Don’t write off Ukrainian iron ore miner Ferrexpo just yet

UK-listed Ukrainian iron-ore miner Ferrexpo has had its operations severely disrupted by Russia’s invasion. But, says Rupert Hargreaves, it’s brilliant business that’s worth keeping an eye on.

Mining can be a tough industry, which is why I tend to avoid the sector as an investor. 

However, there are a couple of exceptions. The largest operators tend to have unrivalled economies of scale, helping them to cope with the cyclical and unpredictable nature of commodity markets. 

Operators that have access to a unique geological phenomenon also tend to have an advantage. For example, a gold miner that stumbles across an easily-accessed, high quality gold seam, may have a cost advantage over the rest of the industry.

Ukrainian iron ore producer Ferrexpo (LSE: FXPO) sits somewhere in the middle.

Ferrexpo’s competitive advantages stand out 

Ferrexpo focuses on producing high-quality iron ore, which commands a premium price. It also has low operating costs and a strong balance sheet. Moreover, by shipping ore straight to Europe by rail, it avoids paying a fortune for shipping. 

Last year, its earnings before interest, tax, depreciation and amortisation (ebitda) margin came in at 56%. This compares with the world’s largest iron ore miner Rio Tinto (LSE:RIO), which reported a margin of 59%. 

Ferrexpo’s edge is its focus on high-grade ore pellets. These pellets have an iron ore content of 65% or more. High-grade iron ore prices averaged $186 per tonne in 2021 compared to $160 per tonne for pellets with a 62% iron content. Last year, the average price of lower-quality ore from Rio’s Pilbara operations averaged $143.8. 

This focus on quality is a competitive edge. Higher-quality blast furnace pellets help steel producers reduce emissions by around 40% compared to lower-quality products, suggesting demand for this resource will only increase as the focus on environmental targets grows. 

This is a brilliant business. Unfortunately, there is a big elephant in the room. 

Ukraine has been at war in one way or another since 2014, and the region has been virtually uninvestable for all but the most adventurous investors since then. And as the situation has deteriorated further recently, even these investors have understandably started to flee. 

Still, there might be an opportunity here for investors if or when the situation calms down. 

Despite disruption, the company’s iron ore deposits are not going anywhere 

I don’t think it is sensible to spend too much time dwelling on the company’s past sales and profit figures or future projections. These are not relevant to the current situation, and may only confuse investors. 

Nevertheless, I think it is worth noting that at the end of 2021, the group had a net cash position of $117m, enough to keep it afloat for the foreseeable future.

Ferrexpo’s main competitive advantage, namely its high-quality iron ore deposits, are not going anywhere. While its operations are currently experiencing severe disruption, and selling iron ore on the open market is proving challenging as its access to a key Black Sea port is blocked, these issues may not last forever. The miner is still producing ore, and it continues to sell to markets in Europe where it can.

So, while I wouldn’t want any exposure to the company right now, I plan to keep a close eye on this firm – there could be an opportunity in future.


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