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Ferrexpo's resource base consists of magnetite ore of 30% iron content, which is particularly well-suited for pelletising. The ore body is a single 50 kilometre-long strike divided into 10 adjacent deposits. Five of these deposits are classified according to the international JORC Code and as at 1 January 2012 represented estimated resources of 6.8 billion tonnes. The other five deposits, representing an estimated 14.2 billion tonnes, are FSU classified.
Table 1: JORC Reserves and Resources as of 1 January 2012
|Gorishne-Plavninskoye and Lavrikovskoye||859||30||2,140||30||1,449||31|
Note: Five further deposits are estimated to contain resources of over 14.2 billion tonnes according to the FSU ('former Soviet Union') classification code. Ferrexpo is currently working together with international consultants to convert these resources to the universally accepted JORC standards. These deposits are collectively known as the 'Northern Deposits' and are classified under the names Manuilovskoye, Vasilievskoye, Kharchenkovskoye, Zarudenskoye and Brovarkovskoe.
Ferrexpo mines and develops its reserves under the well-established laws and codes governing mining in Ukraine. The State Service for Geology and Use of Natural Resources of Ukraine has granted Ferrexpo development licenses for the Gorishne-Plavninskoye, Lavrikovskoye, Yeristovskoye, Belanovskoye and Galeschinskoe deposits. Exploration licenses are held for the remaining Northern Deposits. In general, a development license is granted for a period of 20 years and an exploration licence is granted for 10 years. Renewal is deemed automatic, subject to adherence of stipulated requirements in terms of development of the deposit and community obligations.
resources classified according to the Former Soviet Union code
of sales volume to Traditional Markets
2010: 66% of sales volume
of sales volume to Growth Markets
2010: 27% of sales volume
of sales volume to Natural Markets
2010: 7% of sales volume
In 2011, Ferrexpo was the largest exporter of pellets in the CIS and one of the top 10 pellet producers in the global seaborne iron ore market. Production continued at full capacity and a record quantity of iron units was produced and shipped in the form of pellets. On a Fe equivalent basis, the Group's output of iron units has doubled in the last 10 years of production. In addition, the average grade of its pellets has increased significantly by over 1% to 63.5% Fe.
Pellet production began at FPM in 1977 after construction of the mine, processing facilities and local town of Komsomolsk under Soviet Union ownership. The pit is open cut and approximately 330 metres deep and seven kilometres long. Some key milestones of production output have recently been reached. In December 2010, the processing facilities reached total production of 250 million tonnes of pellets, while in 2011, the mining division extracted the one billionth cubic metre of rock and ore since the start of mining activities.
FPM once again increased the amount of iron ore mined per annum. In 2011, it mined 29,637 thousand tonnes, 2.4% higher than 2010. This is in line with Ferrexpo's strategy to expand the mining capacity of the pit in conjunction with the Mine Life Extension project (see Development Capital Investment at FPM below). Stripping volumes increased in 2011 by 10.7% to 28,214 thousand tonnes reflecting the age of the mine and required pre-stripping to access new reserves as part of the mine life extension.
The FPM processing facilities have latent processing capacity of approximately 3.0 million tonnes of pellets per annum as a result of insufficient mined ore from the existing operations. During the year, 747 thousand tonnes of pellets were produced from purchased third party concentrate (2010: 998 thousand tonnes). The Group purchases third party concentrate subject to availability in the local market and will substitute this with own ore as the capacity expansion and ore from FYM comes on line.
In total, the processing facilities produced 9,811 thousand tonnes of pellets (2010: 10,031 thousand tonnes) of which 4,799 thousand tonnes were Premium 65% Fe pellets (2010: 4,879 thousand tonnes) and 5,012 thousand tonnes were Basic 62% Fe pellets (2010: 5,152 thousand tonnes).
Table 2: Production Statistics
|(000t unless otherwise stated)||Change|
|Iron ore mined||29,637||28,930||707||2.4|
|Average Fe content||30||30||–||(0.1)|
|Iron ore processed||29,535||29,097||438||1.5|
|Concentrate produced ('WMS')||11,487||11,226||261||2.3|
|Average Fe content %||63||63||–||(0.6)|
|Average Fe content %||67||67||–||(0.2)|
|Average Fe content %||66||67||1||(0.7)|
|Purchased iron ore||–||–||–||–|
|Pellets produced from own ore||9,063||9,033||30||0.3|
|Average Fe content %||65||65||–||(0.0)|
|Average Fe content %||62||62||–||0.1|
| Pellets produced from purchased
concentrate and ore
|Average Fe content %||65||65||–||(0.0)|
|Average Fe content %||62||62||–||0.1|
|Total pellet production||9,811||10,031||(220)||(2.2)|
|Pellet sales volume||9,876||9,721||155||1.6|
There were no fatalities at FPM in 2011, and lost-time injuries reduced from 19 in 2010 to 11, reducing the LTIFR to 0.82 per million man hours worked which is the lowest rate in FPM's history (2010: 1.43 per million man hours worked). This reduced the three-year moving average to a LTIFR of 1.12 compared to the prior three average of 1.16 per million man hours worked.
* Please note: following an increased focus on safety by the Group from 2009, incidents that were previously unreported are now
reported on and disclosed.
The management of Ferrexpo strongly encourages a culture of safety in the organisation linking safety performance to remuneration. The Group has regular internal safety audits and external audits by DuPont and is committed to following international best practice as well as to set the standard for mining companies operating in the CIS.
In 2011, FPM completed and implemented 34 projects as part of the BIP. This reduced the C1 cash cost of production by UAH68m or 1.8%, in line with its goal of 1% to 2% cost savings per annum. Of these projects, 18 concerned transportation efficiencies in the open pit, seven projects were focused on improving productivity in the processing facilities and nine projects focused on reducing downtime in the service departments. Table 3 shows the actual resource savings achieved in 2011.
Table 3: Resource Savings under BIP
|Power (million kWh)||21.4|
|Grinding media (tonnes)||1,257.2|
|Diesel fuel (tonnes)||278.0|
It is an essential part of the Group's strategy to reduce costs in order to remain in the lowest cost quartile of global pellet producers. This has been achieved through ongoing efficiency improvements and cost reductions over many years. Table 4 below illustrates the effect of these projects. Since 2005, the year before the start of the BIP, FPM has achieved savings of US$6.6 per tonne in the C1 cash cost of production.
Table 4: Improvement in Consumption Norms
|Norms – examples||2005||2011||Ch %|
|Grinding bodies kg/t||6.4||5.6||(15)|
|Labour productivity thousand tonnes/person||0.7||1.5||53|
Cost: no capital cost required.
Savings: 1,257 tonnes of steel grinding media, UAH8 million (at current prices).
A programme was designed to monitor electrical consumption of the motors on the ball mills in the concentration plant. Ball mills contain steel grinding media which are used to grind the iron ore into an optimum size for further processing. By studying the pattern of power consumption, FPM could assess when grinding media were being over or under loaded. As a result, FPM could optimise the process for consistent loading of grinding media and reduce overall power consumption.
Cost: UAH13 million.
Savings: 18 million kWh power; UAH11 million per annum.
Tailings, fine particles of waste, which are a by-product of pellet production, are stored in a tailings dam. During 2010 and 2011 FPM redesigned the piping from the dam to the processing plant to allow water to flow by gravity, instead of via electrical pumps, back to the processing area for reuse.
Cost: UAH28 million.
Trucks used in the pit to collect ore have been fitted with GPS tracking systems. This allows for better scheduling of pick-ups thereby improving overall mining efficiency. In 2011, the focus was to set up the hardware for this dispatch platform. Now that this has been achieved, the system can be expanded to monitor other performance criteria, such as the pressure and temperature of tyres and engine performance in trucks. The system can also be used in the future to evaluate the performance of other equipment in the pit such as drilling rigs.
The BIP is embedded in the Group's culture with targeted outcomes linked to operational managers' performance evaluations. Ferrexpo believes the programme is essential to ensure continued improvement in the cost reduction of its mining and processing activities.
During the period, the Group allocated US$121 million for the modernisation and debottlenecking of FPM's production facilities (2010: US$49 million).
Included in sustaining capital investment are projects to upgrade FPM's facilities to allow processing capability of 35 million tonnes of crude ore per annum by the end of 2013. This will ensure FPM can process additional ore from the FPM open pit and first ore from FYM, increasing the Group's pellet output to 12 million tonnes per year. Activities during the year focused on the redesign and reinstallation of parts of the crushing plant which were completed and commissioned in January 2012.
Sustaining capital investment also provides for the modernisation of existing assets and systems to increase operating efficiencies, benefiting the cash cost of production.
Of the total pellets produced at FPM in 2011, 49% represented Ferrexpo Premium pellets (65% Fe) while the remaining were Ferrexpo Basic pellets (62% Fe). The Group's strategy is to increase the quality so that all output is Premium pellets. To achieve this, the Board approved a US$212 million investment programme in November 2010.
The FPM pit consists principally of two types of ore seams. The Quality Upgrade Programme will enable the Division to upgrade (beneficiate) leaner ore to a higher iron content through the modification of the existing flotation circuit and the installation of two additional circuits. The project also involves the upgrade and replacement of filters to remove water from the concentrate prior to it entering the pelletising plant. The project is scheduled for completion by the end of 2014.
During the year, FPM completed the majority of the engineering and design documentation and prepared the sites for the flotation sections. Long-lead orders for the vertical mills, used in the beneficiation process were placed, with delivery expected to start in mid-2012.
The FPM open pit mine has been in operation since 1977 and contains ore beyond the original planned pit limits and depths. In November 2010, US$168 million was approved for expenditure to extend the life of the mine to 2038. This project involves stripping and removal of overburden to access further iron rich ore by 2014. The project began in 2011 and is scheduled for completion by the end of 2018.
During the year, approximately 13 million cubic metres of overburden was removed in line with the plan. Higher diesel prices resulted in increased costs, however, the Group expects these costs to moderate over the remaining life of the project. Orders for a drilling rig and two excavators were placed and are expected to be delivered in the first quarter of 2012, while three dump-trucks were delivered in September 2011.
Total development capital investment at FPM in 2011 was US$49 million (2010: US$55 million).
Capital investment at FYM during the period was US$129 million (2010: US$43 million). This project is proceeding on time and on budget (total cost US$267 million) with first ore expected at the end of 2012.
Overall, 60% of the required pre-stripping has been completed. In 2011, 16 million cubic metres of overburden was removed with 15 million cubic metres of pre-stripping remaining. Currently, five draglines, 16 CAT 789 haul trucks, five CAT 793 haul trucks and a hydraulic excavator are in operation. A further excavator and five additional CAT 793 trucks are expected to be in operation by 2Q 2012. Meanwhile, construction of permanent pit infrastructure is well under way and the Division employed 677 permanent staff as of 31 December 2011.
Once first ore is achieved Ferrexpo will be able to increase its pellet output by one third to 12 million tonnes per annum by using the facilities at FPM.
Ferrexpo intends to increase its total production output by over 60% to 20 million tonnes by 2016. FYM plans to produce approximately 28 million tonnes of crude ore per annum. In order to process this material, a new processing (concentrator) facility will allow the Group's output to increase from 12 million tonnes per annum to 20 million tonnes per annum.
Currently, the Group is finalising the engineering design for the concentrator to ensure it complies with international best practice and local design institute requirements. Ferrexpo anticipates final approval of the project, in its entirety, during 2012.
Although concentrate is saleable as a product in its own right, Ferrexpo recognises the benefits of producing iron ore pellets, which are of higher value to end customers. As a result, approval of the concentrator will also initiate the third phase of the project, subject to Board approval, which is to construct a 10 million tonne per annum pelletiser to be established in the most favourable location.
Since the start of the project in 2008, FYM has had an excellent safety record. There were no fatalities or lost time injuries in 2011.
The Ferrexpo Belanovo deposit has total JORC resources of 1,702 million tonnes. Drilling works and site preparation activities were undertaken in 2011 amounting to US$8 million. A Bucyrus RH340 hydraulic face shovel and five Caterpillar 793D haul trucks have been ordered for delivery in mid-2012 in order to begin stripping works. It is anticipated that in 2012 capital investment will be in the region of US$50 million, as part of the programme to reach first ore at the deposit.
In 2011, the majority of physical iron ore traded globally was priced against the Platts iron ore index for 62% Fe fines on a CFR North China basis. Producers and customers would then agree a quotation period to calculate the average fines price and negotiate a quality adjustment and a premium for lump or pellets. The resulting price reflected value in use to the steel mill, taking into account iron content as well as any impurities, and for pellet producers, the pellet premium reflected the benefits to the steel mill of using pellets compared with fines or lump.
Within this context, in 2011 Ferrexpo commenced index linked pricing with a significant number of long-term customers using the average of the quarter of loading as the preferred time period for calculation of the price. Leading iron ore suppliers moved to a similar pricing methodology in most markets during the October to December quarter.
The Group, however, has a number of relationships mainly in Eastern Europe, where long-term contracts exist and where Ferrexpo conducted direct negotiations on a quarterly basis using international pricing trends as a guide.
In 2011, approximately 76% of sales were conducted under long-term volume framework agreements. The remaining sales were made on a short-term or spot basis as new target customers were introduced to the Ferrexpo product ahead of the considerable growth in production in coming years. It is Ferrexpo's strategy to place its products where it can consistently achieve the best market prices.
During the period, the Group was able to further diversify its customer base and, in the process, reduce its dependence on its two largest customers. Sales to these customers reduced to 44% of total sales volume from 55% in 2010. This trend is expected to continue as Ferrexpo finalises additional long-term contracts in China, Japan and Western Europe in 2012.
Ferrexpo's mining operations are integrated with both port facilities on the adjacent Dnieper River and with the Ukrainian rail network. The Group transports most of its finished product by rail to border dispatch points, and as of 31 December 2011, it owned 1,045 rail cars (31 December 2010: 933 rail cars) which can transport approximately two thirds of current Group output. The remaining production is transported by state owned rail cars or by barge. Ferrexpo aims to become self-sufficient in rail car transportation and expects a further 600 rail cars to be delivered in the first half of 2012. This ensures availability of rail cars during peak times and provides a competitive advantage on railway costs.
Currently, a quarter of the Group's pellets are transported via rail to the western Ukrainian border for customers in Central and Western Europe. The remaining pellets are transported via rail or barge:
Overall in 2011, the proportion of sales controlled by Ferrexpo along the supply chain to customers increased to 52% of sales from 14% in 2010. This was achieved through a combination of increased use of the Group's barges, and increased CFR sales to Asia.
In 2011, Ferrexpo invested US$58 million in its logistics infrastructure (2010: US$18 million). This included US$41 million for 112 rail wagons as well as prepayment for delivery of 600 wagons in 2012. The Group acquired land for trans-shipment from barge to rail in Austria for US$4 million, which will allow it to access markets in Northern Europe. In addition, Ferrexpo paid US$38 million for Helogistics in January 2011.
Ferrexpo sells its product to the key steel producing regions in the world, focusing on three market segments: