🕐18.09.13 - 12:27 Uhr

INVESTEC: FERREXPO - GEOGRAPHICAL DIVERSIFICATION - BUY




Ferrexpo (Price: 186p | Target: 201p | Rec: Buy) Ferrexpos announcement that it has acquired 14.4% of Ferrous Resources reflects a step towards geographical diversification out of Ukraine.

We believe that the challenges of operating in Ukraine, as demonstrated by the cUS$300m in VAT that is owed to Ferrexpo by the government, will have played a large part in this investment decision.

The investment appears sound to us, although we still believe that the group has an impressive asset and a unique position in Ukraine that can be further capitalised upon. * Ferrexpo has since Jan’13 accumulated a 14.4% stake in Ferrous Resources for a total consideration of c.US$80m.

Ferrous is a private Brazilian company with JORC compliant reserves and resources of 4bnt of iron ore in the Iron Ore Quadrangle of the Minas Gerais region of Brazil.

Ferrous expects to produce approximately 5mt of 62% Fe fines this year and is fully permitted to expand its output to 15mtpa.

The flagship asset, Viga, has direct access to rail infrastructure to the Sepetiba port, some 450km away. * We believe that the step towards geographical diversification out of Ukraine is in no small part related to the economic pressures that the country faces, which have adversely impacted Ferrexpo through the c.US$300m in VAT that it is owed.

The market has in our view been discounting Ferrexpo for its Ukraine exposure and, for a relatively small investment, the Ferrous stake now offers the prospect of another option.

While we continue to believe that Ferrexpo has a unique asset and position in Ukraine, Ferrous does have a solid resource base in a suitable geography.

The group is due to update the market in Q4 as to whether it will expand its operations in Ukraine and it is possible that todays announcement may see it focussing its production growth elsewhere. * We reiterate our Buy recommendation and our 201p target price, which is based on an equal blend of NPV valuation and peer group earnings multiples.
To access the full note please click here Analyst: Louise Collinge
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