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Ferrexpo
FXPO LN Neutral
Price (at 15:35, 24 Sep 2013 GMT) 1.75 Iron ore to remain above $100/t LT
Valuation 1.80 Event
- DCF (WACC 11.0%)
12-month target 1.80 We revise our estimates, recommendation and TP following the latest update
12-month TSR % +5.2 to Macquaries iron ore price forecast.
GICS sector Materials
Market cap m 1,031 Impact
Market cap US$m 1,647 Raising long-term iron ore price estimate to $90/t real (from $80/t): On
30-day avg turnover m 2.2
the back of extensive research into the structure of the cost curve into the
Number shares on issue m 588.6
medium term, we have pushed up our long run iron ore price estimate by
Investment fundamentals 12.5% to $90/t CFR China. This reflects our view that the $100/t nominal floor
Year end 31 Dec 2012A 2013E 2014E 2015E
for iron ore will not be breached based on an analysis of existing and potential
Revenue m 1,424.0 1,558.3 1,516.5 1,549.2
EBIT m 361.8 396.6 323.0 287.3 projects. As such, while the price profile is negative, iron ore continues to
Reported profit m 214.3 237.6 174.0 125.9 have more longevity than the market is currently discounting. The uplift in
Adjusted profit m 214.3 237.6 174.0 125.9
Gross cashflow m 264.7 327.6 270.9 231.9
long-term pricing has boosted our long-term margin estimates for the
CFPS US$ 0.45 0.56 0.46 0.39 company which supports a higher through-the-cycle valuation for the group.
CFPS growth % -57.1 23.2 -17.3 -14.4
PGCFPS x 6.2 5.0 6.1 7.1
We have also increased our 2013 iron ore price estimate by 6% and shaved
EPS adj US$ 0.37 0.40 0.30 0.21 5% off our 2014 price estimate.
EPS adj growth % -62.4 10.3 -26.8 -27.6
PER adj x 7.7 6.9 9.5 13.1 Upgrading to Neutral; TP rises to 1.80/sh (from 1.55/sh): The
Total DPS US$ 0.07 0.07 0.07 0.07
Total div yield % 2.4 2.4 2.4 2.4 incorporation of our higher long-term iron ore price has lifted our equity
ROA % 13.2 13.7 10.3 8.3 valuation to $1.67bn (from $1.41bn) or 1.80/sh, reflecting the high degree of
ROE % 14.7 14.7 9.9 6.7
EV/EBITDA x 5.4 4.6 5.3 5.6 operating leverage enjoyed by the business. We accordingly upgrade the
Net debt/equity % 27.0 35.5 52.6 62.5 stock to Neutral as the stock now offers 3% upside to the current share price.
P/BV x 1.1 1.0 0.9 0.9
FXPO LN vs FTSE 100, & rec history High operating leverage positions Ferrexpo well for year-end iron ore rally:
Although we continue to remain cautious on the companys longer-term prospects
and peer relative valuation, Ferrexpo currently has the greatest operating
leverage amongst our European pure play coverage universe and the lowest
company-specific risk in the near term which positions the stock well to benefit
from a year-end rally in the iron ore price to around $150/t. Leverage, however,
works both ways so any trade into the name should be short-lived as the iron ore
price is expected to march down after the Q4/Q1 re-stock.
Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our
website www.macquarie.com.au/disclosures.
Macquarie Research Ferrexpo
Fig 1 Production profile (dry metric tonnes) Fig 2 Unit cost progression
FPM pellets FYM pellets (processed at FPM) CIF all-in cost Net f inancing cost/tonne
mt $/dmt
FYM concentrate Guidance (20-22mtpa by 2017) SIB capex/tonne Tax & royalty per tonne
25.0 140
120 5
2.8 2.5 2.5 12 5
20.0 12 3 2 1
6.2 13 11 11 10
100 9 11 9
9 10 11 9 8
7 8 9 8 8
7.2 7.5 7.5
15.0 80
3.8
- 0.6
- 60
- 2.5 3.0 3.0 3.0 3.0 3.0 3.0
10.0 2.0 96
91 93 88 89 90 86
0.1 40 84 86
5.0 9.3 20
8.6 9.0 9.0 9.0 9.0 9.0 9.0 9.0
- -0
- 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E
2012A 2013 2014 2015 2016 2017 2018 2019 2020 -20
Source: Company reports, Macquarie Research, September 2013 Source: Company reports, Macquarie Research, September 2013
Fig 3 Realised pricing and costs Fig 4 Per tonne EBITDA, price, cost
FOB cash cost Overheads $/dmt
Freight Iron ore price (China, 62% CFR) EBITDA per tonne Realised price per tonne CIF cost per tonne
Ferrexpo realised price 200
CIF US$/t 172
180
200
180 160
137 136
160 140
123 120
115
140 120 109
102 99
120 96 93
100 91 88 89 90 86 84 86
81
100 80
80 33 29 28 28 28 29
34 28 28 60
6 5 5 5 5 42 43
60 23 5 5 5 35
5 40 31
26 23
40 5
63 16 15
60 60 56 57 59 60 62 20
20 51
40
-
- 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E
Source: Company reports, Macquarie Research, September 2013 Source: Company reports, Macquarie Research, September 2013
Revenue Operating cost EBITDA break-even iron ore price (62%, China CIF)
EBITDA EBITDA margin
Historical margin FCFE f low break-even iron ore price (62%, China CIF)
2,500,000 50% US$/dmt
Estimate MacqE iron ore f orecast (62%, China CIF)
45% 180
170
2,000,000 40% 160
150
35% 140
130
1,500,000 30% 120
110
25% 100
90
1,000,000 20% 80
70
15% 60
50
500,000 10% 40
30
5% 20
- 0% 10
-
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E
Source: Company reports, Macquarie Research, September 2013 Source: Company reports, Macquarie Research, September 2013
26 September 2013 2
Macquarie Research Ferrexpo
EPS US 97 37 40 30 21 11 -5
Underlying EPS US 49 37 40 30 21 11 -5
26 September 2013 3
Macquarie Research Ferrexpo
Important disclosures:
Recommendation definitions Volatility index definition* Financial definitions
Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following
Outperform return >3% in excess of benchmark return price movements. adjustments made:
Neutral return within 3% of benchmark return Added back: goodwill amortisation, provision for
Underperform return >3% below benchmark return Very highhighest risk Stock should be catastrophe reserves, IFRS derivatives & hedging,
expected to move up or down 60100% in a year IFRS impairments & IFRS interest expense
Benchmark return is determined by long term nominal investors should be aware this stock is highly Excluded: non recurring items, asset revals, property
GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends &
yield minority interests
Macquarie Asia/Europe High stock should be expected to move up or
Outperform expected return >+10% down at least 4060% in a year investors should EPS = adjusted net profit / efpowa*
Neutral expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets
Underperform expected return <-10% ROA Banks/Insurance = adjusted net profit /average
Medium stock should be expected to move up total assets
Macquarie First South - South Africa or down at least 3040% in a year. ROE = adjusted net profit / average shareholders funds
Outperform expected return >+10% Gross cashflow = adjusted net profit + depreciation
Neutral expected return from -10% to +10% Lowmedium stock should be expected to *equivalent fully paid ordinary weighted average
Underperform expected return <-10% move up or down at least 2530% in a year. number of shares
Macquarie - Canada
Outperform return >5% in excess of benchmark return Low stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks
Neutral return within 5% of benchmark return down at least 1525% in a year. are modelled under IFRS (International Financial
Underperform return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards).
only
Macquarie - USA
Outperform (Buy) return >5% in excess of Russell Recommendations 12 months
3000 index return Note: Quant recommendations may differ from
Neutral (Hold) return within 5% of Russell 3000 index Fundamental Analyst recommendations
return
Underperform (Sell) return >5% below Russell 3000
index return
26 September 2013 4
Macquarie Research Ferrexpo
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