Ferrexpo stock suffers from logistical constraints (OTCMKTS: FEEXF)
Posted on the Value Lab 8/30/22
Ferrexpo (OTCPK: FEEXF) is a very special iron ore miner. They have all their operations in Ukraine, on the eastern bank of the Dnieper. From a cash flow perspective, they saw declines in iron ore prices, not helping them by the misfortunes of China, but iron ore is not the worst commodity to which one can be exposed. Logistics is the main problem, blocking volumes. Overall, iron ore seems like a reasonable commodity to take exposure to, but Ferrexpo is not a bargain given the specific risks associated with Ukraine.
H1 performance is well detailed in the following slides.
Production and volume fell. Iron ore prices also fell. Both caused a hit to revenue and operating leverage improved it on the EBITDA line.
Volume declines were a bigger detractor to the company’s performance on the EBITDA line. It was limited mainly by logistical bottlenecks. These began to resolve in other commodity industries like lumber, where rig availability was a limiting factor. Some downturn in the cheap might do something to help those volume limits. With consumption declines already affecting iron ore demand, particularly where China’s woes are in full swing, further resolution of bottlenecks will be positive for Ferrexpo’s outlook.
In general, the markets for steel and therefore iron ore are not so bad. On the large construction side, things are slowing down, but the markets have not completely collapsed. The other recalcitrants allowed an accumulation of the order book after a slow month of July. Energy is going very well and the order book has therefore quickly built up. In the subsea industry, we have seen a significant backlog build-up, and general infrastructure, especially for LNG facilities like regasification, the only way to use imported gas, has also seen a accumulation.
This has offset much of the downturn and has kept these companies’ heads above water. Prices do not reflect a long-term expectation of this resilience, as multiples are clearly at an advanced stage. Ferrexpo is trading at a forward PE of 4.8x. Rio Tinto (OTCPK:RTPPF) is only slightly above 5.5x PE.
The comparison leads to the final point, which is that while steel and iron ore may still be attractive, despite the need to deal with recessionary pressures and market sentiment in times of recession, Ferrexpo is not not so highly rated. It trades at less than 20% discount to Rio Tinto, which has more exposure to resilient commodities other than iron ore, which is a relatively weaker commodity due to construction and exposure to China. This minor discount obviously also does not reflect the risk of a single missile hitting their factories in Ukraine literally destroying the company. It’s east of the Dnieper and it’s a valuable asset, so a potential military target. Who knows how the Russian advance will unfold. I wouldn’t risk it.
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