Investors in natural resources should take a look at Ukraine. The country has lots of them and the democratically elected government has no history of expropriating foreign assets. Ukraine has one of the world's largest iron ore deposits, containing 20 billion tonnes of minerals. Ferrexpo has been granted a development licence to exploit this.
The firm extracts ore at its Poltava site. Forty per cent of the ten million tonnes annual production is shipped to Asia, 7% to the Middle East and the rest to Europe. With iron ore prices holding up well of late, this is a lucrative business.
In 2011, the FTSE 250 firm 51% owned by chief executive and founder Kostyantin Zhevago delivered earnings before interest, tax, depreciation and amortisation (EBITDA) up 37% to $801m. Net borrowing fell from $104m to $80m. Revenues increased to $1.8bn from $1.3bn, and earnings per share (EPS) jumped 34% to 92 cents (or 57p).
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The board has expansion plans: $138m is being spent to extend the life of its open-cast Poltava mine to 2038. The target is to ramp up output to 12 million tonnes by the end of 2013, after opening another facility nearby in Yeristova. Three years later, with a third deposit in Belanovo also onstream, volumes should hit 20 million tonnes.
To reduce transport costs, the firm is investing in rail for the Danube river corridor, as well as securing more larger vessels to supply the Far East.
Ferrexpo (LSE: FXPO), rated a BUY by Jefferies
One downside of the extra investment and the industry's escalating mining costs is that 2012 revenues and EPS are predicted to fall to $1.6bn and 80 cents (or 50p) respectively, putting the stock on a forward p/e of six. But I rate the group on a six times EBITDA multiple. Adjusting for the debt, that generates an intrinsic worth of 420p a share.
The group is involved in a legal wrangle over legacy ownership rights of its 97%-owned Poltava subsidiary. And this dispute is unsettling investors. Yet even in the worst case scenario, I don't expect an adverse court judgment to require a fresh issue of equity.
The company is also exposed to tighter regulation, commodity prices, foreign exchange and geopolitical risks. However, research house Raw Materials Group predicts global iron ore demand will double to 3.5 billion tonnes per year by 2030, providing solid foundations for the industry as a whole, and Ferrexpo in particular.
Broker Jefferies has a 550p target price for the shares.
Rating: HIGH-RISK BUY at 300p
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634.
Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
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