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Table 5: Summary Financial Results
|US$ millions unless otherwise stated||Year ended
|As % of revenue||44.8%||45.2%||–|
|Profit before taxation||690.9||498.1||38.7%|
|Profit for the period||574.9||425.1||35.2%|
|Diluted earnings per share (US cents)||97.0||72.2||34.3%|
|Final dividend per share (US cents)||3.3||3.3||–|
Total revenue increased by 38.1% to US$1.8 billion for the year ended 2011 compared to US$1.3 billion in 2010.
The average realised price achieved by the Group for its pellets rose 28.4% during the period, which increased revenues by US$349.9 million. 40% of sales were on a CFR or similar basis adding US$44.7 million to revenue. Sales volumes reached a historic high at 9.9 million tonnes compared to 9.7 million tonnes in 2010, enhancing growth in margins.
Reliance on the Group's two largest customers, in Central and Eastern Europe, was reduced to 43.5% of pellet sales from 55.4% of sales in 2010. Ahead of an increase in production volumes the Group increased sales to customers in China, Germany, India and Japan which accounted for 41.9% of sales volumes compared to 29.6% in 2010.
Other revenue, not related to pellet sales, amounted to US$88.1 million (2010: US$5.8 million). This included revenue from third party services, such as bunker fuel sales, at the Group's barging subsidiary Helogistics (acquired in December 2010) as well as sales from gravel.
Total cost of sales for the year ended 31 December 2011 increased 34.8% to US$649.5 million (2010: US$481.9 million). Cost of sales consists of the C1 cash cost of sales and other costs including depreciation. These are reviewed below:
The C1 cash cost of production per tonne is defined as the cash costs of production of iron pellets from own ore, divided by production volume, from own ore, and excludes non-cash costs such as depreciation, pension costs and inventory movements, costs of purchased ore, concentrate and production cost of gravel.
The C1 cash cost increased by 27.7% to US$50.7 per tonne compared to US$39.7 per tonne in 2010, principally as a result of global commodity price inflation.
Of the US$11.0 per tonne increase in the C1 cash cost, commodity related price inflation accounted for 55.5% of the increase compared to 2010. In 2011, gas and electricity prices rose by 38.0% and 21.8% respectively while the cost of diesel fuel was 40.6% higher, reflecting a full year impact of the increased oil price at the end of 2010. Higher steel prices resulted in a 14.6 % increase in steel grinding media costs. In total, these factors added US$6.1 per tonne to the C1 cash cost.
Personnel, repair and maintenance and other material costs increased the C1 cash cost by US$4.9 per tonne. These expenses are principally denominated in local currency. On average Ukrainian producer price inflation was approximately 19.0% in 20111.
The Group produced at full capacity throughout the period, which helped to absorb the cost increases. In addition, the Business Improvement Programme('BIP') reduced the C1 cash cost by 1.8%, generating savings of $0.9 per tonne. Since the inception of the BIP in 2006, cumulative productivity gains have achieved savings of approximately US$6.6 per tonne of pellets produced, or US$56.1 million to 31 December 2011.
Just over half of the C1 cash costs are denominated in Ukrainian Hryvnia. The Hryvnia remained on average broadly stable in 2011 compared to 2010 at around UAH8.0 to the US Dollar.
1 Average of January 2011 to December 2011 compared to average January 2010 to December 2010.
Table 6: C1 Cash Costs
|US$m||% of total||US$m||% of total|
|Spare parts, maintenance and consumables||78.2||17.0%||58.9||16.4%|
|Royalties and levies||7.7||1.8%||7.2||2.0%|
|C1 cost of sales||459.5||358.5|
|C1 cost per tonne||50.7||39.7|
Non C1 cost of sales amounted to US$190.0 million for the period (2010: US$123.3 million).
Depreciation increased by 16.1% to US$28.6 million, reflecting capital investments at FPM in 2011.
The remainder of non C1 cost of sales related to the purchase of concentrate for reprocessing into pellets. The Group has nameplate pelletising capacity of 12 million tonnes of pellet production per year. Ferrexpo is currently able to mine ore sufficient to produce around 9 million tonnes of pellets. To utilise the spare pelletising and process capacity efficiently, third party concentrate was purchased when available on the local market. The Group will continue to purchase third party concentrate, provided adequate margins can be achieved. During the year, 747.3 thousand tonnes of pellet equivalent third party concentrate was acquired (2010: 998.1 thousand tonnes) which generated a positive contribution.
The Group's gross margin increased to 63.6% in 2011 compared to 62.8% in 2010. This reflected higher sales prices and volumes, which were partially offset by an increase in production costs.
Selling and distribution expenses were US$318.0 million for the year compared to US$212.0 million in 2010.
Selling and distribution costs to the Ukrainian border increased by US$10.7 million to US$138.0 million in the period (2010: US$127.3 million), equating to US$14.0 per tonne (2010: US$13.1 per tonne). These costs primarily include railway freight to the southern ports at Yuzhny and Ismail and to the western Ukrainian border as well as port charges.
Rail tariffs increased on average by approximately 10.8% during the year, this was partially offset by a discount for volumes transported by the Group's own rail cars. Currently, two thirds of the sales volumes are railed using Ferrexpo's wagons receiving a 6.5% discount for these volumes.
Table 7: Selling and Distribution Expenses
|(US$ million unless otherwise stated)||Year ended
|Other (commissions, insurances, personnel, depreciation, advertising)||38.4||23.3|
|Total selling and distribution expenses||318.0||212.0|
|Total sales volume (thousand tonne)||9,876||9,721|
|Cost per tonne of pellets sold (including international freight)||32.2||21.8|
|DAP/FOB distribution costs per tonne of pellets sold (US$)||14.0||13.1|
International freight costs amounted to US$152.7 million (2010: US$74.9 million). These costs, which are also reflected as part of revenue on associated CFR1 sales, relate to the shipping of pellets by ocean vessel to customers in Asia (on a CIF2 or CFR basis), and by barge to customers in Serbia (on a DAP3 basis) and Austria (through Helogistics). In 2011, Helogistics' operations were included for the first time. The Group doubled shipments of pellets to Asia to three million tonnes on a CFR or equivalent basis principally through the loading of nine capesize vessels thus increasing costs recognised.
Depreciation amounted to US$8.2 million (2010: US$1.8 million) and related to amortisation of Helogistics river vessels as well as to capital investment from the purchase of new rail cars.
General and administrative expenses were US$52.0 million (2010: US$49.2 million). This was related to an increase in professional fees, including legal services reflecting increased activities and projects.
Other income was US$6.9 million in 2011 (2010: US$4.5 million). The increase reflected higher operating income from the lease of premises to third parties at FPM.
Other expenses increased to US$17.1 million (2010: US$5.9 million). This reflected increased spending on support for the local communities in the Poltava region, where Ferrexpo is based and is a key part of the Group's strategy.
EBITDA increased by 36.8% to US$800.9 million for the year compared to US$585.3 million for 2010. This is the highest EBITDA achieved by the Group. The increase was mainly due to a higher average FOB sales price contributing US$323.4 million to EBITDA. This was partially offset by increased production costs of US$100.5 million, driven by domestic and commodity cost inflation, as discussed previously. The EBITDA margin was in line with 2010 at 44.8% (2010: 45.2%).
Finance income was US$2.5 million (2010: US$1.3 million). During the year, income from interest earned increased by US$1.1 million to US$2.5 million. This was driven by higher average cash balances in 2011 of US$604.8 million compared to US$165.7 million in 2010 as well as longer-term deposits receiving more attractive interest rates.
Finance expense increased to US$68.2 million (2010: US$41.6 million) which included US$28.8 million of interest cost on the Group's US$500 million Eurobond, issued in April 2011 at a coupon of 7.875%. Due to financial instability in the global banking sector, particularly in Western Europe, Ferrexpo drew in full its US$420 million revolving bank facility in October 2011. Interest on this facility is 225 basis points above LIBOR on drawn amounts. The average gross debt for the period was US$697.1 million (2010: US$346.8 million).
Ferrexpo prepares and reports its financial statements in US Dollars and operating foreign exchange gains and losses reflect the revaluation of trade receivables and trade payables that are denominated in a currency other than the Group's reporting currency at the balance sheet date.
During the period, the Ukrainian Hryvnia remained stable against the US Dollar at an average rate of UAH7.9579 (2010: UAH7.9547). As a result, there was no significant operating foreign exchange movements, with a loss of US$1.4 million recorded (2010: loss of US$1.1 million).
Non-operating foreign exchange gains or losses result from the retranslation of financial liabilities, loans and other similar items.
Non-operating foreign exchange losses for the period were US$1.9 million compared to US$3.9 million in 2010. The losses were primarily related to the revaluation of income tax payables in Swiss Francs. The average exchange rate between a US Dollar and the Swiss Franc was 0.88 in 2011 compared to 1.04 in 2010.
1 CFR is defined as delivery including cost and freight.
2 CIF is defined as delivery including cost, insurance and freight.
3 DAP is defined as delivery at place.
Table 8: Summary of Group Liquidity and Debt
|US$ million||As of
|Cash and equivalents||890.1||319.5|
|Total liquidity (facilities plus cash)||940.1||384.5|
Net cash flow from operating activities was US$502.7 million for the period, an increase of 32.4% compared to 2010 (US$379.8 million).
Working capital increased by US$111.4 million reflecting higher VAT and trade receivables. As a result of high capital expenditure during the year, and a delay in respect of VAT repayments in May, June and July 2011, VAT receivables increased by US$72.1 million during the period. Higher average prices increased trade and other receivables by US$17.4 million.
Total capital investment for the year was US$378.3 million, which was more than double 2010's investment of US$167.4 million.
Sustaining and modernisation capital investment was US$128.0 for the Group, of which US$121.3 million was invested at FPM (2010: US$49.1 million). The remaining US$6.7 million was invested at Helogistics.
In November 2010, the Board approved US$646.9 million for development projects at FPM and FYM. In 2011, the Group spent US$177.9 million in this regard (2010: development capex US$97.5 million). US$49.0 million was spent at FPM, while US$129.0 million went towards achieving first ore at FYM. The expected spend for 2012 is fully funded while the Group's low level of gearing will underpin future development spend for processing facilities at FYM.
US$8.3 million was spent on the Belanovo deposit (FBM) during the period (2010: US$2.4 million). This was for drilling works and site preparation activities.
In terms of logistics capital investment was US$57.8 million in 2011 (2010: US$17.7 million) which was primarily related to the acquisition of rail cars.
In January 2011, Ferrexpo paid US$38.0 million for the Helogistics acquisition, which was agreed in December 2010, and disclosed in the 2010 financial statements.
The Group's closing cash balance increased by US$570.7 million to US$890.1 million as of 31 December 2011, partly as a result of the net financing inflow of US$521.3 million following the placement of a US$500.0 million bond and the increase of the pre export facility from US$350.0 million to US$420.0 million.
Ferrexpo's gross debt had an average maturity of 4.0 years at the 31 December 2011. The Group has minimal debt repayments of US$10.8 million and US$10.4 million in 2012 and 2013 respectively. Net debt to EBITDA as of 31 December 2011 was 0.1 times.
Revenue US$ million
EBITDA US$ million
The Group calculates EBITDA as profit from continuing operations before tax and finance plus depreciation and amortisation and non-recurring exceptional items included in other income and other expenses, and the net of gains and losses from disposal of investments, property, plant and equipment
NOPAT US$ million
Net operating profit after tax