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Edited Transcript of FXPO.L earnings conference call or presentation 2-Aug-19 8:00am GMT

Half Year 2019 Ferrexpo PLC Earnings Presentation

London Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Ferrexpo PLC earnings conference call or presentation Friday, August 2, 2019 at 8:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Christopher Mawe

Ferrexpo Plc - CFO & Executive Director

* Kostyantin Valentynovych Zhevago

Ferrexpo Plc - CEO & Executive Director

* Stephen Lucas

Ferrexpo Plc - Non-Executive Chairman


Conference Call Participants


* Andrew Ian Jones

Wood & Company Financial Services, a.s., Research Division - Equity Analyst

* Dominic O'Kane

JP Morgan Chase & Co, Research Division - Analyst

* Grant Sporre

Macquarie Research - Head of European Metals and Mining Research

* Kennedy Nyangoni

Barclays Bank PLC, Research Division - Research Analyst




Stephen Lucas, Ferrexpo Plc - Non-Executive Chairman [1]


Good morning, and welcome to Ferrexpo's 2019 Interim Results, and thank you very much for coming.

I'm pleased to report half year EBITDA of USD 372 million, up almost 60% compared to the first half of 2018. Profit after tax increased 78% to $270 million. Our strong cash flow generation enabled further debt reduction, increased investments in our assets to drive growth and we've doubled dividends to shareholders.

We have a diversified sales portfolio selling to world-class steel mills under long-term contracts. Whilst current steel demand is muted in some regions, overall pricing remains attractive compared to historic levels.

Regarding the review and to the use of funds donated by Ferrexpo to the third-party charity, Blooming Land, significant work has been undertaken and this remains ongoing. This includes a forensic review conducted by BDO, a review of relevant documentation, interviews with Ferrexpo employees and directors, correspondence with the charity and other third parties and [advice from] legal counsel in U.K. and Ukraine. At present there are no material changes to the company's previously published conclusions. The independent review committee is seeking to conclude its review as soon as possible.

And with that, I'd now like to hand over to Chris to take you through the first half financial performance.


Christopher Mawe, Ferrexpo Plc - CFO & Executive Director [2]


Yes, so good morning, everybody. And move on to the first slide. So welcome to everybody here in the room and those watching online. So I'm very pleased to present another good set of results. This has been underpinned by production, which is up 5% year-on-year. Three pellet lines have been refurbished so far. There was no refurbishment in half 1 and the final pellet line is due to be refurbished in the fourth quarter of this year.

Sales volumes, as you can see, were up 4% year-on-year, which reflects the markets, and as Steve, the Chairman has already said, we sell to world-class steel mills under long-term contract, and we made no spot sales in the period into China.

Some weakness in Europe meant that we added stocks towards the end of the half year. However, we have had a very strong increase in prices. We move to the 65% index, which was up around about 20% year-on-year. So this move to the 65% index, which I will deal with on the next slide, together with pellet premiums that were in line with last year allowed us to increase turnover, you can see there by some 28%.

Moving on to the cost side. Cost control remained strong. There was an overall 11% year-on-year increase, which reflected local inflation, stronger local currency and it was offset partly by lower gas prices. We also undertook some actions in terms of repairs and maintenance and stripping, which meant overall costs rose. However, when you take the combination of higher turnover, as described, up 28% with the costs, this led to a 59% increase in EBITDA. So this is a very strong result and the EBITDA margin, as you can see, rose to 47%, which is an increase there of 9 percentage points.

Just moving further down the income statement, you can see that the profit after tax rose there by some 78%. That was as a result of tax charge being 15%, which was in line with prior years, but importantly, much lower interest payments in the period. That was on lower debt. So we've reduced debt in the period, and that meant that the profit after tax rose 78% along with EPS.

Finally, the strong profit allowed us to increase capital expenditure so that was 100% higher, reduce net debt, so we now have a very strong net debt-to-EBITDA ratio of 0.44x and increased the dividend. So what you can see is in terms of capital allocation, we have a 100% increase in CapEx, 100% increase in dividend and a 24% reduction in net debt.

In terms of dividend, I think it's important to really point out again that we've paid now or we will pay 4 dividends this year. So one in January, which was declared in December 2018, one in May, one in July, and this dividend, which is a record dividend for the second half of $0.066, will be paid in September. So overall $156 million in cash and we've now been paying 4 dividends a year for the past 2 years. So a good track record in terms of regular dividend payments on a near quarterly basis. Further dividends will be considered as appropriate taking into account earnings and also banking covenants. So we are restricted to distribute maximum of 50% of the profit, the post-tax profit. So that really summarizes the results.

The next slides, I'll just go into certain areas that are of interest in a little bit more detail before summarizing. So first of all, if you look at the EBITDA bridge, you can see here that we've moved from $234 million to $372 million.

The important move has been the increase in the underlying fines price, which you can see delivering $109 million of additional income and EBITDA. And during the year, as you're all aware, the pellet market moved to price of the 65% index, rather than the 62% index. What this meant is that we captured the additional premium inherent in the iron ore -- beyond the iron ore content, and that added $46 million to the EBITDA.

On the same basis, pellet premiums were flat year-on-year. So pellet premiums didn't increase. And then you can see the other moves that are relatively modest. In particular, you can see the C1 cost, so we did note on the first slide 11% increase, but that's a relatively modest $22 million overall due to the low-cost nature of the operations. And overall, what you can see, as I noted, is a very strong increase there in EBITDA, so a very simple bridge between the 2 periods, and all in line with expectations.

C1 cost, I've mentioned earlier, just 1 slide here really to help us understand what's happened on C1 cost. You can see the profile on the slide. So on the top left, the cost drivers in the period there were local inflation and stronger local currency, which were the 2 big ones.

On the operations side, so moving into effective decisions made on operations, we continue to focus on plant availability, and that's to increase production volumes and that reflects a higher maintenance cost and overall, the final major component, there was increases in stripping, and that was to deliver higher-grade ore to the processing facilities and also to facilitate production growth at next year.

Energy costs are overall flat. They've seen some interesting developments that are worthy of note that don't really come out on the reconciliation. So overall in the period, we've had lower gas prices, slightly higher electricity prices. The lower gas prices resulted from a move to the international markets in terms of pricing gas in Ukraine. The electricity market has just undergone a similar change, which should deliver some efficiencies going forward.

And finally, I think on the bottom left of the chart, just if you look at the structure of the cash costs, they are unchanged compared to prior periods. You can see approximately 30% of the costs relate to energy, which I have covered in terms of gas, and as in the past around 50% of total costs are denominated there in local currency.

Just in terms of the guidance going forward. As always, costs are subject to local currency. Local inflation and commodity prices being the largest drivers there.

So we've covered the income statement and the EBITDA. I think it's worth a few words now on the cash flow. Most of the items have already been covered in a reasonable amount of detail. I think in particular, I'll note again the increasing capital expenditure, the increasing dividends and the reducing debt, which come out from here.

I think the final point to add to the puzzle to make it complete is that in the period, we increased working capital. That reflected 2 things: firstly, there was some weaker demand in the first half in Europe, so we built stock. And the higher pricing increased also trade receivables. So you can see overall there working capital movements $67 million, so that's effectively a near-cash equivalent. So that would have reduced debt there significantly more had we realized that working capital. Dividends paid, I have noted.

I think it's also worth noting finally on the cash flow that in the second half, there will be $78 million of dividends, which represents the dividend paid in July plus the one that's been declared here.

Finally, in terms of capital expenditure, what we are concentrating on here and have been over the past many years, 12 years, is low-risk growth. So the increased investment, it was at 100% compared to the prior period, the same as the dividend. So we spent on the concentrated expansion program, the new press filtration, railcars and stripping to support further production growth there. And that really represents the capital expenditure needed to achieve the 12 million tonne run rate which Kostyantin will deal with in a little bit more detail in his presentation.

So final slide, just looking at the balance sheet, I think it speaks for itself does the chart. It's very clear. You can see that over the period since the end of 2015, we have reduced debt, and we've improved leverage ratio sustainably, half year on half year.

In the future, we're going to pursue a low-risk growth. What does that mean? It means low debt, higher IRR and own funding. And we'll continue, as we have done in the past, to balance dividends, lower the debt modestly and spend on growth capital expenditure, which will deliver high returns to shareholders. And at the same time, as we've done over the past years, try to maintain and will maintain good liquidity as well as a smooth amortization profile going forward. That would leave us well positioned for any market environment that we may face. So that is the financial review.

I think it's worth just noting again, it's an excellent financial performance, higher production and sales were the key and that delivered strong EBITDA and strong profit after tax, both up. The significant increase in cash generation has been spent on CapEx and dividend, both up 100%, reducing net debt and we have had a build of working capital, which will reverse itself out in the period. You've seen good cost control there as well in these results as well as a good strong balance sheet to close the end of the period and we are very pleased to record a half 1 dividend, which is a record. So that summarizes the financial review.

I'd now like to hand over to Kostyantin Zhevago, the Chief Executive, who will do the market operations and strategic review.


Kostyantin Valentynovych Zhevago, Ferrexpo Plc - CEO & Executive Director [3]


Thank you, Chris. Thank you, Chairman, thank you, Chris. Good morning, everybody. I would love to make my part of the presentation for the interims with the -- just extending the explanation from Chris of the iron ore market dynamics and they have been very positive in the first half of 2019, with their highest supply expected in the second half of 2019. So this potentially can impact the sales prices, but it's not evident as of yet because of the various trade movements and politics price movements into the market.

Supply disruptions in the first half of 2019 with 62% ferrum iron ore rising above $100 a tonne. It has been a reality in the first half of this year. Iron ore supply in the second half of 2019 to increase. We're expecting that some of the stranded and closed capacity will return back into the market out of Brazil and Australia potentially and will improve shipments into the market. Also increased pellets availability anticipated with the startup of -- or some closed capacities where pellet market was short of the pellet feed to produce final pellets in Brazil.

Overall CRU forecast for iron ore market to remain in deficit till 2021 because of the high built and shutdown capacity in Brazil. Steel mill margins under pressure in the first half of 2019 due to higher raw material costs and weak end used demand – end-user demand. Ferrexpo sales to the international steel mills under long-term contracts, Ferrexpo follows international benchmark pricing and that is all explaining our financial results for the first half, with the first half 2019 iron ore prices being high in comparison to previous periods.

If you look into the chart showing the iron ore market appearance and how it will look like within expected years to come, we see that the highest deficit is in 2019 expected, so we see some deficit in 2020 and some deficit to be in 2021 and that will explain, in our opinion, trends into the iron ore prices for this -- end of this year and further periods to come, at least for the next 2 years.

Current spot pricing remains strong, and if you see this both into the 62% ferrum, CFR landed in China and also 65% ferrum, CFR landed with high Atlantic pellet premium, Chinese pellet premiums lower than that, but very much mirroring the situation from the previous year, where Chinese pellet premiums were high and Atlantic pellet premiums were lower. This year, it is counterbalancing each other.

Freight rate is, in our opinion, on the abnormal high now with a $23 on average, like the way we expected this figure to be lower in between $15 to $17 budgeted. But it is all absorbed within the final CFR price of 65% iron ore plus pellet premium into the price to the final customers.

If we look into the sales pattern of Ferrexpo, as has been all the time explained and it has been all the time planned, we're selling to the top steel mills throughout the world and -- under long-term contract basis. Like in the first half 2019 geographic split of sales volume is shown in this chart and just explaining that we decreased supply to the Central and the Eastern European market to 48% of our total from the 50% of the previous year. We decreased supply to the effectively low consuming and some parts depressed Western European market to 12% of our output in comparison to the 16% of the output previous year. But at the same time, we increased Southeastern Asia and Northeastern Asia supplied to 21% of all our sales in comparison to 16% from the previous year.

So China stayed -- China and Southeastern Asia stayed at the same level as 12% in total, but that is not only China, it's also Vietnam and Taiwan. Turkey, Middle East, North Africa and India contained -- represents 7% of our supply during the first half of this year in comparison to 6% of the previous year.

Overall long-term customer performance in the first half was in line with our expectation and contract agreements. China sales under long-term contracts in the first half 2019 means no spot sales there. Europe showing weaker demand and it is well-understood fact because of the state of the economic -- European economy. Second half of 2019 sales split will reflect prevailing market conditions. As we see right now, certain plants across the globe are complaining of the market conditions and we still see what their offtake is going to be, in line with just tolerances inside of the signed long-term contracts.

Longer-term pellet demand is driven by higher productivity, higher quality, lower carbon dioxide emissions and rising carbon dioxide prices in Europe and that is what is, in our opinion, making pellet as attractive and pellet market as attractive for Ferrexpo to produce and supply on the long-term basis to the best clients on the planet.

The next slide showing operation delivering -- operations delivering improvements. Safety first with 0 fatalities in the first half of 2019, where we have had unfortunately 1 in 2018. Total accidents halved to 5 in first half of 2019 vis-à-vis first half of 2018, which is also important improvement and important morale improvement within the company.

First half 2019 LTIFR of 0.45 in comparison to 0.97 in the first half of 2018, firmly focused on achieving our 0 harm within the operations and we see this as a progressive improvement through period.

Processing, focus on maintenance and reducing downtime, it is all reflected in our production figures. We are improving process plant reliability with improved maintenance management, reducing unplanned downturns -- and downtimes, maintenance scheduling across the operations for the long-term periods and improved spare parts availability where we have right now, like a new approach we believe much more efficient one in comparison to the previous periods in regards of the spare parts availability within the operations and with our supply vendors.

Mining. Focus on improved material movement efficiency, mine optimization programs have reduced mining cost through improvement degrades, transition to the 100% liquid emulsion blasting medium, consolidation of Poltava mine and Yeristovo mine maintenance, center for mobile equipment and centralized mining control hub.

Pelletizing. Improved availabilities through refurbishment. As I mentioned, it has been already reflected into the production figures for the first half in comparison to the first half of 2018. First half of 2019 production was up 5%, final pellet line refurbishment is planned for third quarter of 2019. We are definitely focusing ourselves on quality with high-grade 65% material pellets produced, representing now 96% of total output in comparison to the first half of 2018, being 94%.

You see that in the columns on the right bottom chart showing that production of 65% pellets demand is increasing and effectively bringing ourselves to the planned figure of 96% to 97% and sometimes 98% of total output.

Current capital projects are making good progress output to reach 12 million tonne per annum plus some concentrate by 2021, means end of 2020 annualized capacity at this level. We are finishing right now process 6 million tonne per annum of crushed ore department like which is going to produce crushed ore for pellet feed requirements. Total cost is $35 million. First half 2019 spend is $7 million, remaining to be spent is only $8 million and expected completion 2020, like in some time of the first half of the year.

Another current capital project is stockyard for concentrate, which is making ourselves like an opportunity to decouple the concentrator and pellet plant by providing concentrate storage capacity. Total cost is $24 million. First half of 2019 spend is $7 million, remaining spend is $7 million still to be spent this year and expected completion still end of this year, or early next year.

Important project for us is press filtration plant, which we have planned for long period of time with a lot of engineering being done. Right now, we are in the construction phase. It's important one to improve the quality of our product, make it even better and potentially tap the right production into the future. That's replacement of the disc filtration to reduce moisture in balling plant and it is going to be just replacement of the disk filtration into the press filtration equipment, which is a new one, set of the technology been implemented within the last 10 years. So it's right now proven and we believe that quality yields and production yields are going to be very much attractive for ourselves to invest that sort of money.

Total cost of the project is going to be $115 million to be invested through 4 years, first half 2019 spend is $8 million with equipment on order and letters of credit been placed to get first suppliers of the equipment from the vendors in the first half of 2020. Remaining capital to be spent is $107 million. Expected completion of the first phase is 2021, but totally final phase completed to be 2024 to serve all the required tonnages of the concentrate to be produced into the cake for balling to be effectively processed within this press filtration plant.

If you look on this chart, you will see all the capital projects that we are currently incurring and running, that is Section number 9 to add pellet feed for further pelletizing, medium-fine crushing plant number 1 completed and in commissioning phase now, medium-fine crushing plant number 2 to be completed by the end of this year or early next year. Further on, like a beneficiation plant improvement to increase the quality of the concentrate to be sent afterwards into the pelletizing. In between the beneficiation plant and pelletizing plant, concentrate stockyard to decouple and demerit our concentrate production with a pelletizing plant to be in the position to use more efficiently beneficiation plant in our production, plus press filtration, as I just explained and mentioned, to improve the quality and potentially increase the productivity and capacity of our pelletizing lines after refurbishment. Pelletizing plant itself plenty of different kind of minor projects to increase quality, to improve productivity, to increase capacity and further on make operations more reliable and sustainable.

Ferrexpo's brownfield expansion can increase output to 20 million tonne with modest capital intensity. These are projects that we have discussed many, many times during our presentations and questions that we have received from the investors through couple of years now. Ferrexpo is fully prepared to increase production from 12 million tonnes installed capacity to 20 million tonnes adjusting in steps, with being very much low-cost pellet producer with huge deposits of iron ore for processing into the future at 6 billion tonnes of JORC resources now and plus 13 billion tonnes of Soviet classified resources still to be converted into JORC classification.

We can grow our output in a sustainable manner without stretching the balance sheet and effectively just taking unneeded and unexpected risks for our operations. Projects can be matched to cash flow generation and our current part of cash flow generation, degearing, distribution in between the dividends and the capital projects, capital expenditure is showing exactly it. The expansion will commence with the projects that are self-funding by increasing output.

Engineering studies are currently underway for the following projects: Concentrate expansion projects, we are doing this for further debottlenecking at Ferrexpo Poltava mine and additional concentrate production at Ferrexpo Yeristovo mine to match pellet feed requirement, to grow pellet production from 12 million to 20 million tonnes per annum in increments.

Another project is pellet line upgrade, upgrade of existing pellet lines, as we conveyed it to the market, couple of tonnes from 3 million tonne installed capacity of each pelletizer to 5 million tonne capacity of each pelletizer in increments, to deliver once in 2 or 3 years every single pelletizer to be enhanced and upgraded from 3 million to 5 million tonnes.

In summary, outlook is good for pellet market with long-term market dynamics underpin pellet demand. Ferrexpo prices in pellets are in line with international benchmarks and sells -- and Ferrexpo is selling its products under long-term contract basis with all the existing long-term clients.

Sales mix is reflecting the underlying demand, and each period year after year, we are enhancing the sales mix portfolio, and increasing supply to them as we consider them to be crisis-resistant clients into our portfolio.

In terms of strategy, we have very sustainable and routine strategy, as we have conveyed it for so many times into the market, to increase our output, but without taking additional risks for the balance sheet and to the equity. We are continuing operational improvements. We are pursuing low-risk growth. We are maintaining prudent balance sheet metrics.

If you see the first half 2019 capital allocation, you see that it is reasonably equal in between the degearing, just capital expenditure of $69 million and also awarding equity with a $78 million of dividends.

This is final slide of my presentation. Thank you very much. We have usual one further on as an addendum Ferrexpo explanations on a variety of different kind of metrics, plus also current capital projects making good progress, output to reach 12 million tonnes per year at the end of 2020 running capacity, means producing these tonnages in 2021 on the full year basis. Thank you very much. Thank you, Steve.


Stephen Lucas, Ferrexpo Plc - Non-Executive Chairman [4]


Okay. We now have an opportunity for you to ask any questions you might have. If you could put up your hand and wait for the microphone to come to you, then we can have the questions and the answers transmitted.


Questions and Answers


Dominic O'Kane, JP Morgan Chase & Co, Research Division - Analyst [1]


Dominic O'Kane, JPMorgan. A few questions for me. On the cost guidance, I appreciate there's lots of moving parts and some things are outside of your control, but if we take the sort of gas price and the currency where we are today, where would you think C1 cost would be for H2 and maybe for 2020?

And then on CapEx. The CapEx range that you have given for this year is quite wide. So $220 million to $300 million. Could you just maybe give us some thoughts about the things that need to happen and the timing for when you will make those capital decisions whether we come in at the bottom end of the range or towards the top of the end of the range?

And then finally on the expansion to 20 million tonnes, could you just maybe remind us what kind of capital costs you're thinking at the moment in terms of where the studies are coming at?


Kostyantin Valentynovych Zhevago, Ferrexpo Plc - CEO & Executive Director [2]


Thank you very much. I will start answering the question and Chris and Steve, you will add, once you have anything else to add. So in terms of the cost structure expectation within the current natural gas, oil and electricity price environment, we are reasonably comfortable, the cost structure for these key components is going to be the same as there is wide expectation of oil to stay somewhere in the range where it is right now. Means we are derivative of the oil price going up or down, but it is also reflected in the final price of all the commodities sold into the market. Usually correlation is quite high.

Natural gas price is very low right now in European Union and after maybe 10 years of reporting to you, we are only 3 last years into the direct link to the European gas price after liberalization of the natural gas market in Ukraine, which is great news. Because before that, it was kind of just constant with the -- on the contract with Gazprom, which unfortunately wasn't linked anyhow into the market and wasn't correlating with the market developments.

So today, we are in a privileged position as the whole Ukrainian economy and all Ukrainian customers to be linked to the volatility of the natural gas market globally and in Europe in particular.

Electricity price, market is liberalized right now. We are in the early days. It was liberalized only on the 1st of July, it means 1 month as we are in the liberalist market, but we see that seem like with natural gas price, electricity price is going to be linked to the electricity price in Europe and will be very highly correlated.

To answer your question, either we are expecting any C1 costs growth into the second half of this year within this input metrics, we do not expect this one. We believe that with the higher productivity plus with the efficiencies and enhancements that we are looking into, we are going to stay somewhere into this range of C1 cash cost plus/minus 3%.

For us the key important component, and you can see this from the C1 cost structure, is labor and personnel, which has gone up 10% from 9% of the total cost component into the 10% and that is a reflection of the -- just open, no visa environment for Ukrainians moving in millions into Western Europe, like it has happened in the past with the Polish people, the Central and Eastern European ones going into the Western markets. So we see right now millions of Ukrainians, high quality, educated, are moving into this kind of direction, which is from one standpoint, good sign, people getting experience, getting knowledge, getting skills and getting better earnings. From another standpoint, also good development for us long term to improve productivity and effectively increase personnel costs to effectively keep people attracted within our operations to develop these talents and effectively keep these talents with us.

To answer your question in terms of the capital allocation and capital application, so wide range is right now more refined from $220 million up to $300 million in the beginning of the year or first quarter of the year today into the level of something like $260 million to $275 million, $280 million, depending on our letters of credit placements and final engineering to effectively sign contracts with the vendors as we are more right now intensive on the equipment acquisition pace. And usually equipment is representing 65% of our capital projects and only 35% is a cost for construction and labor to implement these projects. So all in all, it is dependent right now and refine of the engineering that has been supplied by ourselves, institutes and vendors. So we see that this is going to be lower than $300 million by $35 million, $25 million, maybe $20 million simply because some engineering is not completed yet and is pushed into the first quarter of next year.

At the same time, we have privilege and flexibility to match our cash with the projects to be delivered. And we see to be very much prudent in terms of degearing and at the same time, to deliver highest possible winning IRR projects that are in the pipeline. We have all these flexibilities and really this is a privilege.

The last question, please remind me. What was that?


Christopher Mawe, Ferrexpo Plc - CFO & Executive Director [3]


Capital cost?


Kostyantin Valentynovych Zhevago, Ferrexpo Plc - CEO & Executive Director [4]


Capital cost, yes. We strongly consider, as it has been all the time conveyed into the market for last 15 years, that we are low cost not only in production, but we are also low cost in capital to deliver additional tonnes of both pellet feed, which is sellable into the market at a premium and for pellets, which is our key component and key material in production of capturing the highest possible margin within the company. And in this respect, we're expecting that on average, projects will deliver like $150 per tonne of pellet capacity, installed capacity, output capacity. Capital expenditure in our operations with various projects being somewhere in between $110 to $200 of specific cost of additional pellet to be delivered into the market, and still delivering at this kind of levels, very respectful and very much attractive IRR levels.


Grant Sporre, Macquarie Research - Head of European Metals and Mining Research [5]


It's Grant Sporre from Macquarie. Just a follow-up question. You sort of mentioned the sort of pellet feed market and we heard from Vale last night that so market will come back, but it's only going to be sort of 1/3 of the capacity and likewise all the new or the restored capacity is all going to be dry processed material which is going to be used for blending and not into the pellet feed market. So the question really is notwithstanding trying to keep a prudent balance sheet, is there not some way you could accelerate some perhaps pellet feed into the market? So that would be giving the benefit of lower CapEx intensity, but also may be getting a jump and getting a bit more market share?


Kostyantin Valentynovych Zhevago, Ferrexpo Plc - CEO & Executive Director [6]


Thank you very much. It's a good question. For us, it's always the trading between the environment -- financial environment we are in as we're in the emerging world and Ukraine has specifically been not as easy within the last 5 years on the conflict with Eastern neighbor. And you see really we can apply $500 million or $750 million to accelerate the process and it's very much attractive, but it's a consideration for the shareholders and the Board. So either we are ready to take this risk and effectively, this is geopolitical risk. We do not see any kind of production risk. We do not see any execution risk because we have done this in the past for so many years and we are delivering this type of projects on ongoing basis. So for us, this is just repeat conveyer exercise. The question for us is that either we are as the company, we are as the management, we are as the Board, and we are as the market, feel comfortable that we would accelerate this one. We have this option. We are looking into this continuously, but as of now, no final decision has been taken.


Stephen Lucas, Ferrexpo Plc - Non-Executive Chairman [7]


I think the other way of looking at it or the key if you like risk is refinancing risk. So if we ramp up debt in order to invest in order to grow production and steal a march on the competition, we then increase a very key risk, which obviously, you only have to go back a few years and there was obviously quite a lot of anxiety over refinancing risk. Obviously, we don't have that anxiety right now and what we're able to do is with the cash flow we've got, we're able to actually combine the CapEx ambitions that we've got along with debt reduction and obviously the dividend. So I think we've got a very good balance right now and I think we need to think very carefully before we feel like push any one of those dimensions out a bit, given the risks that Kostyantin has highlighted.


Kostyantin Valentynovych Zhevago, Ferrexpo Plc - CEO & Executive Director [8]


You made also a good comment which is I believe would be very important to the market that whatever delivery, both Samarco and other projects in Brazil are going to be dry processes and these dry processes are really for more blending, not to produce in pellets because ferrum content is not that high and silica content is not that low to produce high-quality pellets that we are producing to the market. That's why we feel pretty confident that demand and fulfill this from our customers, we feel pretty comfortable and we feel quite confident that high-quality pellets, specifically with the metrics that we are supplying into the market, we will be in demand independently how much of the pellets supply will return back into the market through dry process.


Andrew Ian Jones, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [9]


Andy Jones from Wood & Company. Just a question on pricing. In the first half, your average realizations were a bit lower than what have been implied by the benchmark price plus the $58 per tonne pellet premium. Is it fair to say that in the second half, are all of your sales going to be based on this 65% index, plus $58, or is there going to be any other lingering effect from whatever caused this discounts to occur in the first half?


Kostyantin Valentynovych Zhevago, Ferrexpo Plc - CEO & Executive Director [10]


Good question. I believe that our first half sales were all without any kind of discount and to international benchmark pricing. And if you see the difference on the metrics, it's just only because this is a mix of the portfolio, some starting from the 1st of January and some starting from the 1st of April. And when it is starting from the 1st of April, it does mean some contracts have been with the 62% ferrum basis plus $58 from the previous year that switched into the new contracted pricing, 65% ferrum index plus $58 from the 1st of April.

And as it is a mixed portfolio of our sales, that is what is showing that some of the sales were lower, not like $58 on top of 65% but still on 62%. We're not concerned of that because that's a rolling ball and we'll have the realization price after the 1st of April of next year on these contracts. And these are mostly European and some Northern Eastern Asian contracts.

In terms of the question that you have raised, what kind of discounts or potential diverting some of the sales into the spot markets, we didn't conclude as of yet either we're going to sell any tolerance tonnage so that potentially can appear because we see the weakness into the market and it is not new. We see that steel mills are in some cases reducing offtake of high quality, I meant very expensive raw material, including pellets and that is all in line with the contracts that we have with these clients. Like there is a tolerance of sometimes 5% to 10% and they can very much lawfully and eligibly reduce offtake from 100% or 105% in some cases to 95% or 90% of the tonnage. And that will yield some tonnages for us to be available to be sold into the -- either spot market or to be kept as just like rolling over stocks into the next year's sales portfolio. And that is a decision for us still to be taken. Our marketing team is working hard and I strongly believe that we are going to take some decisions closer to the fourth quarter of this year.

And I can tell you why because you see -- we see various developments into the marketplace right now and the recent one with Trump imposing tariffs on Chinese exports to the United States. We see this generally not that good for the trade environment like majority of the market is treating this one. But that we treat as good particularly for the iron ore, simply because China will be squeezed to maintain growth rates post additional stimulus into the economy and this stimulus is usually -- can very much still intensive because it is mostly construction and infrastructure. And we know that infrastructure and construction is looking very much still intensive and these will potentially support prices into the fourth quarter of this year. So let's look into the developments, but we see right now that in particular, these kind of developments short term are not looking that bad for iron ore.


Andrew Ian Jones, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [11]


Understood. And just to follow up. In terms of the contracts which you've set in stone for the second half of the year, what percentage of your guidance is covered by contracts, which are also fixed and set in stone but can't be reduced any further? And what percentage of that -- those sales potentially might be exposed to spot market pricing?


Kostyantin Valentynovych Zhevago, Ferrexpo Plc - CEO & Executive Director [12]


As I mentioned to you, that is all into the kind of different tolerances in between the different markets and different contracts. But we are assessing that it cannot be more than 10% cumulatively from what has been tolerance in the first half of the year and will be tolerances into the second half of the year as well.


Unidentified Analyst, [13]


[Sharif] from Deutsche Bank. If European demand continues to remain weak, will you continue to build inventory or direct more sales into Asia into the second half? And my second question is on CapEx, you have a number of ongoing projects currently and if iron ore remains strong, where could we see 2020 CapEx? Do you have a range?


Kostyantin Valentynovych Zhevago, Ferrexpo Plc - CEO & Executive Director [14]


Thank you very much. To answer your question, if Western European -- Central Eastern European market is going to stay weak, definitely there's going to be some kind of additional tonnages available for sale. It hasn't been final decision yet taken in regards of what is going to happen with this. Either this will -- either this tonnage will be diverted into the spot market or it will be just kept as a stockpile into the next year's contract basis because we have some additional capacities. Northern Eastern and Southeastern Asia projects coming on stream, which will require additional tonnages of pellets to be consumed, plus on top of this, with the latest CLU report, you see that generally because of the environmental tightness and regulatory requirements improvements in China, their general pellet use within the blast furnace mix has increased within the last 3 years 2%, means we're expecting this drive to happen, means Chinese market will consume more and more of pellets into years to come.

So to answer your question, do we have a final decision what to do with this potential to happen or to appear in the second half of the year, this decision hasn't been taken yet. So we believe that we will take this decision somewhere closer to the beginning of the fourth quarter.

In terms of the CapEx pipeline for the next year and CapEx figures that you're asking about, we have various scenarios. We have scenarios of going lower on the CapEx depending on what is going to happen into the market, and this is somewhere in between USD 150 million, USD 180 million, up to USD 200 million, and we have high figures on CapEx to be applied into the projects within our pipeline, which will be close to $350 million to $400 million, depending on the cash generation in the business. That is without taking into account any kind of consideration to go into the market and to gear the balance sheet.


Kennedy Nyangoni, Barclays Bank PLC, Research Division - Research Analyst [15]


This is Kennedy Nyangoni from Barclays. My question is regarding the weather patterns we are seeing in Europe given the summer heat wave, which has led to lower water levels in the River Rhine and Danube. What contingency do you have in place if the water levels go below the critical levels in terms of supplying your customers in Germany and the rest of Europe?


Kostyantin Valentynovych Zhevago, Ferrexpo Plc - CEO & Executive Director [16]


To answer your question on the wave heat -- wave of heat in Europe, unfortunately we haven't been anyhow impacted because our Danube levels are allowing us to bring our material up to links only as we are not supplying barges looking into the German market. And any German market deliveries are through Rotterdam, Amsterdam, Antwerp and these area means we own the sea-going vessels coming from the port of Yuzhny [coming] to this dimension.

So we see that impact for us is if steel mills like just in previous year would just announce force majeure, it does mean that is going to be just general impact on their production levels, which market can withstand right now because of the weakness in the demand for steel in Europe, but generally, this will reduce the amount of pellets to be consumed. But what is good about this crisis-resistant clients, which we always wanted to secure, is that these clients are usually fulfilling all their offtakes for the contracted year, and if they have any kind of spare capacity on their stock, either Rotterdam on their sides, does mean they are just decreasing the amount of tonnage into the next year on the negotiated basis. But it has given us the flexibility to reallocate, some people are reducing if it is Europe, some people are increasing if it is, let's say, Formosa in Vietnam, which is joint venture between Formosa of Taiwan and JFE of Japan. So I'm giving you as an example, we have this flexibility. We are very well diversified. You saw this from the pattern of our supply.


Stephen Lucas, Ferrexpo Plc - Non-Executive Chairman [17]


Okay. So if there are no more questions, I think we will wrap things up there. We're happy to continue discussions over coffee. Apart from Chris, Kostyantin and myself, we also have Graeme Dacomb, our newly appointed Chair of the Audit Committee and I'm sure he will be happy to answer any queries that you might have. So thank you very much for coming.


Kostyantin Valentynovych Zhevago, Ferrexpo Plc - CEO & Executive Director [18]


Thank you very much.