Equity Market Insight-Ferrexpo: 1H11 Earnings Review

Ferrexpo published its interim 1H11 financials today, which were below our expectations, but at the same time, beat the market consensus: the company\'s revenues surged 63% YoY to US$855m, exceeding consensus by 14.4%, while EBITDA rose by 86% to US$401m, exceeding consensus by 11%. Overall, the results demonstrated Ferrexpo\'s strong market position and sturdy resistance to costs, which bodes well for our 2011 estimates of the company\'s financial performance.

Market position expectedly strong; mining capacity used 100%. Ferrexpo\'s 1H11 revenues were mostly in line with our expectations (+1.5%), demonstrating the company\'s strong ability to set pricing in line with the buoyant world iron ore market. The company reported average growth of its DAF/FOB prices for pellets of 50% YoY in 1H11. Ferrexpo\'s 1H11 sales volumes remained predictably unchanged compared to 1H10, at 4.7mt, as the miner continued to use its 28mtpa mining capacity at 100%.

Production costs within predictable range. Higher-than-expected reliance on Asian markets and volumes of pellets made from purchased concentrate were the key factors placing Ferrexpo\'s 1H11 EBITDA 8% below our expectations. Rampant commodity cost inflation was responsible overall for 59% of the rise in the company\'s production cash costs (up 27.8% YoY, to US$48.2/t). However, this came as no surprise, as Ferrexpo\'s 1H11 pellet production costs of US$211m were in fact 3% below our expectations.

2011 outlook remains favourable. We expect Ferrexpo\'s operational margins to weaken by 2-3ppts in 2H11, with the biggest concern being the negative impact from a further expected rise in domestic electricity tariffs and Gazprom\'s natural gas price for Ukraine. At the same time, the iron ore market plays into Ferrexpo\'s hands, raising iron ore prices\' chance to remain largely unabated through the rest of 2011, despite the cautious market consensus. Ferrexpo\'s strong results in 1H11 lead us to reiterate our estimates for the company\'s financial performance in 2011E and BUY rating on the stock.