Shares digital

Ferrexpo (FXPO) – 304p, stop loss 242p

SHARES SUMMARY

Current output of nine million tonnes a year in the Ukraine should quadruple over the next decade. Profits will also rocket if iron ore prices continue to rise, making a 400p target price within 18 months look realistic.

Business:

A world leading producer of iron ore pellets in Ukraine

Vital stats:

Market value: £514 million

Historic PE for 2006: n/a

Prospective PE for 2007: 30.3

Prospective PE for 2008: 11.7

Sector PE: 13.2

1-month relative strength: 24.7%

3-month relative strength: 62.3%

Yield for 2007: 0.9%

NMS: 10,000

Spread: 0.16%

Ferrexpo, based in Switzerland, owns one of the largest iron ore reserves in the world containing some 18 billion tonnes at Poltava in the Ukraine. It raised £102 million from investors when it listed on London last June to help finance its huge growth programme.

The shares have the Midas touch, rocketing from 180p to a new high this week. On a prospective PE of 12 this year falling to eight next year the out-performance is set to continue.

Interim results showed iron ore production up 15% at 14,446 tonnes while profits rocketed 179% to £20 million and earnings more than doubled to 3p.

Rising iron ore prices and soaring demand from China and India mean Ferrexpo could make nearly £800 million profit in 2013 if prices rise a further 50%. Prices rose by 20% in 2007 and Deutsche Bank forecasts pellet prices to surge 45% this year and 5% in 2009. Expansion of the Gorishne deposit to around 32 million tonnes a year by 2011 will cost some £80 million.

Production can be maintained at this level until at least 2035. The extra iron ore production will allow the company to boost production of high quality 65% iron ore pellets by some 1.3 million tonnes a year.

The emphasis on 65% pure iron ore pellets is critical as they command a significantly higher price from steelmakers.

The new Yeristovskoye mine is also being expanded ahead of schedule to meet strong demand and take full advantage of the Ferrexpo’s under utilised processing capacity. The target is to lift pellet production of own ore by 15% over the next three years with three new mines coming on stream by 2018.

Producing pellets from iron ore mined by the company is much more profitable than buying in ore from outside. Output of 65% pure pellets has risen from 40% to 44% of output last month and should be nearly 50% by the end of this year.

The other string to the company’s bow is increased operational efficiency which has left costs unchanged over the last 13 months while energy and labour costs have jumped in the Ukraine.

Ferrexpo owns huge undeveloped iron ore resources near its current pits. Just how to develop these deposits is taxing management minds. A joint deal with one of the world’s top half dozen mining giants is possible.

A maiden final dividend worth £5 million will be paid for 2007, doubling in 2008 to give a near 2% yield.

by: Timon Day