UPDATE 2-Ferrexpo postpones project decision, Q3 output up

(Adds analyst comment, shares, details)

By Eric Onstad

LONDON, Oct 15 (Reuters) - Ukrainian iron ore producer Ferrexpo (FXPO.L) posted a 12.4 percent rise in third-quarter iron ore pellet output and said it deferred a decision on investing in growth projects due to market conditions.

"Given the current uncertainties in financial and commodity markets, the board has deferred decisions on the ultimate investment in these projects until the end of the first quarter of 2009," a statement said on Wednesday.

It was reviewing capital costs for the projects, which should be able to be cut due to the collapse of many commodity prices, including steel.

The firm was continuing to look for a joint venture partner for the projects and planned to conclude the process towards the end of the year.

Shortlisted companies have all completed due diligence on Ferrexpo over the past two months and negotiations about valuations would start in mid-November, it added.

The growth projects are the centrepiece of plans by Ferrexpo -- which owns one of the biggest iron ore resources in the world -- to raise production nearly fourfold by 2018.

Analysts said production results were positive and they supported the decision to delay investment in growth projects.

"This is a broadly reassuring update from FXPO with the company sensibly looking to reduce its capex requirements and deferring commitments until clarity over funding and the SI (strategic investor) programme emerges," Amos Fletcher at Cazenove said in a note.

Ferrexpo shares, which have shed 80 percent since mid June, gave up early gains to fall 8.3 percent to 91.5 pence by 1338 GMT, still outperforming a 13.7 percent tumble in the UK mining index .FTNMX1770 on recession fears.

COST PRESSURES EASING

Iron ore pellet output for the three months to end September rose 12.4 percent to 2.51 million tonnes and the firm said it was sticking with its guidance that full year production would be in line with last year's 9.1 million tonnes.

Ferrexpo, the world's 12th-largest producer of iron ore pellets, said inflation in Ukraine was easing and production costs in the third quarter were below management forecasts.

The financial crisis has hit steel production in Ukraine and demand for iron ore and so Ferrexpo was seeking to divert some of its iron ore outside of the country.

Ukraine customers account for around 15 percent of total sales, but the firm warned that depressed conditions might hit other customers in coming months.

Ferrexpo doubled its first-half earnings per share on the back of record prices and shortly afterwards launched a share buyback to return excess cash to shareholders.

The firm agreed annual contract prices hikes of more than 90 percent and it said on Wednesday that the majority of those were fixed until the end of March 2009.

Fletcher at Cazenove said he has pencilled in a 20 percent fall in iron ore prices for next year. Last week, Ferrexpo's majority owner announced it had sold a 20.8 percent stake at a big discount to the main shareholder of Czech coal producer New World Resources (NWRS.L) (NWRSsp.PR) to satisfy a loan agreement.

Fevamotinico, controlled by Ukrainian billionaire Kostyantin Zhevago, said it retained a 51 percent stake in Ferrexpo following the divestment at 86 pence a share, 30 percent below London-listed Ferrexpo's closing price the previous trading day.

(Reporting by Eric Onstad; Editing by Paul Bolding and Mike Nesbit)