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UNITED KINGDOM

Ferrexpo
FXPO LN Neutral
Price (at 15:35, 24 Sep 2013 GMT) 1.75 Iron ore to remain above $100/t LT
Valuation 1.80 Event
- DCF (WACC 11.0%)
12-month target 1.80 We revise our estimates, recommendation and TP following the latest update
12-month TSR % +5.2 to Macquaries iron ore price forecast.
GICS sector Materials
Market cap m 1,031 Impact
Market cap US$m 1,647 Raising long-term iron ore price estimate to $90/t real (from $80/t): On
30-day avg turnover m 2.2
the back of extensive research into the structure of the cost curve into the
Number shares on issue m 588.6
medium term, we have pushed up our long run iron ore price estimate by
Investment fundamentals 12.5% to $90/t CFR China. This reflects our view that the $100/t nominal floor
Year end 31 Dec 2012A 2013E 2014E 2015E
for iron ore will not be breached based on an analysis of existing and potential
Revenue m 1,424.0 1,558.3 1,516.5 1,549.2
EBIT m 361.8 396.6 323.0 287.3 projects. As such, while the price profile is negative, iron ore continues to
Reported profit m 214.3 237.6 174.0 125.9 have more longevity than the market is currently discounting. The uplift in
Adjusted profit m 214.3 237.6 174.0 125.9
Gross cashflow m 264.7 327.6 270.9 231.9
long-term pricing has boosted our long-term margin estimates for the
CFPS US$ 0.45 0.56 0.46 0.39 company which supports a higher through-the-cycle valuation for the group.
CFPS growth % -57.1 23.2 -17.3 -14.4
PGCFPS x 6.2 5.0 6.1 7.1
We have also increased our 2013 iron ore price estimate by 6% and shaved
EPS adj US$ 0.37 0.40 0.30 0.21 5% off our 2014 price estimate.
EPS adj growth % -62.4 10.3 -26.8 -27.6
PER adj x 7.7 6.9 9.5 13.1 Upgrading to Neutral; TP rises to 1.80/sh (from 1.55/sh): The
Total DPS US$ 0.07 0.07 0.07 0.07
Total div yield % 2.4 2.4 2.4 2.4 incorporation of our higher long-term iron ore price has lifted our equity
ROA % 13.2 13.7 10.3 8.3 valuation to $1.67bn (from $1.41bn) or 1.80/sh, reflecting the high degree of
ROE % 14.7 14.7 9.9 6.7
EV/EBITDA x 5.4 4.6 5.3 5.6 operating leverage enjoyed by the business. We accordingly upgrade the
Net debt/equity % 27.0 35.5 52.6 62.5 stock to Neutral as the stock now offers 3% upside to the current share price.
P/BV x 1.1 1.0 0.9 0.9

FXPO LN vs FTSE 100, & rec history High operating leverage positions Ferrexpo well for year-end iron ore rally:
Although we continue to remain cautious on the companys longer-term prospects
and peer relative valuation, Ferrexpo currently has the greatest operating
leverage amongst our European pure play coverage universe and the lowest
company-specific risk in the near term which positions the stock well to benefit
from a year-end rally in the iron ore price to around $150/t. Leverage, however,
works both ways so any trade into the name should be short-lived as the iron ore
price is expected to march down after the Q4/Q1 re-stock.

Earnings and target price revision


Note: Recommendation timeline - if not a continuous line, then there was no
Macquarie coverage at the time or there was an embargo period.
EPS FY13E: 40c (+21%); FY14E 30c (-10%); TP: 1.80/sh (+16%)
Source: FactSet, Macquarie Research, September 2013
(all figures in USD unless noted)
Price catalyst
12-month price target: 1.80 based on a DCF methodology.

Catalyst: Ukraine sit visit (October)

Action and recommendation


Analyst(s)
Alon Olsha We upgrade Ferrexpo to Neutral and raise our TP to 1.80 following revisions
+44 20 3037 2637 alon.olsha@macquarie.com to our long-term iron ore price. However, at 5.3x 2014E EV/EBITDA, Ferrexpo
Jeff Largey continues to trade at a premium to global iron ore peers at 4.5x and on par
+44 20 3037 4359 jeff.largey@macquarie.com
Daniel Lurch, CFA with larger, lower cost, miners Rio Tinto and Vale. We continue to believe this
+44 20 3037 5329 daniel.lurch@macquarie.com premium is unjustified due to inferior longer-term production economics but
would highlight that the stock is attractively positioned ahead of a potential
26 September 2013
year-end iron ore price rally due to above-average operating leverage.
Macquarie Capital (Europe) Limited

Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our
website www.macquarie.com.au/disclosures.
Macquarie Research Ferrexpo

Fig 1 Production profile (dry metric tonnes) Fig 2 Unit cost progression
FPM pellets FYM pellets (processed at FPM) CIF all-in cost Net f inancing cost/tonne
mt $/dmt
FYM concentrate Guidance (20-22mtpa by 2017) SIB capex/tonne Tax & royalty per tonne
25.0 140

120 5
2.8 2.5 2.5 12 5
20.0 12 3 2 1
6.2 13 11 11 10
100 9 11 9
9 10 11 9 8
7 8 9 8 8
7.2 7.5 7.5
15.0 80
3.8
- 0.6
- 60
- 2.5 3.0 3.0 3.0 3.0 3.0 3.0
10.0 2.0 96
91 93 88 89 90 86
0.1 40 84 86

5.0 9.3 20
8.6 9.0 9.0 9.0 9.0 9.0 9.0 9.0

- -0
- 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E
2012A 2013 2014 2015 2016 2017 2018 2019 2020 -20
Source: Company reports, Macquarie Research, September 2013 Source: Company reports, Macquarie Research, September 2013

Fig 3 Realised pricing and costs Fig 4 Per tonne EBITDA, price, cost
FOB cash cost Overheads $/dmt
Freight Iron ore price (China, 62% CFR) EBITDA per tonne Realised price per tonne CIF cost per tonne
Ferrexpo realised price 200
CIF US$/t 172
180
200
180 160
137 136
160 140
123 120
115
140 120 109
102 99
120 96 93
100 91 88 89 90 86 84 86
81
100 80
80 33 29 28 28 28 29
34 28 28 60
6 5 5 5 5 42 43
60 23 5 5 5 35
5 40 31
26 23
40 5
63 16 15
60 60 56 57 59 60 62 20
20 51
40
-
- 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E

Source: Company reports, Macquarie Research, September 2013 Source: Company reports, Macquarie Research, September 2013

Fig 5 Margin profile Fig 6 FCF break-even at $100-110/t iron ore

Revenue Operating cost EBITDA break-even iron ore price (62%, China CIF)
EBITDA EBITDA margin
Historical margin FCFE f low break-even iron ore price (62%, China CIF)
2,500,000 50% US$/dmt
Estimate MacqE iron ore f orecast (62%, China CIF)
45% 180
170
2,000,000 40% 160
150
35% 140
130
1,500,000 30% 120
110
25% 100
90
1,000,000 20% 80
70
15% 60
50
500,000 10% 40
30
5% 20
- 0% 10
-
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E

Source: Company reports, Macquarie Research, September 2013 Source: Company reports, Macquarie Research, September 2013

26 September 2013 2
Macquarie Research Ferrexpo

Fig 7 Ferrexpo key estimates


Income Statement FY11A FY12A FY13E FY14E FY15E FY16E FY17E
Revenue US$'000 1,788,012 1,424,030 1,558,345 1,516,527 1,549,153 1,557,800 1,714,679
Cost of sales US$'000 -620,905 -655,286 -713,763 -712,334 -755,210 -797,662 -946,071
Gross profit US$'000 1,167,107 768,744 844,582 804,192 793,943 760,138 768,608
Operating cost US$'000 -359,081 -357,835 -358,590 -384,667 -400,956 -416,856 -503,938
EBITDA US$'000 808,026 410,909 485,992 419,525 392,987 343,283 264,670
Depreciation & amortisation US$'000 -40,838 -49,095 -89,417 -96,525 -105,693 -115,589 -147,305
EBIT US$'000 767,188 361,814 396,576 323,000 287,293 227,693 117,366
Finance income US$'000 2,511 2,598 1,793 1,179 1,306 1,306 1,383
Finance expense US$'000 -68,205 -88,091 -99,096 -97,150 -120,477 -138,080 -144,064
Non-operating foreign exchange gains (losses) US$'000 -1,934 6,629 1,305 0 0 0 0
Share of profit from associates US$'000 2,012 2,772 4,064 4,270 4,486 4,713 4,952
Other income US$'000 6,943 11,347 4,963 5,215 5,479 5,756 6,047
Other expenses US$'000 -17,091 -30,161 -20,181 -21,203 -22,276 -23,404 -24,589
Profit before tax (underlying) US$'000 691,424 266,908 289,424 215,310 155,810 77,985 -38,906
Profit before tax US$'000 690,900 262,005 288,484 215,310 155,810 77,985 -38,906
Taxation US$'000 -115,964 -46,425 -50,325 -40,909 -29,604 -14,817 7,392
Profit after tax US$'000 574,936 215,580 238,159 174,401 126,206 63,168 -31,514
Minority interests US$'000 -7,114 -1,240 -590 -432 -313 -156 78
Profit attributable to equity holders US$'000 567,822 214,340 237,569 173,969 125,893 63,011 -31,436

EPS US 97 37 40 30 21 11 -5
Underlying EPS US 49 37 40 30 21 11 -5

Balance sheet FY11A FY12A FY13E FY14E FY15E FY16E FY17E


Gross debt US$'000 970,378 1,019,985 993,754 1,099,795 1,338,095 1,423,497 1,499,849
Cash US$'000 890,154 596,560 386,424 130,568 130,568 145,944 130,568
Net debt US$'000 -80,224 -423,425 -607,330 -969,227 -1,207,527 -1,277,554 -1,369,281
Gearing % 5% 21% 26% 34% 38% 40% 42%
Gross debt-to-EBITDA - 0.10 1.03 1.25 2.31 3.07 3.72 5.17

Cashflow FY11A FY12A FY13E FY14E FY15E FY16E FY17E


Operating cash flow US$'000 504,776 121,222 290,685 291,943 246,019 172,555 108,213
Financing cash flow US$'000 481,678 7,068 - 106,110 67,176 199,435 46,538 37,487
Investing cash flow US$'000 - 415,622 - 421,989 - 395,542 - 614,976 - 445,454 - 203,717 - 161,076
Free cash flow US$'000 274,663 - 56,485 116,340 - 212,940 - 65,498 121,039 105,906

Operating metrics FY11A FY12A FY13E FY14E FY15E FY16E FY17E


Pellet sales kt 9,876 9,675 10,957 11,753 12,240 12,240 12,240
Concentrate sales kt - - - - - 592 3,832
Realised price US$/dmt 172 137 136 123 120 115 102
EBITDA/tonne US$/dmt 81 42 43 35 31 26 16
Source: Company reports, Macquarie Research, September 2013

Fig 8 Macquarie iron ore price deck


2012 2013 2013 2013 2013 2013 2014 2015 2016 2017 2018 LT $2013
Unit CY Q1 Q2 Q3 Q4 CY CY CY CY CY CY Long term
Spot 62% Fe iron ore China $/t cfr 130 148 126 135 138 137 120 115 110 100 100 90
Source: Macquarie Research, September 2013

26 September 2013 3
Macquarie Research Ferrexpo
Important disclosures:
Recommendation definitions Volatility index definition* Financial definitions
Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following
Outperform return >3% in excess of benchmark return price movements. adjustments made:
Neutral return within 3% of benchmark return Added back: goodwill amortisation, provision for
Underperform return >3% below benchmark return Very highhighest risk Stock should be catastrophe reserves, IFRS derivatives & hedging,
expected to move up or down 60100% in a year IFRS impairments & IFRS interest expense
Benchmark return is determined by long term nominal investors should be aware this stock is highly Excluded: non recurring items, asset revals, property
GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends &
yield minority interests
Macquarie Asia/Europe High stock should be expected to move up or
Outperform expected return >+10% down at least 4060% in a year investors should EPS = adjusted net profit / efpowa*
Neutral expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets
Underperform expected return <-10% ROA Banks/Insurance = adjusted net profit /average
Medium stock should be expected to move up total assets
Macquarie First South - South Africa or down at least 3040% in a year. ROE = adjusted net profit / average shareholders funds
Outperform expected return >+10% Gross cashflow = adjusted net profit + depreciation
Neutral expected return from -10% to +10% Lowmedium stock should be expected to *equivalent fully paid ordinary weighted average
Underperform expected return <-10% move up or down at least 2530% in a year. number of shares
Macquarie - Canada
Outperform return >5% in excess of benchmark return Low stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks
Neutral return within 5% of benchmark return down at least 1525% in a year. are modelled under IFRS (International Financial
Underperform return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards).
only
Macquarie - USA
Outperform (Buy) return >5% in excess of Russell Recommendations 12 months
3000 index return Note: Quant recommendations may differ from
Neutral (Hold) return within 5% of Russell 3000 index Fundamental Analyst recommendations
return
Underperform (Sell) return >5% below Russell 3000
index return

Recommendation proportions For quarter ending 30 June 2013


AU/NZ Asia RSA USA CA EUR
Outperform 49.80% 57.68% 48.05% 41.13% 61.75% 47.10% (for US coverage by MCUSA, 8.12% of stocks followed are investment banking clients)
Neutral 39.85% 24.45% 42.86% 54.70% 34.42% 30.89% (for US coverage by MCUSA, 6.60% of stocks followed are investment banking clients)
Underperform 10.35% 17.87% 9.09% 4.17% 3.83% 22.01% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients)

Company Specific Disclosures:


Risk Disclosure: ? Timing and cost of expansion: We expect the company to continue the ramp-up towards 12mtpa of pellet production by 2014/15
and to commence the development of the FYM concentrator in late 2014 to support the expansion to 20-22mtpa of iron ore product at a cost of $700mn.
An increase in the capital budget beyond our estimate or a delay in construction would undermine our long-term cash flow forecasts and NPV estimate
for the company. ? Political risk: Ukraine has experienced periods of political instability in recent years and adverse political developments in the future
cannot be ruled out. Moreover, the countrys weak fiscal position continues to pose risks for the private sector and failure to secure an IMF bailout could
lead to rapidly deteriorating economic conditions. ? VAT: The Government of Ukraine continues to hold back VAT payments to the private
sector as it grapples with its own deep fiscal deficit. Failure to return these funds will undermine confidence in private companies operating in the
country and will, over the long-term, lead to an increase in financial gearing as means of funding this cashflow leak. ? Asset risk: FPM and FYM are
Ferrexpos only source of revenue. Any disruptions to the companys mine plans have the potential to materially effect Ferrexpos financial position and
its ability to meet its financial obligations, which are likely to increase if expansion plans are approved.? Iron ore price risk: Ferrexpo is a pure
iron ore producer, effectively price leveraged to a single commodity. As with the forecasting of any commodity market, there are key risks to our current
expectations for the global iron ore market and our benchmark iron ore price forecasts. Major supply or demand shocks have the potential to
considerably alter the outlook for the global iron ore market.
Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.
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26 September 2013 4
Macquarie Research Ferrexpo
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26 September 2013 5
EMEA Research
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Sreedhar Mahamkali (London) (44 20) 3037 4016
Sam Dobson (London) (44 20) 3037 1901 Graeme Train (Shanghai) (86 21) 2412 9035
Consumer Discretionary Peter Steyn (Johannesburg) (2711) 583 2337 Lily Lei (Shanghai) (86 21) 2412 9086
Luxury Goods Materials European Macro Group
Wynand van Zyl (Johannesburg) (2711) 583 2323 Chemicals/Containers, Packaging/Paper &
Economics & Strategy
Retailing Forest Products, Construction Materials Daniel McCormack (Europe) (44 20) 3037 4276
Sreedhar Mahamkali (London) (44 20) 3037 4016 Peter Steyn (Johannesburg) (2711) 583 2337 Elna Moolman (Johannesburg) (2711) 583 2570
David Smith (Johannesburg) (2711) 583 2248 Christian Faitz (Frankfurt) (49 69) 50957 8017
Strategy
Energy Global Metals & Mining George Brits (South Africa) (2711) 583 2223
Jeff Largey (London) (44 20) 3037 4359
Jason Gammel (Global) (44 20) 3037 4085 Alon Olsha (London) (44 20) 3037 2637 Quantitative
David Farrell (London) (44 20) 3037 4465 Daniel Lurch (London) (44 20) 3037 5329 Gurvinder Brar (Global) (44 20) 3037 4036
Mark Wilson (London) (44 20) 3037 4466 Kieran Daly (Johannesburg) (2711) 583 2208 James Murray (London) (44 20) 3037 1976
Marc Kofler (London) (44 20) 3037 1909 James Oberholzer (Johannesburg) (2711) 583 2367 Inez Khoo (London) (44 20) 3037 2640
Gerhard Engelbrecht (Johannesburg) (2711) 583 2407 Richard Hart (Johannesburg) (2711) 583 2320 Josiah Rudolph (Johannesburg) (2711) 583 2210
Alternative Energy & Utilities Gerhard Engelbrecht (Johannesburg) (27 11) 583 2407
Adrian Wood (Sydney) (612) 8232 8531
Find our research at
Shai Hill (Europe) (44 20) 3037 4232 Pharmaceuticals
Robert Schramm-Fuchs (Europe) (44 20) 3037 4559 Macquarie: www.macquarie.com.au/research
Dominic Nash (Europe) (44 20) 3037 4239 Ada Li (Johannesburg) (2711) 583 2181 Thomson: www.thomson.com/financial
Jose Ruiz (Europe) (44 20) 3037 1912 Reuters: www.knowledge.reuters.com
Real Estate
Financials Bloomberg: MAC GO
Property Trusts & Developers Factset: http://www.factset.com/home.aspx
Diversified Financials Leon Allison (Johannesburg) (2711) 583 2209 CapitalIQ www.capitaliq.com
Elan Levy (Johannesburg) (27 11) 583 2165
Neil Welch (London) (44 20) 3037 4272
TMET Contact Gareth Warfield for access (612) 8232 3207

Banks Telecommunications Email addresses


Edward Firth (Europe) (44 20) 3037 4077 Guy Peddy (London) (44 20) 3037 4509 FirstName.Surname@macquarie.com
Benjie Creelan-Sandford (London) (44 20) 3037 4081 Alex Grant (London) (44 20) 3037 1964
eg. john.oconnell@macquarie.com
Thomas Stoegner (London) (44 20) 3037 4532 Media
Piers Brown (London) (44 20) 3037 4044 Tim Nollen (New York) (1 212) 231 0635
Charles Russell (Johannesburg) (27 11) 583 2326 Angus Tweedie (London) (44 20) 3037 4099
Insurance
Hadley Cohen (London) (44 20) 3037 4078
Neil Welch (London) (44 20) 3037 4272

Equities EU Cash Sales South Africa Sales


Stevan Vrcelj (Global Head) (612) 8232 5999 Sam Bygott-Webb (London) (44 20) 3037 4767 Franco Lorenzani (Johannesburg) (2711) 583 2014
Julian Wentzel (Europe) (44 20) 3037 4274 Richard Alderman (London) (44 20) 3037 4875 Sven Forssman (Johannesburg) (2711) 583 2369
Sarah-Jane Wagg (Johannesburg) (2711) 583 2000 Luke Ahern (London) (44 20) 3037 4960 Ed Southey (Johannesburg) (2711) 583 2026
Matthew Camacho (London) (44 20) 3037 4972 Gregory Khodara (London) (44 20) 3037 4836
UK Trading
Charles Lesser (London) (44 20) 3037 4771
South Africa Sales Trading
Richard Bateson (London) (44 20) 3037 4821 James Lumby (London) (44 20) 3037 4846
Julian Parmenter (London) (44 20) 3037 4826 Will Fairley (London) (44 20) 3037 4787 Harry Ioannou (Johannesburg) (2711) 583 2015
Andrew Andreou (London) (44 20) 3037 4908 Richard McGlashan (London) (44 20) 3037 4824 Jesse Ushewokunze (Johannesburg) (2711) 583 2017
Robert Tappin (London) (44 20) 3037 4827 Awais Khan (London) (44 20) 3037 4967 Keith Thompson (Johannesburg) (2711) 583 2058
Marc Crome (London) (44 20) 3037 4778 Lisa Noble (London) (44 20) 3037 4929 Martin Hughes (Johannesburg) (2711) 583 2019
Wayne Drayton (London) (44 20) 3037 4980 Roger Lee (London) (44 20) 3037 4954 Marcello Damilano (Johannesburg) (2711) 583 2018
UK Sales Trading James Stearns (London) (44 20) 3037 4933 Roland Wood (Cape Town) (2721) 813 2611
Markus Geisbuesch (Frankfurt) (49 69) 50957 8709
Drew Hendrickson (London) (44 20) 3037 4784 Holger Hoepfner (Geneva) (41 44) 564 0220
James Buckley (London) (44 20) 3037 4750
Martin Pommier (New York) (1 212) 231 8054
Jim Dixon (London) (44 20) 3037 4949
KC O'Rourke (London) (44 20) 3037 4910 Jan Halaska (Boston) (1 617) 598 2503
Edward Robinson (London) (44 20) 3037 4779 Chris Carr (New York) (1 212) 231-6398
Danny Want (London) (44 20) 3037 4847 Doug Stone (New York) (1 212) 231 2606
Peter Homan (London) (44 20) 3037 4740 Jessica London (New York) (1 212) 231 0977
Gregorio Esmelian (London) (44 20) 3037 4973 Matt Schibanoff (New York) (1 212) 231 0989
Will Rogers (London) (44 20) 3037 1721 ETF Trading
US Sales Trading Robin Quinnell (London) (44 20) 3023 8885
Chris Reale (New York) (1 212) 231 2555 Miller Guo (London) (44 20) 3023 8886
Guy Devereux (New York) (1 212) 231 2555