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Ferrexpo is quality business, which continues to improve, says Numis

Ferrexpo is quality business, which continues to improve, says Numis

FTSE 250 iron ore producer Ferrexpo (LON:FXPO) is a quality business that continues to improve, according to broker Numis, which has initiated coverage on the stock.

The broker begins covering the Ukraine operating firm with a 'buy' stance and 400 pence price target.

Analyst Cailey Barker said the company had one of the largest iron ore reserves in the world at 20 billion tonnes and was looking to grow from its current 10 million tonne per year Poltava mine, known as FPM, with the addition of Yeristovo (FYM) in 2013, and potentially Belanovskoye (FBM) in the future.

"FXPO is a conservative business with a strong track record," said Barker.

"It continues to improve, securing its supply chain with better logistics, upgrading its product quality into high value pellets, and expanding its sales into growth markets."

Barker pointed out that Numis conservatively assumed production would grow from 10 million tonnes per year last year to 22 million tonnes per year in 2016 as Yeristovo comes on line.

FXPO has a strong balance sheet with net debt of around $80mln, and healthy gearing of 6 per cent, the broker believes.

"We expect the company to continue to manage its finances well and remain fully-financed for its expansion plans," said Barker.

Looking at the iron ore market, the analyst added: "Despite recent softening and jitters over Chinese growth, we expect a tight market and strong industrial demand to keep prices buoyant but volatile over the next few years.

"We also expect prices to remain elevated to incentivise development of large scale projects as financing conditions and macroeconomic effects continue to bite."

Barker also noted that the firm was relatively cheap -  currently trading below the peer group at around 5.7 times 2012 price/earnings and 2.9 times EV/EBITDA, compared to the group average at 10.3 times and 4.0 times respectively.

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February 20 2013

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