The world market for iron ore pellets has been hit and prices in various markets have been significantly reduced. The premium on Atlantic pellets went down 56% in the ½ year comparatives. The premium for China pellets went down 20%. This rather reflects the drop in demand in both areas for iron ore.
However as the price has fallen FXPO has been successful in increasing its sales. (A mistake can be made by looking at production levels – which FXPO has also increased, as production can just end in stock, and FXPO did have a lot of stock at the end of the last year).
In the half year FXPO did a variety of positive things;
-It significantly reduced debt out of operational cashflow. Down from $282m at the start of the period to $174m
-It found new customers for its product meaning that losses in price could be largely made up in volume. Sales volumes were up 22% to offset the pellet premium falls mentioned above.
-It reduced its stock level. This is still high imho, but notably better. Stock was down to $218m from $255m at the start of the period and $233m same time last year. Given sales for the 6 months were only $250m you can see this might be a significant issue. Stock itself is multi layered and I would not be surprised if there were not some issues in it on consumable supplies. That said fe pellets do last.
-It began changing, possibly improving its board. An issue at FXPO is the majority shareholder is being charged for embezzlement by the government at another business and until recently most of the board was very much tied to this gentleman. Within FXPO there are some questionable loans too entities related to this shareholder. The new board is coming to grips with these.
It was also lucky to have an overall reduction in its processing costs, mainly fuel and electricity, but it lost out on transportation as the new buyers were in China replacing ones lost in nearby Central Europe. I also note that whilst iron ore prices did not fluctuate much in the period of these results they are going up which should help FXPO.
The company looks to be capable of making in excess of $500m pa which currently puts it on a PE not much more than 3. There are good reasons for this lowly rating, but equally there is a lot to be positive about and with more additional progress in its key areas it could become a great investment over the next few years. The company also continues to pay a dividend.
That being said the controlling shareholding of Mr Zhevago remains and how he chooses to use it, including if he should sell it to someone could have a big effect which should keep the rating down until better understood.
I hold and have added recently. Always DYOR.