RPT-Fitch affirms Ferrexpo plc at 'B'; outlook negative
Oct 3 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed UK-incorporated Ukrainian iron ore pellets producer Ferrexpo plc's (Ferrexpo) Long- and Short-term Issue Default Ratings (IDR) at 'B'. The Outlook on the Long-term IDR is Negative. In addition, the senior unsecured rating of Ferrexpo Finance plc's 2016 guaranteed notes issue was also affirmed at 'B' with a Recovery Rating (RR) of 'RR4'.
The ratings of Ferrexpo continue to reflect its competitive cost position in the iron ore pellets market, its significant reserve base, the favourable location of its core production assets, and expected moderate leverage over the medium term. The ratings are constrained by the Ukraine's sovereign rating (B/Negative) due to the company's large operational exposure to that country. Absent the sovereign constraint Fitch would view Ferrexpo's standalone rating as 'B+'.
KEY RATING DRIVERS
Ratings Constrained by Sovereign
Ferrexpo's ratings remain constrained by Ukraine's rating due to its operating base within the country, as well as its exposure to the weak domestic political, financial and regulatory environment. In recent periods this risk has been reflected in rising energy costs as well as in a significant amount of outstanding VAT receivables due from the government. The company's lack of geographic and commodity diversification are also rating constraints.
Competitive Cost Producer
Ferrexpo retains a strong cost position in the upper second quartile of the global cost curve. Cash operating costs have, however, increased consistently in recent periods. Costs increased 18% yoy in 2012 and reached USD60 per tonne in H113, up from USD51 in 2011, due to the Yeristovo mine ramp-up, higher Ukrainian energy tariffs, and oil price increases.
Expected Financial Performance
Over the next two to three years the primary influences on Ferrexpo's revenues are expected to be rising volumes from the ramp-up of the Yeristovo mine offset by declining market prices for iron ore products. Fitch expects spot iron ore prices to average USD110 per tonne in 2014 before declining to USD90 per tonne in the medium term. Under Fitch's conservative operating assumptions funds from operations (FFO)-adjusted net leverage will remain below 2.0x in 2013/14 before peaking around 2.25x in 2015.
Ferrexpo benefits from a favourable location at its Poltava and Yeristova mines, with strong access to the Black Sea ports and into central Europe via rail and waterway links. The company is also well-located to access Middle Eastern and Asian markets which are the current areas of new export growth.
Negative: Future developments that could lead to negative rating action include:
-Downgrade of Ukraine's rating
-FFO net leverage sustained above 2x (applicable only to 'B+'standalone rating)
-EBITDA margins consistently below 18% (applicable only to 'B+' standalone rating).
Positive: Future developments that could lead to positive rating actions include:
-Upgrade of Ukraine's rating to Ferrexpo's standalone level of 'B+'
-FFO net leverage below 1.0x on a sustained basis (applicable only to 'B+' standalone rating)
-A reduction in key customer concentration and an increase in scale and diversification (applicable only to 'B+' standalone rating).
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