Fitch Ratings has affirmed Ferrexpo plc's Long-Term Issuer Default Rating (IDR) at 'CCC+'.
The rating reflects Ferrexpo's sufficient funding for at least over the next one year, aided by cash flow generation from limited but stable export sales and a lack of financial debt. It also reflects heightened operating risk for the company following Ukraine's military invasion by Russia. The rating also incorporates risks stemming from Ferrexpo's exposure to various legal claims that could have a negative impact on the credit profile of the company.
Key Rating Drivers
Uncertainty from Legal Claims: Ferrexpo is facing a number of legal processes that Fitch believes could affect its operational and financial performance. Among these is a UAH4,727 million claim against its Ferrexpo Poltava Mining subsidiary related to contested sureties given by a now defunct bank. The group earlier this year withdrew a proposed interim dividend and made a USD125 million provision for the legal claim, which is under consideration in the Ukrainian Supreme Court. The timeline and court outcome of the claims remain uncertain.
Sales Volumes Recovering: The reopening of some Black Sea shipping lanes from Ukrainian ports since late 2023 has allowed Ferrexpo to raise iron ore pellet production volumes (both direct reduced iron (DRI) and standard grade) in recent months. It reported a 76% year-on-year rise in total pellet production in 1H24, and is now utilising two to three of its four pellet lines (up from one to two last year). Fitch forecasts production volumes of 5.5mt in 2024, up 44% from a year ago, which assumes a drop in volumes in 2H24 due to an expected weakening of pellet demand in the coming months.
Earnings Bottoming Out: Ferrexpo's 2023 Fitch-adjusted EBITDA of around USD92 million is likely to be the trough, provided no more material disruptions to operations from the war. We forecast EBITDA of over USD150 million in 2024, driven by an expected increase in production volumes, before it gradually moderates to 2027, in line with Fitch's lower commodity price assumptions.
2024 Free Cash Flow Turns Negative: We estimate slightly negative free cash flow (FCF) in 2024, as expected higher working-capital outflows offset the impact of improved utilisation and continued low capex. Ferrexpo's longer-term FCF forecasts are less certain at this stage, due to the unclear duration and severity of the war with Russia.
Energy Shortages Return: Ferrexpo has resumed importing energy from European neighbours at a higher cost, following an intensification in Russian attacks on Ukrainian energy infrastructure since March 2024. Fitch assumes a material increase in electricity input prices this year, which in combination with a recovery in volumes, will put some pressure on absolute operating costs.
Derivation Summary
The 'CCC+' and below ratings for most corporate issuers in Ukraine reflect heightened operational and financial risks.
Ferrexpo's 'CCC+' rating reflects high operational risks in Ukraine but benefits from export proceeds and lack of financial debt, which makes it more resilient than other Fitch-rated Ukrainian corporates such as Metinvest B.V. (CCC) and Interpipe Holdings plc (CCC-).
Key Assumptions
Average realised pellet price of USD137/tonne in 2024
Pellet production of 5.5mt in 2024
Capex of USD100 million in 2024
No dividends
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, lead to Positive Rating Action/Upgrade:
De-escalation of Russia's military operations in Ukraine facilitating a further re-opening of logistical routes and reducing operating risks
Factors that Could, Individually or Collectively, lead to Negative Rating Action/Downgrade:
Significant operational disruptions, liquidity constraints as a result of the war and/or ongoing legal proceedings
Liquidity and Debt Structure
Sufficient Liquidity: At end- 2023, Ferrexpo had available cash and cash equivalents of USD115 million. It has minimal debt linked to leases, which allows it to maintain a net cash position. Operations are managed on a day-to-day basis with operating cash flow and existing cash balances.
The group maintains its offshore cash position primarily in US dollars, while, in Ukraine, cash is held primarily in hryvnia. Ferrexpo targets to maintain around 80% of cash offshore (primarily in US dollars), with the remainder in Ukraine to support daily operations and general requirements.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Ferrexpo plc has an ESG Relevance Score of '4' for Group Structure and Governance Structure due to related party transactions which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
FERREXPO PLC 
