Ferrexpo would like to re-emphasise that Blooming Land is not considered a related party of the Group. As detailed in the Group’s full year results announcement, the IRC has considered the relationship of the CEO and the Group executive management with Blooming Land, including the CEO’s business network, and unanimously concluded, based on the evidence before it, including the interim findings of the Independent Review to date and representations from the Chief Executive Officer, that neither the CEO nor the Group’s executive management control or exercise significant influence over Blooming Land as defined under applicable accounting standards or under Chapter 11 of the Listing Rules and, as a result, Blooming Land is neither a related party of the CEO nor of the Group’s executive management.
The search for a new auditor for the Group is underway and Ferrexpo will make an announcement as soon as appropriate.
Director Resignations
The Group also announced on 26 April 2019 that two of its directors Mary Reilly, Chair of the Audit Committee, and Bert Nacken, Chair of the Remuneration Committee, had decided not to seek re-election at the Company’s AGM on 7 June 2019.
Ms Reilly and Mr Nacken have since informed the Company that, having seen the Company to the publication of its annual report and accounts in what have been difficult and very time consuming circumstances, they have decided to resign with immediate effect.
Ferrexpo would like to thank both Ms Reilly and Mr Nacken for their contributions and, in particular, their work to date on the on-going Independent Review. The remaining members of the IRC (Vitalii Lisovenko, Chair, and Steve Lucas) are committed to completing the Independent Review thoroughly in accordance with the agreed terms of reference and as soon as possible, with advice from Herbert Smith Freehills, BDO and Ukrainian counsel.
The Board has initiated a process to identify and appoint new Independent Non-Executive Directors. This process will be taken forward as a matter of priority, in order to restore the appropriate balance of independent non-executive directors to the Board and its committees, including the IRC.
The Board can confirm that its Directors are fully committed to Ferrexpo and focused on delivering its successful business strategy given the strong fundamentals underpinning the market it operates in.
Group Trading
As noted in recent announcements, the Group continues to trade strongly. To date in 2019, realised prices for Ferrexpo’s pellets have continued at high levels and the Group remains a competitive producer in a favourable segment of the iron ore market, underpinning near record EBITDA margins and strong cash generation.
Commitment to Corporate Governance
Steve Lucas, Chairman of Ferrexpo, said: “The Board of Ferrexpo is committed to the highest levels of corporate governance and transparency.”
“We are naturally disappointed by Deloitte’s resignation and its reasons, as well as the resignation of Ms Reilly and Mr Nacken. We have commenced a process to appoint new auditors and additional independent non-executive directors. We are also committed to completing the independent review into Blooming Land as quickly as possible and will update shareholders on the outcome in due course.”
“As reported in the Group’s 2018 full year results announcement, at this stage we cannot conclude as to the ultimate use of all of the funds by the charity. While there are indications that some funds could have been misappropriated, further work is required before any final conclusions can be drawn and the Board would like to make clear that to date no conclusive evidence of misappropriation of funds has come to light. “
The Company and its Directors have a good and open dialogue with all of the Company’s stakeholders, and the Company remains committed to maintaining this level of engagement. The Chairman will be meeting and speaking with shareholders and other market participants during the course of this week. The Directors also look forward to speaking to shareholders at this year’s annual general meeting. In the meantime, if shareholders would like to speak to the Company or Directors regarding recent developments, appropriate arrangements can be made through Ferrexpo’s Investor Relations Manager.
