REG - Ferrexpo plc - Full Year Financial Results for 2023
18/04/2024 07:00
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RNS Number : 1399L Ferrexpo PLC 18 April 2024
18 April 2024
Ferrexpo plc
("Ferrexpo" or the "Company" or the "Group")
Full Year Financial Results for 2023
Ferrexpo plc (LSE: FXPO), producer of premium iron ore pellets for the
transition to lower carbon and green steel, announces its audited financial
results for the year ended 31 December 2023.
Lucio Genovese, Executive Chair of Ferrexpo, commented:
"Although the war is now in its third year, the 2023 financial year represents
the first full year that we operated during a time of war. The challenges that
we continue to face cannot be understated, however, our results demonstrate
that we have learnt to be nimble and how to adapt and respond to ever changing
circumstances.
It is pleasing therefore, that we can report production and sales of over four
million tonnes, equal to the logistics capacity that was available to us
during the year, generating revenues of US$652 million. Our cost of sales on
a unit basis fell 8% to US$76.5 per tonne, reflecting better availability and
prices for consumables, and also efficiency gains and cost saving measures.
After positive cash flows from operating activities of US$101 million, we
report a firm underlying EBITDA of US$130 million. Even after investing over
US$100 million dollars during the year, it is also pleasing that we are able
to report a year end net cash position of US$108 million, slightly ahead of
the previous year. In our accounts this year, we have recorded a provision
of US$131 million, which has been recognised to cover any possible negative
outcome that arises from two legal cases that we are challenging. The effect
of this provision is that instead of reporting a profit of US$46 million we
are instead reporting a loss of US$85 million. With advice from our Ukrainian
legal counsel, we believe that the various claims are without merit and that
we have strong legal arguments to vigorously defend ourselves in court.
Throughout the year, we worked tirelessly to protect our people and preserve
the integrity of our assets. We understand that more than ever, we have an
important role to play as a large employer on whom so many people depend, and
also the critical need for our contributions to local communities and the
national economy.
Finally, I want to highlight that the new year has started well. The increase
in demand experienced in December 2023 has continued in to the first quarter
of this year. We have seen good demand for our premium products in Europe and
elsewhere, which provided us the confidence to start a third pelletiser
line. This means that we have more production flexibility than at any other
time during the war. It also means that we are able broaden our product mix,
including restarting production of DR pellets again."
Financial highlights
· Revenue 48% lower at US$652 million due to lower realisable sales
resulting from logistics constraints and a decrease in average iron ore prices
(2022: US$1.2 billion).
· Underlying EBITDA(A) fell to US$130 million at an EBITDA margin of
20%, heavily influenced by operating foreign exchange gains of only US$31
million for 2023 compared to US$339 million in 2022.
· Net cash flows from operations: remain positive at US$101 million
despite the significant challenges posed by the war (2022: US$301 million).
· US$131 million effect from provisions to cover possible negative
outcome of ongoing legal proceedings results in a loss of US$85 million.
· Capital investment of US$101 million, including sustaining and
optimisation projects (2022: US$161 million).
· Net cash position: improved marginally to US$108 million as at 31
December 2023 (2022: US$106 million).
Financial
summary
US$ million (unless stated otherwise) 2023 2022 YoY change
Total pellet production (kt) 3,845 6,053 (36%)
Sales volumes (kt) 4,174 6,183 (32%)
Iron ore price (65% Fe Index, US$/t) 132 139 (5%)
Revenue 652 1,248 (48%)
C1 cash cost of production (US$/t) 76.5 83.3 (8%)
Underlying EBITDA 130 765 (83%)
Underlying EBITDA margin 20% 61% (41pp)
(Loss)/profit for the period (85) 220 (139%)
Debt servicing - 42 -
Capital investment 101 161 (31%)
Closing net cash 108 106 +2%
The Group operates in an evolving political, fiscal and legal environment in
Ukraine and the risks associated with this heightened further in 2023 and
early 2024. As result, the Group has recognised provisions totalling US$128
million, including US$124 million for one specific ongoing legal dispute. See
details in Note 2 Basis of preparation and Note 14 Commitments, contingencies
and legal disputes to the Consolidated Financial Statements in respect of the
possible impact on the Group's business activities.
Safety and wellbeing
· Tragically, 14 colleagues were killed serving in the armed forces
during 2023, bringing the total to 34 between February 2022 and December 2023.
· Safety performance at Ferrexpo's operations remains strong, with a
third successive fatality-free year and lost time injury frequency rate of
0.32 continues materially below the Group's historic trailing average.
· The Group's LTIFR has remained at a relatively low level, ahead of
the Group's historical five-year trailing average of 0.69.
Market factors
· The premium 65% Fe iron ore price added 15% over the year as a whole
from January to December 2023, however, the annual average price for 2023 was
5% lower at US$132 per tonne compared to 2022.
· The iron ore pellet market experienced some volatility during the
year, with global pellet supply growing only 1%. Direct Reduction ("DR")
pellet premiums fell by a third to an annual average of US$57 per tonne (2022:
US$87 per tonne).
· C3 freight index, indicative of global freight rates for iron ore
shipments, fell 14% to US$21 per tonne, reflecting weaker demand in China.
Operational factors
· Iron ore pellet and concentrate production of 4.2 million tonnes in
2023 (2022: 6.1 million tonnes), comprising 3.8 million tonnes of premium
blast furnace pellets and 0.3 million tonnes of concentrate.
· Operations continued to ship products to customers throughout 2023,
by rail, rail and barge to customers in Europe, or rail, barge and ship from
alternative Black Sea ports to customers in Europe and MENA.
· Full year iron ore sales of 4.2 million tonnes (2022: 6.2 million
tonnes), mirroring available logistics capacity.
· Investment in growth continues with installation of Group's press
filtration complex, which will increase pellet quality and lower natural gas
consumption per tonne of production.
· C1 Cash Cost of Production(A) ("C1 costs") fell 8% to US$76.5 per
tonne, due to a reduction in the unit cost of energy such as natural gas and
fuel (principally diesel), partially offset by higher electricity costs in
Ukraine.
· As of late February 2024, the Group has resumed operations at the
third (of four) pelletiser lines, due to improved logistics access to export
markets.
ESG factors
· Absolute Scope 1 emissions fell by 27% in 2023, in part reflecting
lower production due to war related constraints. Scope 1 emissions on a unit
of basis rose 4%, due to an increased utilisation of alternate logistics
channels for exports, which resulted in an increased consumption of gasoil.
· Absolute Scope 2 emissions fell by 39%, also due to lower production.
On a unit basis, Scope 2 emissions fell by 11% due to an increased proportion
of electricity being sourced from cleaner sources including hydro and nuclear
power.
· In 2022, DR pellets represented 6% of all production, resulting in
lower Scope 3 emissions for that year. However, in 2023 no DR pellets were
produced. Consequently, Scope 3 emissions in 2023 on a unit basis increased to
1.33 tCO(2)/t of pellet production from 1.24 tCO(2)/t of pellet production in
2022 respectively. Absolute Scope 3 emissions nevertheless decreased 25%
year-on-year due to the overall lower production in 2023.
· During the year, the Group completed a Life Cycle assessment and
Double Materiality assessment with its environmental consultants, Ricardo plc.
The Life Cycle assessment independently verified that when a steel
manufacturer uses a Ferrexpo DR pellet, in an electric arc furnace, to produce
a tonne of steel billet, 37% less carbon is emitted compared to traditional
steel production methods. The Double Materiality assessment combines impact
materiality with financial materiality, providing a more in-depth analysis of
what issues are material to an organisation. The results demonstrated that
topics relating to governance and responsible business were considered the
most important by stakeholders, closely followed by our role in enabling the
transition to green steel and how we can ensure ongoing employment for our
workforce.
· The Group also published its 8(th) Responsible Business Report.
Corporate governance topics
· On 31 December 2023, Graeme Dacomb resigned as an Independent
Non-Executive Director and as Chair of the Audit Committee. On 1 January 2024,
fellow Non-executive Director, Stuart Brown was appointed as Chair of the
Audit Committee.
· On 22 October 2023, Stuart Brown was appointed as an Independent
Non-executive Director of the Company and as a member of the Audit Committee.
· On 1 August 2023, Fiona MacAulay stepped down as a member of the
Audit Committee.
· On 1 July 2023, Lucio Genovese transitioned from Non-executive Chair
to Executive Chair on an interim basis following the resignation and departure
of Jim North as Group CEO on 30 June 2023.
· On 25 May 2023, Jim North resigned as Executive Director of the
Company.
· On 25 May 2023, Ann-Christin Andersen resigned from the Board as a
Non-executive Director and Chair of the Health, Safety, Environment and
Community ("HSEC") Committee. On 25 May 2023, fellow Non-executive Director,
Natalie Polischuk was appointed as Chair of the HSEC Committee.
· On 25 May 2023, Nikolay Kladiev, Group CFO, was appointed as an
Executive Director of the Company.
Principal legal issues and provision
On 7 December 2022, Ferrexpo Poltava Mining ("FPM") received a claim in the
amount of UAH4,727 million in respect of contested sureties. These contested
sureties relate to Bank Finance & Credit which the Group previously used
as its main transactional bank in Ukraine. Bank Finance & Credit is still
going through the liquidation process after having been declared insolvent by
the National Bank of Ukraine and put under temporary administration on 18
September 2015. The counterparty in this claim alleges that it acquired rights
under certain loan agreements originally concluded between the Bank Finance
& Credit and various borrowers by entering into the assignment agreement
with the State Guarantee Fund on 6 November 2020. The counterparty further
claims that FPM provided sureties to Bank Finance & Credit to ensure the
performance of obligations under these loan agreements. On 26 January 2024,
the Ukrainian court of appeal has confirmed a claim against FPM in the amount
of UAH4,727 million (approximately US$124 million). On 30 January 2024, FPM
filed an appeal to the Supreme Court of Ukraine. The first hearing scheduled
for 20 March 2024 was delayed and was rescheduled for 17 April 2024. The
Supreme Court hearing on 17 April 2024 considered primarily procedural matters
and the next court hearing is scheduled for 27 May 2024. Although the Group
remains of the view that FPM has compelling arguments to defend its positions,
the Group has recognised a full provision totalling US$124 million for this
ongoing legal dispute.
On 25 March 2024, Ferrexpo was made aware of a court order dated 18 January
2024 in the Ukrainian Register of Court Decisions regarding restrictions on
certain corporate rights in all of Ferrexpo's Ukrainian subsidiaries. These
restrictions are imposed on 49.5% of the shares in all of Ferrexpo's Ukrainian
subsidiaries except for TIS-Ruda LLC and Nova Logistics LLC, where the
relevant percentages frozen are 24.7% and 25.2% respectively. The
restrictions do not affect ownership of the shares but prohibit their transfer
and restrict the right to use corporate rights for the abovementioned
percentages, including the right to vote. Ferrexpo is not a party to the
proceedings in which the restrictions have been imposed, and these
restrictions were imposed without even notifying Ferrexpo. The Group plans to
file an appeal to cancel these restrictions.
Stakeholder engagement activities
Due to the ongoing war in Ukraine, the Group's management team will not be
hosting an open access call with investors. The Group's management team will,
however, be hosting an analyst briefing at 11:00 UK time today. For those
interested in attending, please contact ferrexpo@tavistock.co.uk. A
presentation will be published here
(https://www.ferrexpo.com/investors/results-reports-and-presentations/) . The
Group expects to host its Annual General Meeting in May 2024 and will provide
an update at this event.
Alternative Performance Measures
Words with the suffix "A" are defined in the Alternative Performance Measures
- see pages 66 and 67 for more information.
In this report, the terms "Ferrexpo", the "Company", the "Group", our
"business", "organisation", "we", "us", "our" and "ourselves" refer to
Ferrexpo plc and, except where the context otherwise requires, its
subsidiaries.
For further information please contact:
Ferrexpo:
Nick Bias n.bias@ferrexpo.ch +44 (0)20 7389 8305
+44 (0)7733 177 831
Tavistock:
Jos Simson ferrexpo@tavistock.co.uk +44 (0)20 7920 3150
Gareth Tredway +44 (0)7785 974 264
About Ferrexpo:
Ferrexpo is a Swiss headquartered iron ore company with assets in Ukraine and
a premium listing on the London Stock Exchange in the FTSE 250 index (ticker
FXPO). The Group produces high-grade iron ore pellets, which are a premium
product for the global steel industry and enable reduced carbon emissions and
increased productivity for steelmakers when the Group's iron ore pellets are
converted into steel, compared to more commonly traded forms of iron ore.
Ferrexpo's operations have been supplying the global steel industry for over
50 years. Before Russia's invasion of Ukraine in February 2022, the Group was
the world's third largest exporter of pellets to the global steel industry.
The Group has a customer base comprising of premium steel mills around the
world. For further information, please visit www.ferrexpo.com
(http://www.ferrexpo.com/) .
EXECUTIVE CHAIR STATEMENT
Ferrexpo has demonstrated a strong performance during a time of war and we
should be proud of our achievements. In the face of extraordinary
circumstances, we have continued to produce, export, and preserve cash.
Dear Shareholders
The challenges that Ferrexpo faced in 2023 cannot be understated. After two
years of war in Ukraine, our people and our business continue to be severely
affected. Our strategy to move early and right-size our business, so that we
are more responsive to ever changing circumstances, is working. During the
year, we have worked tirelessly to protect our people, preserve the integrity
of our assets, and contribute to local society and the national economy. In
the face of such extraordinary circumstances, we have continued to produce and
export our products and preserve cash. I believe that the Company has
performed exceptionally well and despite the challenges we should be proud of
our achievements.
War
This announcement covers the financial year 2023, the second year of war since
Russia commenced its full-scale invasion of Ukraine in February 2022 and at
the time of this announcement it is already the third year.
Beyond the challenges in Ukraine, it would appear that the wider world is
entering a new era of geopolitical uncertainty. Old conflicts have reignited,
new ones are emerging, and autocratic leaders and their nationalist agendas
are prevailing in and across many countries and regions.
Against this increasingly volatile and complex backdrop, it is perhaps
inevitable, regrettably, that when it comes to Ukraine, a certain level of
'war weariness' is starting to appear.
Weariness, however, is not an option for the people of Ukraine who at no point
have lost sight of what is at stake - the very existence of the Ukrainian
state. It is my observation that the Ukrainian identity has strengthened over
this period, which has bolstered the resilience and commitment of Ukrainians -
who remain as determined as ever.
Reconstruction
Today, even during a time of war, Ukraine is already considering what sort of
state it wants to be when the war is over, and how to reconstruct its
political system, economy and society as a whole. In December 2023, this
thinking took a decisive direction when the EU opened member accession talks
with Ukraine. Setting a path for the integration of Ukraine into the EU is the
right thing, and one in which Ferrexpo can play a critical role.
As Ukraine embarks on the task of economic reconstruction, government and
business must work together to agree on the steps needed to create an
investment environment that will help rebuild Ukraine as quickly as possible
and shorten the path to EU membership. This includes upholding the rule of
law, creating a level playing field for business and gaining the trust of a
new set of investors who see prospects for rapid, sustained growth in the
country after the war. It also means rooting out much of the corruption that
is endemic in Ukraine.
Ferrexpo holds a pivotal position in shaping Ukraine's future. As a UK-based
public limited company, we uphold governance standards that instil confidence
in international investors, safeguarding their investments. Our commitment
extends beyond financial security; we aim to bolster and expand our
capabilities to drive growth in the Ukrainian economy. With a focus on
producing premium products essential for steel producers' decarbonisation
efforts, especially within Europe, we are poised to facilitate the growth of
sustainable trade between Ukraine and the EU. Our dedication to this cause
marks our distinctive role in Ukraine's reconstruction. Ferrexpo is uniquely
positioned to lead the charge towards a prosperous and sustainable future for
Ukraine.
People
Our future hinges upon our people - our steadfast workforce, their families,
and the communities we serve. This commitment unequivocally extends to those
members of our workforce who are bravely serving in the Armed Forces of
Ukraine. We honour their sacrifice and eagerly anticipate their return to the
roles we have preserved for them.
Ferrexpo stands out for its unparalleled combination of large-scale and
top-tier assets within our industry. However, it is the unwavering dedication
of our workforce that truly fuels the productivity of these assets. So, at
this point, I'd like to express our heartfelt gratitude to each and every
member of our team for their tireless efforts and unwavering determination.
I am deeply saddened that 14 of our colleagues were killed serving in the
Armed Forces of Ukraine in 2023, bringing the total to 34 since February 2022.
We bow for each of these brave souls. May they rest in peace and be remembered
for their extraordinary courage and sacrifice. At the date of this
announcement, 641 of our colleagues are serving in the armed forces, equal to
9% of our total workforce
Safety and wellbeing
Throughout the year, Ukraine has continued to face regular attacks from
Russia, influencing how we ensure the wellbeing of our people, who remain our
primary concern. We are committed to ensuring their safety and offering
comprehensive physical and psychological support during these challenging
times. Examples of this include providing protective clothing for those
serving in the armed forces, building bomb shelters for those working in
industrial functions, the provision of meals for those on longer shifts,
permitting those in administrative functions to work from home and offering
childcare in safe bomb shelters. We continue to provide broader assistance
through our humanitarian aid programmes, which have provided housing, food and
medicine, funded the donation of equipment, and support programmes and
initiatives.
Safety must be thought of in new and broader terms. For example, as the war
evolves we are starting to see people return from the armed forces. The
rehabilitation of veterans into the workforce is challenging, especially for
those with physical and mental injuries. We have helped with physical
rehabilitation, including prosthetics, and emotional trauma. This extends to
support for family members too. It is our role to foresee and adapt to these
changes, so that we can continue to keep our people as safe as possible and
support their wellbeing.
Skills
The enlisting of such a large amount of our Ukrainian workforce, particularly
those with technical skills, has had an inevitable impact on our human and
operational capacity. The workforce that remained on site have proven
remarkably agile and flexible, ensuring the continuity of all activities. Our
training centres have risen to the challenge to help people develop new
skills, including internally displaced people joining our workforce, and for
others learning to upskill and cross-skill, to provide the optimum flexibility
across our workforce.
The determination of our employees has proven invaluable in overcoming some
disruptions to vital infrastructure, an inevitable eventuality of Russia's
regular attacks on Ukraine. While we did suffer some downtime as a result of
damage to electricity transformers, roads and bridges, our speedy repairs,
sometimes working with various authorities has meant that operational
disruptions were mostly short lived.
Assets and logistics
Thanks to the resilience of our employees the Company's assets remain intact
and operational. Together, we have continued to seek to preserve Ferrexpo's
underlying value as well as the Company's significance for the Ukrainian
economy.
During the year, we continued to invest in our assets, such as the
construction and commissioning of the press filtration complex, to improve the
quality of our products. Resources have been devoted to undertaking desktop
reviews and engineering analysis. By completing these studies at a time of
considerable constraint, we will not only be in a far better position to
recommission production in the future, but also have more clarity when we
reinitiate upgrade and expansion projects. We will continue with this advanced
preparatory work into 2024.
Limitations on our logistics corridors have again constrained our ability to
export, which forced us to limit production levels. We have been able to
operate one, sometimes two, of our four pellet lines to match the reduced
export capacity available to us. The lack of access to Black Sea export
routes, in particular, sharply reduced opportunities to export product volumes
to the Middle East and Asia, however, this has started to ease since early
2024.
Thanks
There were some Board changes during the year. Ann-Christin Andersen and
Graeme Dacomb resigned from the Board and I would like to express my thanks to
both. I would also like to extend my thanks to Jim North who stepped down as
CEO in April 2023. I had the pleasure over eight years to observe the
tremendous positive impact Jim had on modernising and expanding Ferrexpo. Jim
is both a pragmatic realist and a visionary, and he possesses the rare balance
of being technically brilliant and a skilful diplomat. The war impeded his
objectives to grow Ferrexpo towards an annual net-zero production of
24 million tonnes, but he has left us a road map that we will resume when the
time is right.
Following Jim's departure I assumed responsibility as an interim Executive
Chair, leading the business with an experienced Executive management team whom
in 2024 will celebrate working at Ferrexpo for a collective 100 years, and in
the industry for 150 years. As I said in last year's report when I was
Non-executive Chair, strong governance is essential now more than ever, and
whilst my interim role as an Executive Chair is admittedly a combined role, we
do not believe now is the right time to make any significant management
changes.
Finally, I wish to thank each and every one of our employees as well as our
local communities for the bravery and resolve they have continued to show in
the face of such fierce adversity and express my gratitude to all those
associated with Ferrexpo for their contribution and continued support over the
past 12 months.
Lucio Genovese
Interim Executive Chair, Ferrexpo plc
CHIEF FINANCIAL OFFICER STATEMENT
The challenges of the last year have accelerated our learning and adoption
to make us more agile and responsive to ever changing circumstances.
The cohesion shown by our employees across the business demonstrates a team
that is unified and working together to overcome any challenges that they
face.
Dear Stakeholders,
As we reflect on 2023, another year blighted by Russia's ongoing invasion of
Ukraine, I am proud that we are able to report operating and financial results
that reflect the determination of our people in these difficult times. The
cohesion shown by our employees across the various departments of the business
demonstrates a team that is unified and working together to overcome any
challenge they face. This fortitude has made us stronger and allows us to
understand what our people and operations are capable of.
While the challenges of the past year have been formidable, they have also
accelerated our learning and adaptation, making us more agile and responsive
to the ever evolving situation on the ground. As we started 2023, we once
again faced significant uncertainties surrounding the energy supply in the
winter months, given previous attacks on the electricity grid and other
infrastructure. This compelled us to manage our working capital and stocks
effectively to mitigate the potential risk of blackouts while ensuring we
could fulfil our obligations to customers.
Pleasingly, the team's cohesiveness, coupled with our proactive planning ahead
of time meant we were able to manage through this uncertain start to the year.
As we headed for the second quarter, and bolstered by a strong liquidity
position, we seized market opportunities and restarted an additional
pelletiser, thereby increasing our production capability and flexibility.
With stable production from the first pellet line, and an initial contribution
from the second pellet line, total iron ore pellet production for the first
half was almost 2 million tonnes, a 57% increase compared to the second half
of 2022. Unfortunately, any expectations for further growth in production and
sales in the second half of the year were thwarted by the continued inability
to use the Black Sea for exports, which would have justified us further
expanding capacity for exports to the Middle East and Asia.
Despite these setbacks, we adjusted our operational plans swiftly, leveraging
alternative routes into Europe and other Black Sea ports, to maintain sales
levels while reducing production to align with market conditions. As a
result, we ended the year producing at the logistics capacity available to us
at 4.2 million tonnes of pellet and concentrate production.
In terms of budgeting, we encountered some surprises, notably in logistics
challenges and costs, however iron ore prices were strong in the final quarter
helping to offset these costs. Indeed, for the year as a whole our unit costs
reduced. All in all, thanks to years of investment prior to the war, our
quality assets and premium product range continues to ensure our net cash
position.
It was important that throughout 2023, we maintained a prudent approach to
cash allocation, focusing on key operational and capital projects essential
for sustaining our business amid volatile wartime conditions.
The Group operates in an evolving political, fiscal and legal environment in
Ukraine and the risks associated with this heightened further in 2023 and
early 2024. As result, the Group has recognised provisions totalling US$128
million, including US$124 million for one specific ongoing legal dispute. See
details in Note 2 Basis of preparation and Note 14 Commitments, contingencies
and legal disputes to the Consolidated Financial Statements in respect of the
possible impact on the Group's business activities.
Looking ahead to the start of the new year, we remain cautiously optimistic.
In particular, logistics costs have improved, providing us with a favourable
environment to capitalise on market opportunities.
As we navigate the complexities of operating in a dynamic geopolitical
landscape, our focus remains on building resilience, optimising our assets,
and enhancing operational flexibility. Our high quality assets have been
instrumental in providing stability amidst uncertainty, underscoring the
importance of prudent investments made in the past.
In conclusion, while the road ahead will no doubt continue to present its
share of challenges, we are confident in our ability to navigate through
uncertainty and are prepared to continue delivering the embedded value in our
quality assets to our shareholders. We appreciate your continued support and
trust as we navigate these uncertain times.
Nikolay Kladiev
Chief Financial Officer, Ferrexpo plc
OPERATING DURING A TIME OF WAR
The full-scale invasion of Ukraine commenced on 24 February 2022. With all
our production based in Ukraine, our workforce and operations
are affected by the ongoing war. In this section we explain how the war
is affecting our people and how we are managing the business at this time.
People
The safety and wellbeing of our people is paramount, especially during a time
of war. At the end of 2023, our Ukrainian workforce comprised 6,432 employees
and 933 contractors. In addition, 641 colleagues are currently serving in the
Armed Forces of Ukraine, whom we support on an ongoing basis with safety
equipment, clothing and other essentials throughout the time that they are in
the military.
As the war progresses, the availability of people and skills is becoming more
complex. More members of our workforce are being conscripted to join the armed
forces. Ferrexpo employees are attractive candidates because they possess the
technical and mechanical skills that the army needs, the very skills that are
critical to our production processes.
During 2023, more than 700 employees resigned or left our business. Although
our operations are over 250 kilometres from the front lines, many have chosen
to leave the region and move to the far west of Ukraine or abroad. This is in
addition to the 900 or so that left in 2022.
The business continues to carry a large workforce while operating at a reduced
capacity. This means that to date there has been the sufficient amount of
people to continue operations. As the business continues to restore idled
capacity, many employees are back to a full working week, with some already
working overtime. We are also recruiting more people, including younger and
older people, and more women. At our Ferrexpo Technical Expertise Centre,
multiple initiatives have been established to upskill, cross-skill and reskill
employees, including fast tracking vocational training and qualifications
programmes.
In 2023, 67 colleagues were demobilised from the armed forces, 46 of whom have
returned to work. During the year, we expanded our support for veterans to
include physical rehabilitation and psychological support. Veterans unable to
return to their previous functions due to factors such as noise and vibration,
are offered the opportunity to train and qualify for other more suitable
roles.
Local communities
During the early stages of the war, it was clear that the local communities
where we operate needed humanitarian support. Although many people left,
displaced people fleeing the war in the eastern regions passed through, and in
some instances, settled in the Poltava region. In early 2022 the Ferrexpo
Humanitarian Fund was established, which combined with associated CSR funding
at the date of this report has donated US$25 million to foster over 100
individual programmes and initiatives.
As the war protracts, the needs of society are changing. In the early stages
of the war, the immediate focus was to help house and feed people. This
situation has settled now. Indeed, of the many new people that settled in the
region, 102 have taken employment at Ferrexpo.
The focus of humanitarian support has evolved. Presently, we are committed to
supporting our colleagues actively serving in the armed forces, as well as
aiding in the rehabilitation of veterans. Additionally, contributions are
directed towards addressing critical national emergencies, such as providing
assistance to the residents of the Kherson region in the aftermath of the Nova
Kakhovka Dam explosion.
In Horishni Plavni, the town centred on our operations, we continue to offer
community support through commitments to cultural and social programmes,
education and medical facilities, and infrastructure. This support also
includes programmes and initiatives that support sports, social clubs and
arts, along with physical and mental health.
Operations and logistics
Our operations are large in scale. The process flow is relatively simple:
mining, processing and beneficiation, with considerable built in production
flexibility at each stage.
During 2023, reduced logistics availability forced us to reduce production to
a roughly a third of our full capacity.
In addition to people, our operations rely on many inputs, including, energy,
chemicals and equipment. Since the start of the full-scale invasion, we have
learnt to adapt to ever-changing conditions. This can mean finding new
suppliers as our traditional suppliers have suffered from the war, or
where logistics routes are no longer available.
Before the full-scale invasion, Ferrexpo transported its products using its
own fleet of rail wagons and barges to customers in Europe, or via rail to
Ukrainian Black Sea ports for onward transportation by ship, primarily from
the Group's joint venture facilities at the Port of Pivdennyi. Access to
Ukrainian Black Sea ports was severely restricted in 2023, with only a handful
of vessels leaving with cargoes of iron ore towards the end of the year.
In response, the Group sales strategy focused on premium European customers
that could be reached by rail or a combination of rail and river barge using
the Company's owned barge fleet company First-DDSG Logistics. Another export
route was later developed by rail to the Ukrainian border, and onward
transportation by barge through inland waterways to a Black Sea port in
another country.
The business learnt to be nimble and adapt to the many challenges it faced in
2023. Altering mining and processing to produce different products to meet
customer needs, sourcing supplies of critical inputs, managing inventories to
reduced logistics capacity, and finding alternative routes to supply
customers.
The determination of the workforce, the flexibility of our operations, and our
premium products sold to premium customers are our strengths, and explain how
we are continuing to operate during a time of war.
Remembering those we have lost
Tragically, 14 colleagues were killed serving in the armed forces during 2023,
bringing the total to 34 since February 2022.
2023 2022
Dmytro Belikov, age 32 Yuriy Bilenko, age 38
Oleksiy Bridnya, age 33 Serhii Buhuev, age 42
Andriy Chernya, age 37 Oleksiy Bulba, age 45
Oleksandr Chugainov, age 54 Serhiy Chemkayev, age 44
Andrii Dukanych, age 33 Maksym Chystyakov, age 24
Serhiy Kharlamov, age 57 Volodymyr Holub, age 54
Serhii Kondyk, age 31 Oleksiy Khanilevych, age 24
Denys Koshovyi, age 30 Rostyslav Ledovskyy, age 25
Kostyantyn Orchikov, age 30 Dmytro Lysachenko, age 28
Oleksandr Scherbakov, age 28 Roman Lytvynenko, age 30
Denys Svyrydov, age 50 Vitaliy Med, age 40
Yaroslav Taran, age 50 Ihor Novohatniy, age 39
Oleksiy Yatskov, age 36 Oleksiy Nazimov, age 25
Anatoliy Zakupets, age 37 Volodymyr Pavlenko, age 43
Petro Perovskiy, age 25
Andrii Petrenko, age 49
Serhii Pizniy, age 34
Oleksandr Smyrnov, age 32
Vladyslav Solomko age 32
Oleksandr Terlenko, age 48
Slava Ukraini.
OPERATIONAL REVIEW
During 2023, the Group maintained production, operating two mines and up to
two of four pelletiser lines, achieving production of 4.2 million tonnes.
As a large-scale premium iron ore pellet and concentrate exporter, access to
logistics is critical. Due to the ongoing war in Ukraine, our activities in
2023 reduced according to available export logistics. Attacks on Ukraine's
electricity energy and transport infrastructure also continued, at times
limiting our ability to import supplies, and produce and export our products.
Health and safety
2023 was the third consecutive year that we have reported zero fatalities at
our operations. For the year, the Group reported a rolling 12-month LTIFR of
0.32, below the historic five-year trailing average of 0.69.
Reserves and resources
Ferrexpo controls licences covering a series of contiguous deposits located
along the Kremenchuk Magnetic Anomaly, a magnetite deposit that extends for
more than 50 kilometres. The Group has mines on three deposits and additional
licences for deposits immediately to the north of our current operations.
Across the Group's three active mines, JORC-compliant Ore Reserves are
estimated to be 1,615 million tonnes of iron ore, with an iron ("Fe") content
of 32% Fe (2022: 1,627 million tonnes grading 32% Fe). The JORC-compliant
Mineral Resource estimate across our three mines is 5,737 million tonnes of
iron ore, with an iron ("Fe") content of 32% Fe (2022: 5,749 million tonnes
grading 32% Fe), which is inclusive of Ore Reserves.
In addition, at a number of exploration properties immediately north of our
active mines, we have exploration stage properties with a combined non-JORC
compliant Mineral Resource estimate of 14 billion tonnes of iron ore, grading
34% Fe (collectively referred to as the "Northern Deposits").
Mining activities
Throughout the year, we continued to scale our mining operations according to
the processing plant ore requirements, determined by logistics availability.
Mining activities focused on the Poltava and Yeristovo Mines, with volumes
totalling 36 million tonnes (2022: 55 million tonnes). Different sections of
the pits were mined depending on the concentrate and pellet quality required
by individual customers.
Processing activities
Reflecting reduced logistics availability, processing volumes decreased by 33%
during 2023 to 12 million tonnes (2022: 17 million tonnes).
In 2022, the Group produced 353,000 tonnes of DR pellets, equivalent to 6% of
total output. No DR pellets were produced in 2023, however, sales of 100,000
tonnes from stocks were achieved. Nevertheless, during this challenging time
for the country, the work on DR pellets continues, in particular, we are
improving our pellet production technology by finding a technical solution for
the coating of our pellets. This was made possible through the initiative of
internal experts united by a common goal to enhance the quality of final
products. A temporary solution for coating of FDP pellets has already been
implemented at Pellet Lines 1 & 2. Now we are elaborating a permanent
solution for all four pelletising lines to install the system that will coat
FDP pellets with a mixture tailored to customer requirements. The development
of design documentation is underway. Due to these projects, steel customers
are expected to improve their technological manufacturing processes.
Following Russian attacks on Ukraine's energy infrastructure during 4Q 2022,
the Group was forced to temporarily cease production for several weeks. In
preparation for similar attacks in 4Q 2023, throughout 2Q and 3Q 2023, the
Group built stocks of finished pellets at its operations and at various
staging points across its logistics network in Ukraine and overseas so that it
would be able to continue supplying its customers. Fortunately, there were far
fewer attacks in 4Q 2023, so the Group was able to reduce production and
drawdown from it stocks to supply customers.
Growth programme
The Group's expansion and decarbonisation programmes remain longer-term
objectives. The initial Wave 1 programme to add 3 million tonnes production
capacity a year continues to be analysed for implementation after the war
ends. Desktop work, including optimisation studies, is ongoing, however
wherever possible investment has been deferred. Nevertheless, despite the
ongoing war, various capital expenditure projects aimed at improving product
quality and efficiencies advanced. For example, in July 2023 the Company
installed and implemented the first stage of modern press filtration
technology at the pellets workshop. This technology helps to strengthen
finished pellets, whilst increasing productivity and reducing iron losses,
which results in costs savings and a reduction in Scope 1 emissions.
Outlook
Logistics availability will continue to determine sales and production during
2024. The Group intends to continue the operation of two pelletiser lines.
Depending on the availability to export through different Black Sea ports, the
opportunity to expand production further with the restart of the third
pelletiser line remains. This will be contingent on sufficient supply of
consumables, a balanced and skilled workforce, and logistics capacity. During
the first phase of the war in 2022, the Group responded quickly to protect its
employees and protect the integrity of its assets. During 2023, the Group has
become more agile and flexible, and was able to deliver to its closest
customers. Whilst the Group cannot with any certainty offer production and
cost guidance for 2024, there are some opportunities to enhance efficiencies,
production and sales.
Operational performance
(000't unless otherwise stated) 2023 2022 YoY change
Production
Iron ore mined 12,112 18,837 (36%)
Strip ratio 2.0 1.9 (3%)
Iron ore processed 11,576 17,375 (33%)
Concentrate production 5,314 8,025 (34%)
Pellet production 3,845 6,053 (36%)
- Direct reduction pellets (67% Fe) - 353 (100%)
- Premium blast furnace pellets (65% Fe) 3,845 5,700 (33%)
Commercial concentrate production 307 124 (148%)
Iron ore sales
- Pellets 3,868 6,055 (36%)
- Concentrate 306 128 +140
- Total products sold 4,174 6,183 (32%)
JORC-Compliant Ore Reserves and Mineral Resources 1
Proven Probable Total
JORC-compliant Ore Reserves Mt Fe Fe Mt Fe Fe Mt Fe Fe
total
magnetic
total
magnetic
total
magnetic
%
%
%
%
%
%
Gorishne-Plavninske-Lavrykivske ("GPL") 301 33 26 818 31 23 1,119 32 24
Yerystivske 208 30 25 288 33 26 496 32 26
Total 509 32 26 1,106 32 24 1,615 32 25
Measured Indicated Inferred Total
JORC-compliant Mineral Resources Mt Fe Fe Mt Fe Fe Mt Fe Fe Mt Fe Fe
total
magnetic
total
magnetic
total
magnetic
total
magnetic
%
%
%
%
%
%
%
%
Gorishne-Plavninske-Lavrykivske ("GPL") 467 35 29 1,616 30 22 744 32 24 2,827 31 24
Yerystivske 257 35 29 569 34 27 382 33 27 1,208 34 27
Bilanivske 336 31 24 1,149 31 23 217 30 21 1,702 31 23
Total 1,060 34 27 3,334 31 23 1,343 32 24 5,737 32 24
MARKET REVIEW
Stronger than forecast iron ore prices supported reduced sales volumes.
Benchmark iron ore prices gained 15% over the year and ended 2023 at an
18-month high. Pellet premiums, however, remained weak throughout much of the
year, improving only in the last few months, which bodes well for the year
ahead.
Ferrexpo produces premium iron ore pellets with a minimum 65% Fe content,
which are priced off quoted market benchmarks, and include a pellet premium
that takes into account quality specifications.
The 65% Fe iron ore fines price opened the year at US$131 per tonne. As China
emerged from strict pandemic related restrictions and in anticipation of
stocking ahead of the peak Chinese construction season, prices rose to a peak
US$149 per tonne in 1Q 2023.
Actual demand, however, did not meet expectations, and consequently prices
fell in 2Q 2023 to a low of US$110 per tonne.
Uncertainty prevailed through the remainder of 2Q and into 3Q 2023 as the
market responded to short-term macro-economic and construction industry
signals. This resulted in volatile prices, oscillating between US$110 and
US$135 per tonne.
A clearer and more positive picture emerged in 4Q 2023 as China asserted its
pursuit of accelerated economic growth dependent on steel-intensive sectors.
At this time, market supply was tight with inventories at historically low
levels. Therefore, a strong rally in prices ensued in 4Q 2023, increasing over
20% from October 2023 to end the year just shy of US$150 per tonne.
The price of iron ore is very dependent on China. In 2024, government policy
supporting industrial sectors has stimulated demand for steel. However,
certain risks remain. The margins for manufacturing steel are still low, due
to weak demand for rebar, used in construction.
However, market commentators are forecasting flat supply for 2024, with
limited growth from the largest producers, Australia and Brazil.
During the first full year of war, the Group achieved sales of 4.2 million
tonnes. With no access to the Ukrainian Black Sea ports exports were
constrained to by that limited yet available rail capacity for exports direct
to Europe and to alternative Black Sea ports. This explains why sales shrank
by 30% in 2023, although it should be noted that sales to Europe were more
resilient falling only by 15%.
High-grade premiums
The premium for higher grade 65% Fe iron ore fines contracted by a third in
2023 to US$12 per tonne. This is typical when there is weakness in the steel
market as producers prefer lower cost iron ore grades to preserve their
margins. However, premiums improved marginally during December 2023 due to
disruptions to global supply. Longer term, as steel production is forced to
decarbonise, it is expected that margins should widen further because higher
grade ores generate less emissions in steel making.
Iron ore pellet market review & outlook
Iron ore pellets are preferred by steelmakers because they can increase
productivity and lower emissions. This is mainly because with pellets, there
is no need for a coal intensive process in steel making called sintering.
In 2023, the iron ore pellet market experienced some volatility, though
remained robust. Overall pellet supply globally grew by 1%. Brazilian
producers recommissioned capacity that was idled following tailings disasters.
The increase in exports from Brazil offset supply disruptions from Ukraine and
Russia. Because of Chinese steel production margins, there was less incentive
to consume pellets and, consequently, pellet premiums deteriorated throughout
the year.
Looking ahead to 2024, the recovery of iron ore prices due to the Chinese
government supporting economic growth, a recovery in European demand, and
ongoing supply constraints, market commentators are forecasting an improvement
in steel margins and, therefore, pellet demand.
By the end of 2023, several blast furnaces in the region had restarted, whilst
a large European producer was forced to suspend exports due to infrastructure
constraints.
Therefore, in an improving pricing environment, an increase in demand for
Ferrexpo's pellets is being observed.
Market development efforts
Ferrexpo has continued its market development efforts despite the ongoing war.
In 2023, Memorandums of Understanding were signed with several premium steel
makers in Europe and Asia for the supply of high-grade direct reduction ("DR")
pellets to help them transition to lower carbon steel making.
DR pellet demand growth is forecast to significantly outpace traditional
pellets and therefore one of our strategies is to focus on this premium
product. We are collaborating with a variety of potential customers around the
world to test our product suitability and tailor DR pellet specifications to
suit each customer's technical requirements. These include reducing silica
content (gangue elements), coating (to improve physical interaction in the DR
module), and improving on pellet compression strength.
Summary of industry key statistics
(All figures US$/tonne, unless stated otherwise) 2023 2022 YoY change
Iron ore fines price (62% Fe, CFR China) 2 120 120 -
Iron ore fines price (65% Fe, CFR China)(1) 132 139 (5%)
Average 65% Fe spread over 62% Fe(1) 12 19 (34%)
Atlantic (blast furnace) pellet premium(1) 45 72 (38%)
Direct reduction pellet premium(1) 57 87 (34%)
C3 freight (Brazil - China) 3 21 24 (14%)
C2 freight (Brazil - Netherlands)(2) 10 13 (20%)
Global steel production (million tonnes) 4 1,850 1,832 +1%
FINANCIAL REVIEW
Cash positive operations during a time of war have allowed for continued
controlled investment whilst maintaining a stable net cash position.
Summary
The ongoing war in Ukraine continued to affect the Group's operational and
financial performance in 2023. Taking into account logistics and energy
limitations throughout 2023, production volumes were aligned with sales
potential to manage the working capital and maintain a strong net cash
position. The general market and price environment was favourable for iron ore
products, whilst energy prices developed differently to 2022 (higher
electricity price, and lower gas price), the Group's operating cash flow
generation declined compared to the previous year, which included two months
of sales prior to Russia's full-scale invasion.
Despite the ongoing war, we invested US$101 million into our assets in Ukraine
in 2023 and were able to finish the year with a net cash position of US$108
million as at 31 December 2023.
Key Financial Performance Indicators
US$ million (unless stated otherwise) 2023 2022 YoY change
Total pellet production (kt) 3,845 6,053 (36%)
Sales volumes (kt) 4,174 6,183 (32%)
Iron ore price (65% Fe Index, US$/t) 5 132 139 (5%)
Revenue 652 1,248 (48%)
C1 cash cost of production(A) (US$/t) 76.5 83.3 (8%)
Underlying EBITDA(A) 130 765 (83%)
Underlying EBITDA(A) margin 20% 61% (41pp)
Debt servicing - 42 (100%)
Capital investment(A) 101 161 (37%)
Closing net cash 108 106 +2%
Revenue
Group revenues declined by 48% to US$652 million in 2023 (2022: US$1,248
million), mainly due to restricted access to export routes. Consequently,
sales volumes were 32% lower at 4.2 million tonnes in 2023 (2022: 6.2 million
tonnes).
In addition to lower sales volumes, Group revenue in 2023 was affected by a 5%
decline in the annual average benchmark iron ore price (65% Fe) and a 28%
decline in the annual average pellet premium. On the positive side, lower
rates for international freight improved the Group's net back realised prices
for sales under the International Commercial Terms ("Incoterms") of FOB ("Free
on Board"). However, due to lack of access to Ukrainian Black Sea ports, the
Group's FOB sales were lower than in 2022, which included almost two months of
access to the port of Pivdennyi before the war began.
Since the beginning of the war, the Group's export routes have predominantly
involved either the railing of products direct to European customers, or the
railing of iron ore pellets to the Group's barging subsidiary on the River
Danube for delivery to specific customers in Europe, or by barge to other
non-Ukrainian Black Sea ports, for onward sale by ship. This incurs higher
logistics costs and a longer cash conversion cycle. See 'Market Review'
section for more information.
C1 cash cost of production(A)
Cost of sales in 2023 totalled US$362 million, compared to US$582 million in
2022. The decrease predominantly results from the lower pellet production
volume, which decreased from 6.1 million tonnes in 2022 to 3.8 million tonnes
(-38%). The Group's production volume is currently aligned to accessible
logistics capacity to minimise the working capital outflow. The C1 cash cost
of production(A) ("C1 costs") reflects the Group's operating costs for the
production of iron ore pellets from its own ore, with a breakdown of the
different cost components shown in the table below.
Additionally, there was a positive effect from the decrease of the Group's
average C1 costs, decreasing to US$76.5 per tonne, compared to US$83.3 per
tonne in 2022 (-8%). The C1 costs per tonne also depends on the Group's
production volumes. The change in 2023 is predominantly driven by the effects
of the significant devaluation of the local currency in the second half of
2022, the positive net effect of lower gas prices and higher electricity and
additional cost saving initiatives, which were partially offset by the
negative effects from the fixed cost absorption as the Group operated its
assets below nameplate capacity.
The main C1 costs drivers are the price of electricity, natural gas and diesel
in Ukraine being outside of the Group's control, which collectively represent
48% (2022: 49%) of the total cost base as presented in the table below.
Following a sharp increase in global energy prices during 2022, the average
Brent price for oil in 2023 and the average price for natural gas decreased by
17% and 68% respectively in US dollar terms, compared to the 18% and 67%
increases recorded in 2022. The average electricity price in Ukraine increased
in 2023 by 12% in US dollar terms, peaking at US$112 per megawatt-hour ("MWh")
in November 2023, compared to an average of US$83 per MWh in 2022.
Another important component of the Group's C1 costs that is outside of the
Group's control are the royalties in Ukraine, which accrue and are paid based
on a tiered system, which came into effect in January 2022. Based on this
regime, royalties are calculated based on the benchmark index price for a
medium-grade (62% Fe) iron ore fines price and computed based on the cost of
different iron ore products. The rate varies between 3.5%, 5.0% and 10%
depending on benchmark index price for 62% Fe. The total royalty expense
totalled US$25 million in 2023, compared to US$41 million in 2022, mainly
driven by the lower production volume, but also by the effect of lower index
prices during some periods in 2023.
Group operating costs, denominated in Ukrainian hryvnia ("UAH"), account for
approximately two thirds of the Group's C1 costs. Consequently, changes in
hryvnia to dollar rates can have a significant impact on the Group's operating
costs, including the C1 costs. The UAH depreciated in the last quarter of 2023
from 36.569 to 37.982 to the US dollar as of 31 December 2023, resulting in a
significantly lower effect on the Group's C1 costs than in the previous year.
In line with previous years, the Group's C1 costs represent the cash cost of
the production of iron pellets from own ore ('to the mine gate'), divided by
production volume from own ore. This excludes noncash costs such as
depreciation, pension costs and inventory movements, as well as the costs of
purchased ore, concentrate and gravel. The C1 cash cost of production (US
dollars per tonne) is regarded as an Alternative Performance Measure ("APM").
Breakdown of C1 costs
C1 costs in 2023 were down by 8% in 2023 to US$76.5 per tonne, with this
decrease principally related to the reduction in the unit cost of energy such
as natural gas and fuel (principally diesel), partially offset by higher
electricity costs in Ukraine. The table below shows the breakdown and change
of the Group's C1 costs, with energy-related costs comprising 48% of the total
C1 costs (2022: 49%).
2023 2022 YoY change
Electricity 32% 22% +10pp
Natural gas and sunflower husks 9% 19% (10pp)
Fuel (including diesel) 7% 8% (1pp)
Materials 8% 6% +2pp
Personnel 11% 9% +2pp
Maintenance and repairs 16% 20% (4pp)
Grinding media 6% 6% (0pp)
Royalties 9% 9% +0pp
Explosives 2% 2% +0pp
The considerable reduction of the proportion for natural gas and sunflower
husks, driven by a significant decrease of the prices for gas on the global
markets, was offset by the increase of the proportion for the electricity,
driven by higher prices in Ukraine. See section "C1 cash cost of production"
for further information on price changes. The increase of the proportion for
materials and personnel is the net effect from the flat fixed component and
the higher local inflation, partially offset by the effects from the
devaluation of the local currency in Ukraine. In light of the ongoing war in
Ukraine resulting in lower production activities, the Group scaled further
back on the maintenance and repair programme for its mining and processing
equipment.
Selling and distribution costs
Total selling and distribution costs decreased to US$161 million in 2023
(2022: US$236 million), mainly reflecting lower sales via seaborne markets due
to the unavailable Black Sea ports in Ukraine, but also due to the overall
lower sales volume in 2023. As a result, CFR sales volume decreased to 168
thousand tonnes, compared to 1,218 thousand tonnes in 2022, reducing the
international freight costs from these sales by US$51 million. However,
international freight costs in 2023 were also affected by higher freight costs
for the export of some of the Group's products through an alternative Black
Sea ports, with some of the services provided by the Group's barging
subsidiary First-DDSG.
Seaborne logistics routes are generally the lowest cost and most efficient way
for delivering the Group's products to its customers. Since the full-scale
invasion of Ukraine, the Group has established new logistics routes and
relationships with alternative logistics providers and port operators. These
routes rely heavily on rail, where capacity is restricted and demand is high
from other industries, and also on river barges, which combined are more
expensive. Although the situation generally improved in 2023 compared to 2022,
the Ukrainian rail network continues to be under pressure to handle goods
otherwise exported via Ukraine's Black Sea ports. This is further exacerbated
by the long journey time through Ukraine's western borders. Whilst improving,
the journey time is still slightly longer than before the war, resulting in a
negative impact on the Group's cash conversion cycle.
Applicable rail tariffs remained unchanged in 2023, after a 70% increase in
July 2022 for 20 types of cargo - even when using the Group's own rail wagons.
The effect from the higher tariffs was however partially offset in US dollar
terms due to the significant depreciation of the local currency in July 2022.
General and administrative expenses
General, administrative and other expenses in 2023 remained stable at US$64
million compared to 2022. Positive impacts from effective cost management and
savings have, however, been offset by higher legal costs relating to Group's
ongoing legal disputes. See Note 14 Commitments, contingencies and legal
disputes to the Consolidated Financial Statements for further information on
the ongoing legal challenges and disputes of the Group in Ukraine.
Other operating expenses
Other operating expenses decreased from US$310 million in 2022 to US$29
million in 2023, predominantly due to a non-cash impairment loss of US$254
million recorded in the first half of 2022 on the Group's non-current
operating assets, including property, plant and equipment, goodwill and
intangible assets, and other non-current assets. The recorded impairment loss
in 2022 resulted from the Group's lower cash flow generation and higher
war-related discount rate. The Group's non-current operating assets have been
tested again for impairment as at 31 December 2023 based on the Group's latest
long-term model. The impairment test performed did not result in an additional
impairment loss or a partial or full reversal of the recorded impairment loss.
Currency
Ferrexpo prepares its accounts in US dollars. The functional currency of the
Group's operations in Ukraine is the Ukrainian hryvnia, as approximately two
thirds of the Group's operating costs are historically denominated in local
currency.
As a result of the significant balance in foreign currencies currently held by
the NBU, the local currency remained relatively stable until the end of 2023,
compared to a depreciation of the Ukrainian hryvnia by 34% during the
financial year 2022. The Ukrainian hryvnia remained unchanged at 36.568 to the
US dollar from 21 July 2022 to 3 October 2023, when the National Bank of
Ukraine ("NBU") lifted the peg in place since the devaluation of the local
currency from 29.255 to 36.568 (34%). With a continuation of Martial Law
during 2023, the NBU has maintained significant currency and capital controls
in Ukraine. These measures limit the possibility to convert balances in local
currency into US dollars, and the ability to transfer US dollars between
onshore and offshore accounts of the Group.
Ukrainian hryvnia vs. US dollar 6
Spot 15.04.24
39.399
Opening rate 01.01.23
36.568
Closing rate 31.12.23
37.982
Average 2023
36.574
Average 2022
32.342
Operating and non-operating foreign exchange gains/losses
Given that the functional currency of the Ukrainian subsidiaries is the
hryvnia, a depreciation of the hryvnia against the US dollar results in a
foreign exchange gains on the Group's Ukrainian subsidiaries' US dollar
denominated receivable balances from the sale of pellets. The operating
foreign exchange gains were US$31 million in 2023 compared to a gain of US$339
million in 2022, when the hryvnia depreciated by 34%.
As for the operating foreign exchange gains, the non-operating foreign
exchange losses are mainly due to the depreciation of the hryvnia against the
US dollar. The non-operating foreign exchange loss decreased from US$63
million in 2022 to US$8 million in 2023 and is primarily related to the
translation of US dollar denominated loan payable balances of the Group's
Ukrainian subsidiaries.
Underlying EBITDA
Despite the loss for the year, underlying EBITDA remained positive in 2023,
but decreased by 83% to US$130 million, mainly due to lower operational
performance as a result of the war and lower operating foreign exchange gains
in 2023 compared to 2022. The effect of US$131 million of provisions
recognised as at 31 December 2023 for ongoing legal disputes is considered as
an exceptional item and is therefore excluded from the Group's underlying
EBITDA. The Group's underlying EBITDA includes operating foreign exchange
gains of US$31 million in 2023 compared to US$339 million in 2022. These
foreign exchange differences are predominantly dependent on the fluctuation of
the exchange rate of the Ukrainian hryvnia against the US dollar.
Additionally, the decrease of the underlying EBITDA is also affected by a
decrease of the sales volumes by 32% and realised prices by 21%, driven by
lower benchmark iron ore fines price and pellet premiums in 2023, partially
offset by an 8% decrease in C1 costs.
Net finance expense
The Group's finance expenses remained stable at US$5 million compared to US$4
million in 2022. The vast majority of the expense is related to the calculated
interest on the Group's pension scheme, without any cash outflow effects, and
to bank charges. With the exception of lease liabilities, the Group does not
have any outstanding interest-bearing loans and borrowings, therefore there
are no interest expenses incurred on finance facilities.
At the same time, interest income increased five-fold to US$5 million compared
to US$1 million in 2022 as the Group invested the available funds in deposits
due to the rise in interest rates on the global financial markets.
Income tax
In 2023, the Group's income tax expense was US$16 million (2022: US$119
million). The effective tax rate of the financial year 2023 was 26.1%, before
the effect of the recognised provisions for legal disputes in the amount of
US$131 million in the consolidated income statement, compared to 35.0% for the
comparative year ended 31 December 2022. The result of the financial year 2023
was affected by the recognition of the aforementioned provisions for legal
disputes in Ukraine, which are not tax deductible and an additional allowance
of US$10 million on deferred tax assets recognised by the Group's two major
subsidiaries in Ukraine. The effective tax rate in the comparative year was
predominantly driven by an impairment loss of US$254 million on the Group's
non-current operating assets, which is not tax deductible in Ukraine.
In 2023, the income tax paid by the Group totalled US$13 million (2022: US$110
million), of which US$12 million was paid in Ukraine (2022: US$91 million).
The income tax paid includes withholding tax considered as income tax paid.
Items excluded from underlying earnings
The underlying EBITDA in the comparative year was adjusted by the impairment
loss of US$254 million recorded in 2022 as a result of a reduction in the
carrying value of the Group's assets in Ukraine due to the war.
The impairment test performed as of 31 December 2023 did not result in an
additional impairment loss or a partial or full reversal of the recorded
impairment loss. See Note 10 Plant, property and equipment to the
Consolidated Financial Statements for more information.
As announced on 29 January 2024, following subsequent and unexpected events in
Ukraine in relation to a claim against one of the Group's Ukrainian
subsidiaries, the Group recorded a provision for legal disputes in the amount
of US$124 million (UAH4,727 million). The provision is in respect of a
contested sureties claim lost in a court of appeal in Ukraine. The Group's
subsidiary in Ukraine filed a cassation appeal to the Supreme Court of Ukraine
and the first hearing scheduled for 20 March 2024 did not take place as the
presiding judge recused himself. Following the appointment of a new panel of
judges, on 1 April 2024 the Supreme Court suspended the possible enforcement
of the decision of the court of appeal. A Supreme Court hearing on 17 April
2024 considered primarily procedural matters and the next court hearing is
scheduled for 27 May 2024. Further to that, the Group also recognised a
provision in the amount of US$4 million (UAH136 million) following a negative
decision from a court of appeal in respect of a claim made by two former
minority shareholders of one of the Group's major subsidiaries in Ukraine. The
effect of the total provisions recognised as at 31 December 2023 in the amount
of US$131 million for the above-mentioned legal disputes is considered as an
exceptional item and is therefore excluded from the Group's underlying EBITDA.
Loss for the year
The Group's result for the financial year 2023 is a loss of US$85 million,
mainly resulting from the recognition of provisions for ongoing legal
proceedings and disputes in Ukraine totalling US$131 million as at 31 December
2023. Without the effect from these provisions, the result for the financial
year 2023 would have been a profit of US$46 million, compared to US$220
million in 2022, reflecting a 82% decrease in the Group's operating profit as
a result of the ongoing war, as well as significantly lower net foreign
exchange gains of US$23 million in 2023, compared to US$276 million in 2022.
Cash flows and cash and cash equivalents
Operating cash flow before changes in working capital decreased by 76% to
US$103 million compared to US$434 million in the previous year. The lower
operating cash flow generation is driven by the Group's lower operating
profit. There was an overall working capital inflow of US$13 million compared
to an outflow of US$20 million in 2022. The inflow in 2023 largely reflects
the increase of the trade receivable balance due to increased sales volumes in
the last two months of 2023, the significant decrease of the inventories as a
result of the Group's destocking activities and positive effect from regular
VAT refunds received in 2023, resulting in a significant decrease of the
outstanding VAT balance in Ukraine as at 31 December 2023.
The lower net cash flow from operating activities of US$101 million, compared
to US$301 million in 2022, was considered by the Group in its capital
allocation, including capital expenditure and shareholder returns, and
exceptional bail payments for four managers of one of our subsidiaries in
Ukraine in 2023. See sections below for further information. Despite the lower
overall cash flow generation, the Group managed to maintain its closing
balance of cash and cash equivalents at US$115 million as of 31 December 2023,
compared to US$113 million as of 31 December 2022.
The balance of cash and cash equivalents held in Ukraine amounts to US$11
million as at 31 December 2023 (31 December 2022: US$45 million). Following
the adopted Martial Law in Ukraine, the National Bank of Ukraine ("NBU") has
introduced significant currency and capital control restrictions in Ukraine.
These measures are affecting the Group in terms of its cross-border payments
to be made, which are restricted and may be carried out only in exceptional
cases. For further information see Note 14 Commitments, contingencies and
legal disputes to the Consolidated Financial Statements.
Capital investment
Capital expenditure in 2023 totalled US$101 million compared to US$161 million
in 2022. Of the total amount spent in 2023, sustaining and modernisation
capital expenditure was US$31 million (2022: US$57 million), covering the
activities at all of the Group's major business units. Due to the ongoing
operational and logistics constraints as a result of the ongoing war in
Ukraine, the Group further reduced the level of its investments in sustaining
capital expenditure projects, by reviewing and optimising the level and timing
of its repair activities.
The Group also reconsidered the timing of its strategic development projects
resulting in a reduction of the related capital expenditure to US$70 million,
compared to US$104 million in 2022. As such, major projects advanced in 2023
include US$22 million spent on stripping activities for future production
growth and US$13 million spent on the enhancement of the Group's press
filtration complex, which will help raise pelletising capacity in the near
term once operations return to full capacity. The Group continued to invest
US$22 million in the concentrator and pelletiser projects as part of the Wave
1 Expansion Programme to manage previously entered commitments and also spent
US$3 million in the development and exploration of the Belanovo deposit, as
well as US$1 million in a hydrolysis plant for the trial of hydrogen use as a
fuel in the Group's pelletiser.
Considering the lower cash flow generation no ordinary dividends were paid
during the 2023 calendar year (2022 total: 13.2 US cents or US$155 million).
The Group has a shareholder returns policy outlining the Group's intention to
deliver up to 30% of free cash flows as dividends in respect of a given year.
The Group has announced on 18 January 2024 an interim dividend of 3.3 US cents
for the financial year 2023, reflecting that the Group performed well in the
second half of 2023, which was due for payment to the shareholders on 23
February 2024. Following subsequent and unexpected events in Ukraine relating
to a claim against one of the Group's Ukrainian subsidiaries, the Group
announced on 20 February 2024 the decision to withdraw this interim dividend.
Debt and maturity profile
The Group enters into arm's length transactions with entities under the common
control of Kostyantin Zhevago and his associates. All these transactions are
considered to be in the ordinary course of business.
During the financial year 2023, the Group made bail payments totalling US$15
million on behalf of four members of the top management of one of the Group's
subsidiaries in Ukraine in respect of various legal actions and ongoing court
proceedings initiated by certain governmental bodies against the Group's
subsidiaries and members of the top management in Ukraine. See also below
under Contingent liabilities and legal disputes and Note 15 Related party
disclosures to the Consolidated Financial Statements for further details.
Related party transactions
The Group enters into arm's length transactions with entities under the common
control of Kostyantin Zhevago and his associates. All these transactions are
considered to be in the ordinary course of business.
During the financial year 2023, the Group made bail payments totalling US$15
million on behalf of four members of the top management of one of the Group's
subsidiaries in Ukraine in respect of various legal actions and ongoing court
proceedings initiated by certain governmental bodies against the Group's
subsidiaries and members of the top management in Ukraine. See also below
under Contingent liabilities and legal disputes for further details.
For further information, please see Note 15 Related party disclosures to the
Consolidated Financial Statements.
Contingent liabilities and legal disputes
The Group is exposed to risks associated with operating in a developing
economy during a time of war and the current circumstances facing the Group's
controlling shareholder. As a result, the Group is subject to various legal
actions and ongoing court proceedings initiated by different government
agencies in Ukraine. There is a risk that the independence of the judicial
system and its immunity from economic and political influences in Ukraine is
not upheld, consequently Ukrainian legislation might be inconsistently applied
to resolve the same or similar disputes. As a result, the Group is exposed to
a number of higher risk areas than those typically expected in a developed
economy, which require a significant portion of critical judgements to be made
by the management. In respect of the contested sureties claim, if the final
Supreme Court ruling is not in favour of FPM, the claimant may take steps to
appoint either a state or a private bailiff and request the commencement of
the enforcement procedures, which could have a material negative impact on the
Group's business activities and its ability to continue as a going concern, as
the assets of FPM could be seized or subject to a forced sale. In addition to
the afore-mentioned claim, a supplier and related party to the Group filed by
an application to open bankruptcy proceedings ("creditor protection
proceedings") against the Group's major subsidiary in Ukraine. The possible
commencement of the enforcement of the decision of the Ukrainian court of
appeal, which is currently suspended by a decision of the Supreme Court, and
the possible opening of creditor protection proceedings might potentially
affect the Group's ability to continue as a going concern. See Note 2 Basis of
preparation and Note 14 Commitments, contingencies and legal disputes to the
Consolidated Financial Statements.
Going concern
As at the date of the approval of the Consolidated Financial Statements, the
war is still ongoing and poses a significant threat to the Group's mining,
processing and logistics operations within Ukraine. As a result, a material
uncertainty still remains as some of the uncertainties remain outside of the
Group management's control, with the duration and the impact of the war still
unable to be predicted at this point of time. In addition to the war-related
material uncertainty, the Group is also exposed to the risks associated with
operating in a developing economy, which may or may not be exacerbated by the
war and/or the current circumstances facing the Group's controlling
shareholder. As a result, the Group is exposed to a number of risk areas
that are heightened compared to those expected in a developed economy, such as
an environment of political, fiscal and legal uncertainties, which represents
another material uncertainty as at the approval of these consolidated
financial statements.
See Note 2 Basis of preparation to the Consolidated Financial Statements for
further information.
RESPONSIBLE BUSINESS REVIEW
Our workforce comprises over 8,000 employees and contractors. 95% of our
workforce is based in Ukraine, with many currently serving in the armed
forces. During a time of war, protecting their safety and wellbeing is
paramount.
Health and safety performance
2023 2022 Change
Safety indicators (lagging)
Fatalities(4) 0 0 -
Lost time injuries(4) 5 9 (44%)
Lost time injury frequency rate ("LTIFR") 0.32 0.51 (37%)
All injuries frequency rate ("AIFR") 0.64 0.99 (35%)
Near miss events 1 1 -
Significant incidents 4 8 (50%)
Restricted work days 675 934 (28%)
Severity rate (average lost days per incident) 169 104 +63%
Safety indicators (leading)
Health and safety inspections 6,282 5,413 +16%
Health and safety meetings 1,466 1,388 +6%
Health and safety inductions 2,897 5,332 (46%)
Training hours 7,264 6,828 +5%
Hazard reports 688 740 (7%)
High visibility management tours 149 157 (5%)
Protecting our people
At Ferrexpo, we have a global workforce comprising over 8,000 employees and
contractors, and colleagues some of whom are currently serving in the Armed
forces of Ukraine. 95% of the workforce is based in Ukraine, mainly at our
operations in the Poltava region, but also other colleagues work in other
functions and services in Kyiv and another locations across Ukraine.
Given the scale of our workforce and the nature of our activities, it was
never an option to evacuate our people during the war. Our people wish to and
need to continue working. Being employed is critical during a time of war.
Therefore, it is our responsibility to take extensive measures to protect our
workforce during this time, both in the workplace, and, where possible, in the
communities where they live. Measures taken have included remote working for
those with suitable roles, to ensure that they were as far from the front line
as possible.
Measures for our on-site workforce have included the provision of air-raid
shelters, adjusting shift patterns to align with night-time curfews and the
provision of free meals in light of disruption to supply chains in local
communities.
In the early phases of the war, when uncertainty arose over the continued
provision of social services, the Group commenced an on-site childcare
facility for the children of employees, which was staffed by Ferrexpo
volunteers, to ensure that children could be close by and safe during such an
uncertain period of time.
As the war evolved, the need for such facilities diminished as life began to
resume in Ukraine, with schools opening and a 'new normal' beginning. As the
conflict evolved in 2022, so did our response. We focused our efforts on the
supply of key equipment such as armoured ambulances and food packages to towns
along the front line. In late 2023, needs shifted again, and psychological
wellbeing has become more important as people try to deal with the stress of
living in a protracted war.
At the time of this announcement, 641 of our brave colleagues are serving in
the Armed Forces of Ukraine. We are proud of their efforts to defend Ukraine,
and continue to support them by providing personal protective equipment and
other essentials.
In 2023, 67 colleagues were demobilised from the armed forces, 46 of whom have
returned to work. During the year, we expanded our support for veterans to
include physical rehabilitation and psychological support. Veterans unable to
return to their previous functions due to factors such as noise and vibration,
are offered the opportunity to train and qualify for other more suitable
roles.
In 2023, the Group recorded a third successive year without a fatality. The
average recoded lost-time injury frequency rate ("LTIFR") for the year was
0.32, an improvement on the 0.51 recorded last year and materially below the
historic average.
Environmental Stewardship
Greenhouse gas emissions footprint and energy consumption (2023/2022)
2023 Data (% change to 2022) 2022 Data
Absolute basis Unit basis Absolute basis (kilotonnes CO(2)e) Unit basis
(kilotonnes CO(2)e)
(kg CO(2)e/t)
(kg CO(2)e/t)
Scope 1 emissions 247 (-27%) 57 (+4%) 341 55
Scope 2 emissions 137 (-39%) 32 (-11%) 223 36
Subtotal (S1+S2) emissions 384 (-32%) 89 (-2%) 564 91
Scope 3 emissions 5,707 (-25%) 1,326 (+7%) 7,642 1,237
Total emissions 6,091 (-26%) 1,415 (+7%) 8,206 1,328
Biofuels emissions 4 (-39%) 1 (-12%) 6 1
(reported separately)
Energy consumption (kWh) 2,162,913,319 (-29%) - 3,052,942,993 -
'Unit basis' represents the intensity ratio, aligning to requirements of SECR
(Streamlined Energy and Carbon Reporting).
Scope 1 emissions
Scope 1 direct emissions principally relate to three activities at our
operations - diesel consumption (primarily used in mining activities), natural
gas (primarily used in pelletising activities) and gasoil (primarily used in
inland waterway logistics activities). Collectively, these three sources of
emissions represented 97% of Scope 1 emissions in 2023 (2022: 97%), with
emissions from the consumption of diesel and gasoil for transport making up
60% of Scope 1 emissions (2022: 55%) and natural gas making up 37% of Scope 1
emissions (2022: 43%). In addition, we track a further 15 sources of Scope 1
emissions across our operations, ensuring that multiple aspects of our
operations are covered in our emissions estimates.
Absolute Scope 1 emissions fell by 27% in 2023, in part reflecting lower
production due to war related constraints. Scope 1 emissions on a unit of
basis rose 4%, due to an increased utilisation of alternative logistics
channels for exports, which have resulted in an increased consumption of
gasoil. Calculations of Scope 1 and Scope 2 emissions have been independently.
Scope 2 emissions
Scope 2 indirect emissions relate exclusively to our purchasing of electricity
from third parties, which is predominantly used in our concentrator equipment.
On an absolute basis, this fell by 39%, also due to lower production. On a
unit basis, Scope 2 emissions fell by 11% due to an increased proportion of
electricity being sourced from cleaner sources including hydro and nuclear
power.
Scope 3 emissions
For Ferrexpo Scope 3 emissions primarily relate to the type of iron ore pellet
produced, since the downstream processing of iron ore accounted for 96% of
Scope 3 emissions in 2023. In 2022, direct reduction ("DR") pellets
represented 6% of all production, resulting in lower Scope 3 emissions for
that year. However, in 2023, no DR pellets were produced. Consequently, Scope
3 emissions in 2023 on a unit basis increased to 1.33 tCO(2)/t of pellet
production from 1.24 tCO(2)/t of pellet production in 2022 respectively.
Absolute Scope 3 emissions nevertheless decreased 25% year-on-year due to the
overall lower production in 2023.
Methodology
Ferrexpo's methodology for calculating its GHG emissions footprint utilises,
where possible, emissions factors provided by the Greenhouse Gas Protocol,
which is in line with reporting requirements under the Global Reporting
Initiatives ("GRI") framework for reporting sustainability topics. Through
using carbon factors provided by the Greenhouse Gas Protocol, the Group is
able to provide carbon dioxide-equivalent emissions figures ("CO(2)e") that
also account for emissions of both methane (CH(4)) and nitrogen oxide (N(2)O).
Water
Our operations include multiple water cycle interactions, from the water
ingress into our mines, to recycling water in our processing operations, to
the River Dnipro, which flows adjacent to our operations. Testing of water
quality has continued throughout 2023, with any discharged water quality
tested across more than 12 different chemical elements or attributes. In our
processing plant, where water is utilised in the processing of iron ore, we
once again recycled 97% of process water (2022: 98%).
Waste generation
The Group generates solid form waste in its mining operations (overburden in
the form of waste rock and sand), as well as emissions of other gases and dust
from its mining and processing operations.
During 2023, waste removal from mining activities fell by 45% due to lower
production. It is important to note that the overburden and waste removed from
our mining operations is non-hazardous and is stored in on-site waste dumps
designed by our mine planning department.
Aside from greenhouse gases, gaseous emissions include those emitted from our
processing operations (NO(2), SO(2), and CO), with emissions from such sources
declining by an average of 30% during the year, in line with mining volumes.
Dust emissions in 2023 increased 9% compared to the previous year.
Elsewhere in our operations, we continued to expand our domestic waste
recycling programme with collection bins and sorting facilities. All four of
our main operating subsidiaries in Ukraine now have active recycling
programmes.
ISO-certified systems
Ferrexpo now has an ISO-compliant environment management system (ISO
14001:2015) at both FPM and FBM, with the latter achieving accreditation
during 2022. This is in addition to accreditation of our Energy Management
System (ISO 50001:2018) at the same two subsidiaries, with FBM also acquiring
this accreditation in 2022.
RISK MANAGEMENT
Ferrexpo identifies and assesses risks based on each risk's probability of
occurrence and the severity of any event. The Group aims to mitigate the
potential impact of each risk through its management of day-to-day activities,
taking a prudent approach to risk where possible.
Risk identification
Ferrexpo aims to manage risks across its business through the early
identification of potential risks before they emerge, with senior managers and
the Group's executive management team responsible for maintaining risk
registers for each area of the Ferrexpo business. Risk registers are regularly
reviewed and updated, with local risk owners reporting to senior management
teams on a regular basis.
The Group risk register records risks on the basis of the likelihood of
occurrence and level of potential impact on the Ferrexpo business. A total of
49 risks were included on the Group risk register as of December 2023, with
risks ranging from the war in Ukraine (both direct and indirect), risks
relating to operating in Ukraine, operational risks such as the risk of a pit
wall failure, health and safety-related risks, and risks relating to
information technology and climate change. Further to the Group risk register,
which records the risks with the most serious potential impact and likelihood
of occurrence, operating entities maintain their own local risk registers,
which feed into the Group risk register. In 2023, the Group continued to
develop and operate an enterprise risk management ("ERM") tool that was
implemented in 2022 to record and monitor risks, which is the platform for the
reporting and assessment of risks within the Group.
The Group considers emerging risks to be risks that are newly developing, or
increasing in potential severity of impact, or changing risks that are
difficult to quantify.
Risk mitigation
Risks are inherent in operating a business and it is through effective risk
identification, risk management, prudent decision making and other risk
mitigation measures that the Group can understand and mitigate the risks that
the business faces. The Group's management team, however, understands that it
cannot eliminate all risk.
Risk governance framework
Risks are reported internally on a monthly basis, as part of the Finance, Risk
Management and Compliance ("FRMC") Committee, with the Group's senior
leadership team reviewing the Group-level risk matrix, which plots the
likelihood of occurrence against the potential severity of impact, and
identifying material changes in either variable to all of the risks listed.
Risks are reported on the Group risk register to the FRMC Committee on a
monthly basis, with each risk attributed a potential monetary impact should an
event occur. The FRMC Committee reports to the Group's Executive Committee,
which in turn reports to the Board, which has the ultimate responsibility for
the Group's approach to risk management. The Audit Committee, a sub-committee
of the Board, assists the Board in its regular monitoring of the risks faced
by the Group. The Group's internal audit function assists with the process of
risk review, and conducts ad hoc reviews of risk management controls and
procedures.
Risk assessment for 2023
Russia's full-scale invasion of Ukraine in February 2022, has had a
significant impact on the Group's ability to operate.
In addition to the war in Ukraine, a secondary effect of the conflict is the
increased political alignment within Ukraine. It is unclear as to the eventual
impact of this change on the Group, which in turn creates a potential risk for
the Group should the political landscape shift adversely.
Climate change is a rising Principal Risk, and the Group is facing both
physical and transitional risks, which requires increased reporting
requirements.
PRINCIPAL RISKS
Principal Risks are those considered to have the greatest potential impact on
Ferrexpo's business, assessed on the bases of impact and probability.
Introduction
This section outlines the Principal Risks facing the Group in 2023, each of
which have the ability to negatively affect the Group, either in isolation or
in combination with other risk areas. Principal Risks are defined as factors
that may negatively affect the Group's ability to operate in its normal course
of business, and may be internal, in the form of risks derived through the
Group's own operations and activities, or external, such as political risks,
market risks or climate change related risks. The Principal Risks listed here
are neither exhaustive, nor are they mutually exclusive, and therefore one
risk area may negatively impact another risk area.
Principal Risks include, but are not necessarily limited to, those that could
result in events or circumstances that might threaten the Group's business
model, future performance, solvency or liquidity and reputation.
Risks are inherently unpredictable, and, therefore, the risks outlined here
are considered the main risks facing the Group. New risks may emerge during
the course of the coming year, and existing risks may also increase or
decrease in severity of impact and/or likelihood of occurrence, and this is
why it is important to conduct regular reviews of the Group's risk register
throughout the year. The Group maintains a more extensive list of risks,
covering over 40 different risks at the Group level, with additional risks
considered in local risk registers at each operating entity. The Group risk
register is reviewed on a monthly basis for completeness and relevance by the
Group's Finance, Risk Management and Compliance ("FRMC") Committee, which
ultimately reports into the Board for further review and approval of the risk
register. The Group risk register is also reviewed by the Audit Committee at
least four times a year. The members of the Executive Committee manage risk
within the business on a day-to-day basis. The Committee includes the Chief
Executive Officer, Chief Financial Officer, Chief Marketing Officer, Group
Chief Human Resources Officer and General Director of Ferrexpo Poltava Mining.
The Group's management team continually reviews and updates its view on, and
approach to, risks facing the Group. This section of the Annual Report and
Accounts primarily covers risks facing the Group in 2023, but also early 2024,
up until the publication date of this report. A further update on the
Principal Risks will be provided in the Interim Financial Results, which is
due to be published in August 2024.
Key themes
Ongoing war in Ukraine since the full-scale invasion in February 2022
On 24 February 2022, Russia launched a full-scale military invasion of
Ukraine, with the conflict continuing into its third year as of the date of
this report. This event has significantly changed the operating environment
for businesses in Ukraine on an unprecedented scale.
Ukraine country risk
This area has been listed as a Principal Risk facing the Group since listing
in 2007, and the Group has successfully operated amid challenging
circumstances for more than 16 years. The war in Ukraine has served to
escalate a number of risks relating to Ukraine, including risks relating to
the political environment and the independence of the judicial system.
Climate change
An important topic for any modern business, with discussions with multiple
stakeholder groups centring on the Group's efforts to reduce emissions both in
the Ferrexpo business, but also in the Group's value chain (Scope 3
emissions). As a consequence of rising stakeholder focus on this topic, the
Group published its first standalone report on climate change in December
2022.
Cybersecurity
As a business seeking to modernise, the Group is increasingly reliant on
electronic software for the management of key operational and administrative
activities. As a business primarily operating in Ukraine, the Group has faced
heightened cybersecurity threats from malicious parties since 2014, coinciding
with Russia's initial invasion of Ukraine
1. Country risk
1.1. Conflict risk (external risk)
It is over two years since Russia's full-scale invasion of Ukraine on 24
February 2022. Ferrexpo's main operations are in the Poltava region of central
Ukraine, which has not seen any direct combat between Russian and Ukrainian
forces. Ukraine has, however, faced numerous missile and drone strikes,
including the Poltava region. The Group's facilities have not been directly
targeted by Russian missile strikes, but a number of neighbouring third party
facilities such as the Kremenchuk oil refinery and state owned electricity
infrastructure have been damaged by such attacks. Such damage can affect the
Group's ability to source various inputs needed for ongoing production.
The war in Ukraine is placing a strain on the economy of Ukraine, with a
number of businesses closing, unemployment, and lower tax revenues. At the
same time, spending on the military and social programmes have increased.
Consequently, the government of Ukraine has sought to increase revenues
through changes to its fiscal policies, such as increases to railway tariffs,
as well as implementing measures to stabilise the economy, such as enacting
laws for the repatriation of funds and currency controls. A number of these
measures have the potential to either directly or indirectly affect Ferrexpo
negatively through consequences such as lower revenues and a more restrictive
operating environment. Due to the strain placed on the Ukrainian economy, the
exchange rate for the Ukrainian hryvnia depreciated significantly at the start
of the full-scale invasion in 2022. The government immediately responded with
the introduction a peg for the hryvnia to the US dollar set at UAH29.25 per US
dollar, however, it was forced to devalue the currency to 36.5 per US dollar
in July 2022. In October 2023, the government announced that it would allow
for limited fluctuations of its currency, scrapping the peg that had been in
place since Russia's invasion 20 months earlier, with the central bank stating
a shift to a "managed flexible exchange rate". This new policy resulted in
short term volatility. Fluctuation in the Hryvnia can have a significant
impact on the Group's costs, assets and shareholders' equity. Due to the war,
a proportion of the Group's workforce in Ukraine are serving or have served in
the Armed Forces of Ukraine. Some have relocated to safer locations. As such,
the Group faces potential risks around being able to adequately skill its
operations and the associated ancillary services.
Additional risks related to the war in Ukraine include, but are not limited
to, restrictions related to the cost effective and timely transport of the
Group's products, restrictions in accessing markets, rising costs related to
reduced output and alternative supply arrangements and the impact on employee
safety and wellbeing.
Risk mitigation
The health and safety of the workforce is the Group's primary concern.
Whilst it is difficult for a company such as Ferrexpo to defend itself from
direct military activities since Russia's full-scale invasion, the Group has
taken multiple measures to keep its workforce, their families and local
communities safe from the threats posed by Russian aggression. Measures have
included remote working for those able to do so, timing of shift patterns to
fit with curfew hours, the provision of on-site childcare facilities to ensure
children are close and employees are not having to travel unnecessarily,
construction of new and renovation of older bomb shelters and the provision of
protective equipment such as armoured vests and helmets for employees serving
in the Armed Forces of Ukraine. The Group has also engaged in extensive
discussions with local authorities, and has stepped up to provide financial
assistance through the Ferrexpo Humanitarian Fund, with oversight by the Board
of Directors of Ferrexpo to ensure good governance in all support activities.
The Group will continue to take measures as required to protect its workforce,
and their families and local communities, for the duration of the war, and
during the post-war period where continued support is required.
1.2. Ukraine country risk (external risk)
The considerations outlined here are separate to the risks relating to the
ongoing war in Ukraine, but some or all of them may be exacerbated by the
current conflict.
Ferrexpo's main operations are in Ukraine, which is considered to be a lower
middle income economy, under the classifications provided by the World
Bank 7 . Ukraine is a country that placed at rank 77 in the United Nations'
Development Programme's ("UNDP") Human Development Index (as published in the
latest report on 8 September 2022) 8 , and is therefore classified as having a
"high" level of human development (based on factors such as life expectancy
and levels of education). This ranking places it in a similar bracket to China
(79) and Sri Lanka (73), other countries considered to be developing
economies. As a result of operating in a developing economy, the Group is
subject to a number of elevated risks, such as the fiscal and political
stability of Ukraine, independence of the judiciary, access to key inputs and
capital, exposure to monopolies and other influential businesses (particularly
those that are related parties to the government of Ukraine), in addition to a
range of other factors. As a result of being a business in a developing
economy, the Group is exposed to heightened risks around corruption, with
Ukraine placing 116 in Transparency International's Corruption Perceptions
Index ("CPI") 9 .
Through the Group's exposure to an operating environment in a developing
economy, Ferrexpo has been subject to a number of risk areas that are
heightened relative to those expected of a developed economy. Risks associated
with the war in Ukraine are covered in this announcement, but there are
indirect risks associated with the war, such as the increasing political unity
within Ukraine and determination to drive political, fiscal or economic
change, the latter often associated with financial and military agreements
struck with western governments and organisations.
This change can be exhibited in a number of practical applications, which can
include, but are not limited to, changes to the regulatory environment,
potential increases to tax and royalty rates, increased disclosure
requirements or operational restrictions. Changes may be made as a result of
government decision making, a third party international partner, lender, or
another party within Ukraine, and therefore the rationale for changes may not
correlate with the official agenda of the government of Ukraine. As a result
of this local instability, which is amplified by the war in Ukraine, sources
of capital for businesses deriving their revenues from Ukraine are limited at
the present time, which in turn may reduce the operational flexibility of the
Group.
The independence of the judiciary in Ukraine has been frequently referenced in
the Principal Risks section of the Group's Annual Report and Accounts, and
this is a consideration that remains particularly relevant for the Group
today. As described in Note 14 Commitments, contingencies and legal disputes
to the Consolidated Financial Statements, the Group is currently subject to
several legal proceedings in Ukraine that are similar in part to previously
heard legal proceedings, and it cannot be guaranteed that the Ukrainian legal
system will always provide a ruling in line with the laws of Ukraine or
international law.
On 7 December 2022, Ferrexpo Poltava Mining ("FPM") received a claim in the
amount of UAH4,727 million (US$124 million as at 31 December 2023) in respect
of contested sureties. These contested sureties relate to Bank Finance &
Credit ("Bank F&C") which the Group previously used as its main
transactional bank in Ukraine. Bank F & C is still going through the
liquidation process after having been declared insolvent by the National Bank
of Ukraine and put under temporary administration on 18 September 2015. The
counterparty in this claim alleges that it acquired rights under certain loan
agreements originally concluded between the Bank F&C and various borrowers
by entering into the assignment agreement with the State Guarantee Fund on 6
November 2020. The counterparty further claims that FPM provided sureties to
Bank F&C to ensure the performance of obligations under these loan
agreements. On 26 January 2024, the Ukrainian court of appeal has confirmed a
claim against FPM in the amount of UAH4,727 million (US$124 million as at 31
December 2023). On 30 January 2024, FPM filed an appeal to the Supreme Court
of Ukraine and the first hearing scheduled for 20 March 2024 did not take
place. Following the appointment of a new panel of judges, on 1 April 2024 the
Supreme Court suspended on the possible enforcement of the decision of the
court of appeal. A Supreme Court hearing on 17 April 2024 considered primarily
procedural matters and the next court hearing is scheduled for 27 May 2024.
Although the Group remains of the view that FPM has compelling arguments to
defend its positions, the Group has recognised a full provision totalling
US$124 million for this ongoing legal dispute. As at the date of approval of
these consolidated financial statements, no enforcement procedures have
commenced and on 1 April 2024 the Supreme Court suspended the possible
enforcement of the decision of the Ukrainian court of appeal, so that such
enforcement procedures cannot be initiated by the claimant until a final
decision is made by the Supreme Court, or the Supreme Court's suspension order
is otherwise lifted. If the final Supreme Court ruling is not in favour of
FPM, the claimant may take steps to appoint either a state or a private
bailiff and request the commencement of the enforcement procedures, which
could have a material negative impact on the Group's business activities and
its ability to continue as a going concern, as the assets of FPM could be
seized or subject to a forced sale. In addition to the afore-mentioned claim,
a supplier and related party to the Group filed an application to open
bankruptcy proceedings ("creditor protection proceedings") against the Group's
major subsidiary in Ukraine. The possible commencement of the enforcement of
the decision of the Ukrainian court of appeal, which is currently suspended by
a decision of the Supreme Court, and the possible opening of creditor
protection proceedings might potentially affect the Group's ability to
continue as a going concern and, as a consequence, its viability.
The contested sureties claim and decision of the court of appeal are other
examples of the risk of operating in a dynamic and adverse political landscape
in Ukraine, which creates additional challenges for both the Group's
subsidiaries in Ukraine and also for the Group itself.
As referenced in the Group's previous public reporting, including in the
Group's Interim Results published in August 2023, there are outstanding
allegations relating to the Group's controlling shareholder, Kostyantin
Zhevago, that remain unresolved, and there is a risk that assets owned or
controlled (or alleged to be owned or controlled) by the Group's controlling
shareholder may be subject to restrictions, in Ukraine or elsewhere, or that
the Group may be impacted by, or become involved in, legal proceedings
relating to these matters, in Ukraine or elsewhere.
As disclosed in 2022 Annual Report and Accounts, subsequent to the detention
of Mr Zhevago in France on 27 December 2022 at the request of the authorities
in Ukraine, the Supreme Court of France rejected the appeal in November 2023
and ruled that Mr Zhevago should not be extradited to Ukraine. The legal case
relates to the potential extradition of Mr Zhevago, and associated legal
claims being made in Ukraine, and remains outstanding as of the date of this
report. The risks relating to the Group as a result of this legal action, and
potential further legal action, cannot be accurately estimated at the present
time, nor can the potential timeline for resolving any matters.
As a consequence of recent events relating to the Group's controlling
shareholder, as outlined above, the Group may experience adverse effects, such
as negative media attention, a reduced ability to operate within Ukraine and
overseas due to negative perceptions of the Group, and a restricted operating
environment for aspects of the Group's business, such as closure (or
suspension) of relationships with stakeholder groups such as banking services.
The Group's relationships both upstream and downstream may also be negatively
impacted by events related to the Group's controlling shareholder, such that
the Group is limited or impaired in its ability to do business overseas in a
specific country or region. In addition, restrictions imposed on the Group's
controlling shareholder (or negative perceptions of the Group's controlling
shareholder) may potentially have an adverse effects on the Group within
Ukraine, with a restriction on the Group's ability to successfully operate its
business model. A number of legal claims or legislative actions within Ukraine
are known as of today - as detailed in this section, and further actions to
restrict the Group's ability to operate may arise in the future. It is
difficult for the Group to predict the scale or nature of such restrictions,
and therefore, the Group is limited in its ability to pre-empt and mitigate
risks in this area.
The Group is subject to a number of actions by the government of Ukraine that
threaten to destabilise, or have the effect of destabilising, the operating
environment in which the Group exists. For example, in previous years, the
government of Ukraine has cancelled exploration licences by Presidential
decree, providing minimal detail in terms of an explanation or rationale.
As previously referenced in the Group's 2021 Annual Report and Accounts, in
June 2021, the government of Ukraine cancelled a mining licence for an
early-stage exploration project known as Galeschynske, which is a licence held
by Ferrexpo Belanovo Mining and located to the north of the Belanovo mine
(without forming part of this mine). This matter remains outstanding, and
there remains a risk that this dispute may increase in scale or severity for
the Group. The Group has been informed of other licence disputes by the
government, which are similar in scale to the licence dispute discussed above.
It is difficult for the Group to predict the outcome of existing licence
disputes, and whether new claims and/or disputes may arise in relation to the
Group's operating licences.
In March 2023, restrictions were placed on shares held by Ferrexpo AG ("FAG"),
the Group's Swiss subsidiary, in three main operating subsidiaries of the
Group in Ukraine, covering 50.3% of the shares held in each subsidiary. The
Kyiv Commercial Court ordered the arrest (freeze) of 50.3% of FAG's
shareholding in each of Ferrexpo Poltava Mining ("FPM"), Ferrexpo Yeristovo
Mining ("FYM") and Ferrexpo Belanovo Mining ("FBM"). This court order was
issued by the Kyiv Commercial Court during a hearing in the commercial
litigation between the Deposit Guarantee Fund and Mr. Zhevago, the Group's
controlling shareholder, in relation to the liquidation of Bank Finance &
Credit in 2015. The Group's subsidiaries affected by this court order,
including FAG, filed appeals in Ukraine to remove the restrictions. The court
of appeal refused on 26 July 2023 to satisfy the appeals of FAG, FPM, FYM and
FBM in relation to the restriction covering 50.3% of corporate rights in FPM,
FYM and FBM. The Group's subsidiaries filed cassation appeals to the Supreme
Court of Ukraine. On 10 January 2024, the Supreme Court in Ukraine rejected
the cassation appeals and the restrictions in the Deposit Guarantee Fund case
remain effective. For more details of this case please see Note 14
Commitments, contingencies and legal disputes to the Consolidated Financial
Statements.
Also in relation to the commercial litigation between the National Bank of
Ukraine (the "NBU") and Mr Zhevago, the Group's controlling shareholder, in
relation to the personal surety of Mr Zhevago for the loan provided by the NBU
to the Bank F&C, the Chief State Bailiff of the Ministry of Justice of
Ukraine issued a resolution on arrest of debtor's property as part of intended
enforcement proceedings. The state bailiff has imposed an arrest on part of
the corporate rights of 50.3% of the issued share capital of FYM and FBM,
assuming that these rights are owned by Mr. Zhevago.
FAG filed lawsuits in October 2023 to cancel the arrest and to block the
enforcement procedure. On 30 November 2023, a court of first instance
suspended the enforcement proceeding to forcefully sell Ferrexpo AG's
corporate rights in FYM and FBM. The state bailiff filed an appeal. For more
details of this case please see Note 14 Commitments, contingencies and legal
disputes to the Consolidated Financial Statements.
As previously referenced in the Group's 2022 Annual Report and Accounts, a
number of the Group's subsidiaries in Ukraine received letters from the Office
of the Prosecutor General, notifying them of an ongoing investigation into a
potential underpayment of royalties between 2018 and 2021 (the
"Investigation"). On 3 February 2023, one of the Group's senior managers in
Ukraine received a notice of suspicion in relation to this Investigation. On 6
February 2023, as part of the Investigation, a court order was issued in
Ukraine freezing the bank accounts of FPM. These actions by the government of
Ukraine mirror actions taken in similar investigations into other metals and
mining companies in Ukraine, and therefore, represent a scenario that the
Group was aware of and able to partially mitigate the associated risks. It is
important to note that the Group may not be able to successfully challenge
this court order to freeze FPM's bank accounts and may not be able to
successfully challenge the claims being made as part of the Investigation. The
Group has managed to get certain aspects of this court order to be repealed,
enabling the Group to pay certain amounts such as salaries and taxes (but
other restrictions remain in place).On 31 October 2023, a notice of suspicion
was delivered to another top manager. On 13 November 2023, the court approved
the bail in the amount of close to UAH 800 million. An appeal was filed, and
after several court dates were postponed, the next hearing is scheduled for 29
April 2024.
In addition to the royalties investigation, on 10 January 2023 the State
Bureau of Investigations ("SBI") in Ukraine and on 17 January 2023 The
National Police of Ukraine performed several searches in respect of
investigations on alleged illegal extraction of minerals ("rubble"). FPM's
position is that the minerals in question are not a separate mineral resource,
but that it is a waste product resulting from the crushing of iron ore during
the technical process for the production of iron ore pellets. The sales of the
rubble were subject to inspections by the State Service for Geology and
Subsoil of Ukraine for many years and were suspended by the Group in September
2021. The outcome of such investigations are the notices of suspicion issued
to the management of FPM by the SBI on 29 June 2023 and by the National Police
of Ukraine on 22 September 2023 with subsequent payments of bails totalling
UAH122 million (US$3 million at this point of time) and UAH400 million (US$11
million at this point of time), respectively, that were approved by the court.
In the pre-trial investigation of the rubble case and following an application
from the prosecutor to arrest (freeze) all rail wagons and railway access
tracks owned by FPM, a court of first instance issued the order to do so. FPM
filed an appeal and a hearing of the court of appeal on 30 October 2023 the
court of appeal confirmed the arrest of assets (freeze), but refused to
provide clarifications on the exact scope of the order which created an
alleged restriction on the use of one type of FPM's rail cars. Since that time
FPM has not been using this type of rail cars (totalling 1,339 units), but
continues to use another type of its rail cars (totalling 1,043 units). The
Group is engaging with the authorities in Ukraine and intends to appeal the
claims issued as part of these investigations. Stakeholders should note that
the Group may not be able to successfully challenge the claims being made as
part of these pre-trail investigations.
The Group's exposure to operating in Ukraine can result in high velocity
risks. Risk velocity relates to how fast a risk may escalate in scale and
affect an organisation, with high velocity risks considered to be those that
move rapidly from a starting point of having a low likelihood and scale of
impact, to having a high likelihood and scale of impact. Examples of high
velocity risks would be natural disasters and armed conflict, both of which
could be difficult to predict in advance and could have a significant impact
on a business.
The risk factors discussed here in this section, either individually or in
combination, have the ability to materially adversely affect the Group's
ability to operate its production and other facilities, ability to export its
iron ore products, access to new debt facilities and ability to repay debt,
ability to reinvest in the Group's asset base, either in the form of
sustaining capital investment (to maintain production or expansion), capital
investment for future growth, or the Group's ability to pay dividends, could
result in a material financial loss for the Group and could result in a loss
of control of the Group's assets.
Risk mitigation
Ferrexpo operates in accordance with relevant laws and utilises internal legal
counsel and external legal advisors as required to monitor and adapt to
legislative changes or challenges.
The Group maintains a premium listing on the London Stock Exchange and is
subject to high standards of corporate governance, including the UK Corporate
Governance Code and UK Market Abuse Regulation. Ferrexpo has a relationship
agreement in place with Kostyantin Zhevago, which stipulates that the majority
of the Board of Directors must be independent of Mr Zhevago and his
associates. For all related party transactions, appropriate procedures,
systems and controls are in place and adhered to.
Ferrexpo prioritises a strong internal control framework including high
standards of compliance and ethics. The Group operates a centralised
compliance structure that is supported and resourced locally at the Group's
operations. Ferrexpo has implemented policies and procedures throughout the
Group including regular training. Ferrexpo prioritises sufficient total
liquidity levels and strong credit metrics to ensure smooth operations should
geopolitical or economic weakness disrupt the financial system of Ukraine.
Ferrexpo looks to maintain a talented workforce through skills training and
competitive wages, taking into account movements of the Ukrainian hryvnia
against the US dollar and local inflation levels. Ferrexpo has a high profile
given its international client base and London listing, and it is important
that Ferrexpo's Board of Directors and relevant senior management continue to
engage with the Group's stakeholders to effectively communicate the economic
contribution that Ferrexpo makes to Ukraine and to show that it operates to
high international standards.
As set out in detail in the risk description, the Group is involved in a
number of ongoing legal proceedings, some of which may potentially lead to
attempted seizures of the Group's funds, movable and immovable assets and
corporate rights in Ukrainian subsidiaries. In case of the commencement of
enforcement procedures for any ongoing legal disputes, the Group will
challenge every order and action of claimants or bailiffs in the court, which
is expected to delay for a reasonably long period of time and block the
seizure of funds and assets.
1.3. Counterparty risk (external risk)
As a business operating in a lower middle income economy, and also as a
business operating in a country that is currently engaged in an armed
conflict, there are significant risks in respect of the Group's business
interactions with third party suppliers of goods and services. Risks may
relate to a number of subject areas, including (but not limited to) governance
and corruption risks, risk of collapse, risks relating to monopolies and
situations whereby alternative suppliers may not be available, and
counterparty risks relating to the conflict in Ukraine whereby counterparties
may be exposed to Russia (with such relationships potentially not being known
to the Group). The full-scale Russian invasion of Ukraine in 2022 has imposed
a significant strain on the economy of Ukraine and has, therefore, heightened
the counterparty risks facing the Group.
A secondary effect of the ongoing war in Ukraine is that the Group may be
affected in its ability to conduct effective due diligence on counterparties
given the imposition of martial law in Ukraine, and other war related
restrictions. The Group has had to change a number of key suppliers since
February 2022, and in doing so, has had to conduct due diligence checks as
part of each new relationship, which carries inherent risk to the Group.
Counterparty risks may result in direct consequences for the Group such as
financial harm and operational issues in sourcing material, and also include
indirect consequences such as damage to the Group's reputation either within
Ukraine or with international stakeholders, such as investors, lenders and
customers.
Additionally, recent events relating to the controlling shareholder of the
Group have resulted in secondary effects on a number of business relationships
of the Group. The Group is currently managing these risks either through
existing relationships or through new relationships, and it should be noted
that any new (or change of existing) business relationship carries an inherent
counterparty risk to the Group.
Risk mitigation
In terms of supplier governance, the Compliance team conducts regular checks
on all suppliers, screening entities for a number of risks and elevating those
deemed to be higher risk for further consideration by the FRMC Committee as to
their eligibility. For entities that the Group conducts business with, the
Group has developed a Code of Conduct for Suppliers, which as of 2023 is
referenced in 90% of all contracts equal to approximately 2,000 due diligence
checks completed on potential third parties (2022: 90% and 1,300 checks).The
Group's exposure to the failure of a counterparty, or the failure of a party
to provide its contracted goods and services, is managed through the Group
engaging with a range of suppliers, where possible, in addition to sufficient
cash reserves to maintain the Group's overall liquidity. Where it is not
possible or practical to source goods and services from multiple providers,
the Group considers alternative goods and services to meet its needs and to
reduce single party risk.
With regard to the structures in place to monitor and manage counterparty
risk, the FRMC Committee, is an executive sub-committee of the Board charged
with ensuring that systems and procedures are in place for the Group to comply
with laws, regulations and ethical standards. The FRMC Committee met ten times
in 2023 (2022: ten) and is attended by the Group Compliance Officer and, as
necessary, by the local compliance officers from the operations, who present
regular reports and ensure that the FRMC Committee is given prior warning of
regulatory changes and their implications for the Group. The FRMC Committee
enquires into the ownership of potential suppliers deemed to be "high risk",
and oversees the management of conflicts of interests below Board level and
general compliance activities (including under the UK Bribery Act 2010, the
Modern Slavery Act, the Criminal Finances Act, and the EU General Data
Protection Regulation).
The Group aims to minimise risk around the timely provision of goods and
services through maintaining sufficient cash reserves and liquidity, as well
as maintaining alternative suppliers should one counterparty fail.
The Board aims to ensure adherence to the highest standards of diligence,
oversight, governance and reporting with all charitable donations, with the
Health, Safety, Environment and Community ("HSEC") Committee required to
provide approval for community support expenditures.
2. Market related risks
2. Risks relating to the global demand for steel
The Group is a part of the global steel value chain, which is a sector that is
heavily reliant on global connectivity, and global factors that affect the
supply and demand balance of both steel and the raw materials required for
making steel.
Steel is typically made using processes that involve iron ore, a portion of
scrap steel (depending on the process method) and energy (which can include
coal, natural gas and electricity). Prices for these key inputs can be
volatile, and are factors that will move independently of any single steel
producer's control, and will therefore have the ability to significantly
affect the profitability of individual steel producers. Additional factors
governing the input costs, and therefore profitability, of steelmakers
include: the availability and cost of labour, requirements for capital
investments to sustain or grow output, the availability of raw materials and
energy (in addition to unit costs), the cost and availability of logistics
routes and the presence of lower cost competitors in key markets.
Global steel demand varies considerably and can be significantly influenced by
factors outside of the control of a steel producer, such as political
instability (e.g. the war in Ukraine), global energy prices, and the macro
outlook for the global economy. In addition to these macro-economic
environment factors, individual steel producing facilities and regions may be
affected by national, regional and local factors such as political
instability, political intervention, weather events, cybersecurity events, and
climate change, amongst other factors.
Given that the factors listed here have the potential to materially affect the
profitability of steel mills, individual companies and facilities may respond
to cyclically higher costs or weaker market conditions by reducing or halting
steel production, until more favourable market conditions resume. This in turn
could have a material effect on suppliers to such businesses, including iron
ore producers such as Ferrexpo. A more recent trend has seen a surge in
awareness of climate change related issues, which is driving increased changes
within various levels of the operating environment for steel companies - from
local and regional government enacting legislation related to climate change,
to customers and local communities demanding that steel production involve
lower emissions. Efforts to counter the effects of climate change in the steel
industry, which typically focus on the reduction of carbon emissions in the
production of steel, could generate higher operating costs in the near term,
and higher requirements for capital investment over the medium to long term.
Whilst operating costs for steelmakers could increase in the near term as a
result of emissions reduction measures, end users of steel may not agree to
higher steel prices, and therefore profit margins could decrease until such
costs are lowered or successfully passed through to end users.
The structure of the global steel industry relies on a consistent supply of
materials to steel mills and a consistent offtake of finished steel by
customers. As a consumer of bulk commodities, such as iron ore and coal, the
timely and reliable delivery of these materials is required for stable steel
prices, since any disruption in the delivery process can create short and
medium-term spikes in steel prices. Equally, a scenario whereby global markets
encounter an excessive supply of steel, either through an unforeseen downturn
in end-user demand, or disruptive increases in steel supply, could have a
negative effect on steel prices.
Global steel markets also rely on the consistent availability of logistics
pathways, and events such as the ongoing attacks on shipping in the Red Sea
since October 2023, serve to demonstrate the possibility of short-term pricing
fluctuations in shipping freight rates (both positive and negative) when
global logistics chains are not functioning optimally.
Risk mitigation
Under normal circumstances, the Group has the ability to mitigate risks around
demand for steel through its global customer base, with the Group having the
ability to geographically arbitrage its products. During 2023, the Group had
no access to Ukrainian Black Sea ports, resulting in a shift to European
customers accessible by rail. When the Group has been able to access
alternative Black Sea ports, the size of shipments have been lower at higher
costs.
Other risk mitigation activities include the Group's ability to produce high
quality forms of iron ore, which typically command higher premiums with
customers and also tend to be more in demand throughout the economic cycle.
Ferrexpo operates in a country whereby the local currency, the Ukrainian
hryvnia, is a currency which is correlated to the performance of commodity
prices, and historically the Group has experienced depreciation in the hryvnia
at times of lower commodity prices, which in turn reduces the Group's
dollar-denominated cost base. Movements in the hryvnia-dollar exchange rate
can, however, be influenced by other factors and may not necessarily reduce
costs at times of low iron ore prices.
3. Risks related to realised pricing
3.1. Changes in pricing methodology (external risk)
Pricing formulas for iron ore pellets are governed by multiple factors,
including the iron ore fines prices, a premium for additional ferrum content,
pellet premiums, freight rates and additional quality premiums and discounts
depending on the type of iron ore pellet or concentrate supplied and its
chemistry.
Industry-wide factors, which are outside of the Group's control, can influence
the methodology for pricing iron ore products, in addition to the various
premiums and discounts that are applied by individual customers and regions.
Premiums or discounts paid for specific characteristics may change and
adversely affect the Group's ability to market specific products.
Should the standard industry pricing methodology change in the future, it
could have a positive or negative impact on the Group in the form of realised
prices for iron ore pellets and concentrates, and therefore affect the Group's
financial performance. Additional potential impacts of changing perceptions
around pricing methodology could include a restriction in the Group's ability
to sell its products to specific customers and geographic regions, should such
stakeholders elect to pursue a different pricing methodology with an
alternative of iron ore products suppliers.
As a producer of high-grade forms of iron ore (grading 65% Fe and above), over
time, the Group has developed customer pricing agreements with customers on
the basis of high-grade benchmark fines indices (grading 65% Fe). Such
agreements enable the Group to realise the value of the iron content in its
products, with high-grade (65% Fe) fines index trading an average of US$12 per
tonne above the medium grade (62% Fe) in 2023 (2022: US$19 per tonne) 10
(#_ftn10) . The premiums paid for material priced using the high-grade
benchmark index reflect the more restricted supply of higher grade iron ores
into the global market, with the majority of supply being either low or medium
grade iron ores. Premiums paid for higher grade iron ores (referred to as the
"ferrum premium") also reflect the operational benefits to steel mills through
higher blast furnace productivity and lower emissions profiles associated with
higher grade input materials.
The Group also relies on pricing structures for its pellets to include a
pellet premium, which reflects the high quality, pelletised nature of the iron
ore delivered to customers. Given the benefits of pellets to steelmakers
(namely improved furnace productivity and lower greenhouse gas emissions), it
is accepted practice that steelmakers pay an additional premium for iron ore
pellets (referred to as the "pellet premium"). Pellet premiums have varied
significantly in recent years, which reflects both supply and demand-related
factors. Given the scale of the pellet premium relative to the iron ore fines
index and pelletising costs, significant shifts in pellet premiums would have
a significant impact on profitability and product differentiation. A number of
pellet premiums are quoted by third parties, which are computed in a variety
of ways. Any switch from using one specified pellet premium to another quoted
pellet premium, could also result in a difference in realised pricing for the
Group.
Risk mitigation
The Group aims to price its products through clear and consistent engagement
with customers, with the Group seeking to develop mutually beneficial
long-term relationships. Through consistent supply and consistent high quality
of the Group's products, Ferrexpo aims to maintain strong relationships with
its customers.
Through strong customer relationships, the Group aims to ensure that the net
realised prices received for its iron ore products are in line with the
international benchmarks for pricing of similar products, in addition to
premiums paid for the quality and specification of the product being sold.
Ferrexpo endeavours to achieve the prevailing market price at all times, and
the Group aims to be a low cost producer and therefore cash flow positive
throughout the commodities cycle.
3.2. Lower iron ore prices (external risk)
This factor is one that is connected to risks related to the global demand for
steel, since demand for steel directly impacts the pricing of raw materials
used to produce steel, such as iron ore.
As a company that derives the majority of its revenues from iron ore products,
Ferrexpo is inherently exposed to iron ore prices, either in the form of
benchmark iron ore fines prices, or pellet premiums. Variations in iron ore
prices come in a number of forms, from the underlying iron ore price, the
ferrum and pellet premium in addition to discounts and premiums applied for
the naturally occurring trace elements in ores such as silica and alumina.
The iron ore fines price is the largest component of pricing for the Group's
products, which averaged US$132 per tonne in 2023 (65%Fe 11 (#_ftn11) , 2022:
US$139 per tonne). Iron ore fines prices are predominantly affected by Chinese
demand, which is the largest import market globally.
The quoted price for iron ore fines is called the benchmark index, and is
applicable for forms of iron ore that have a specified chemistry that is
amenable for steelmaking, such as the percentage of each trace element
contained (e.g. silica, alumina and phosphorus). The Group's products
typically conform to the requirements of the benchmark index, and therefore
tend not to have penalties applied. Iron ores that do not comply with the
benchmark index, however, will be subject to a range of penalties, which may
vary significantly depending on a range of market factors and technical
requirements of each steel mill. Any variation in the quality and chemistry of
the Group's iron ore that is sold in any given period could therefore result
in penalties being incurred.
A secondary component of the pricing structure of the Group's products is the
pellet premium, which is applied to the sale of iron ore pellets. This premium
is significant to the Group, and historically can represent up to an
additional 50% on top of the benchmark iron ore fines index. Should
reputational issues concerning the Group and its UBO affect existing or
potential relationships in steelmaking regions that demand Ferrexpo's
high-grade product offerings, the Group may no longer be able to realise the
same level of product pricing as previously experienced.
The Group aims to mitigate price risk through producing high-grade, low
impurity iron ore products, which receive premiums when sold to customers,
rather than penalties or discounts. Through such products, the Group has been
able to build a higher-margin business, which in turn enables further
investment in the Group's production facilities.
In addition, the Group aims to be a low cost producer of iron ore products.
Through operating with a lower cost base than the Group's peers, particularly
when the premiums paid for pellet quality and specification are considered,
Ferrexpo aims to remain competitive on a global basis.
Ferrexpo's operating costs are partly correlated with commodity prices. When
the commodities cycle is in a downward phase, Ferrexpo typically receives a
lower selling price, but the Group's cost base also tends to decline as a
result of local currency devaluation. The Ukrainian hryvnia is a
commodity-related currency and has historically depreciated during periods of
low commodity prices, although movements of the Ukrainian hryvnia against the
US dollar can also be influenced by short-term geo-political and other
factors.
Ferrexpo regularly reviews its options in respect of hedging sales. The
Group's current strategy is to not enter into such hedging agreements due to
the relatively low liquidity of this market and high costs involved. The Group
will continue to review this strategy as the market for hedging iron ore
pellets evolves, which may increase the attractiveness of hedging.
Risk mitigation
The Group aims to mitigate price risk through producing high-grade, low
impurity iron ore products, which receive premiums when sold to customers,
rather than penalties and/or discounts. Through such products, the Group has
been able to build a high-margin business, which in turn enables further
investment in the Group's production facilities.
In addition, the Group aims to be a low cost producer of iron ore products.
Through operating with a lower cost base than the Group's peers, particularly
when the premiums paid for grade and form (pellets) are considered, Ferrexpo
aims to remain competitive on a global basis.
Furthermore, Ferrexpo's operating costs are partly correlated with commodity
prices. When the commodities cycle is in a downward phase, Ferrexpo typically
receives a lower selling price, but the Group's cost base also tends to
decline as a result of local currency devaluation. The Ukrainian hryvnia is a
commodity-related currency and historically over the long-term it has
depreciated during periods of low commodity prices, although movements of the
Ukrainian hryvnia against the US dollar can also be influenced by short-term
political factors, in addition to other factors.
Ferrexpo regularly reviews its options in respect of hedging the price of its
output. The Group's current strategy is to not enter into such hedging
agreements due to the relatively low liquidity of this market and high cost of
entering into such arrangements. The Group will continue to review this
strategy as the market for hedging iron ore pellets develops over time, which
may eventually reduce the effective cost of such arrangements.
3.3. Pellet premiums
The pricing of the Group's products includes a pellet premium. This references
the pelletised nature of Ferrexpo's products and the benefits they offer in
the steel making process. Consequently iron ore pellets customers will pay a
premium over and above the prevailing iron ore fines price. The pellet premium
is one of the principal factors that enables the Group to generate
higher-margins.
Factors governing the pellet premium in any given year include supply and
demand for iron ore pellets. Demand factors can be related to the global
macro-economy and steelmakers desire to optimise their production and
productivity, which tends to result in demand from steelmakers. Pellet demand
can also be affected by emissions reduction legislation. Iron ore pellets
remove the need for sintering in steel making, a process that typically uses
coal. Steelmakers that utilise a greater proportion of pellets in a blast
furnace can therefore reduce the overall emissions footprint of steel
production.
The overall supply of iron ore pellets is relatively constrained, with
existing producers typically producing at their nameplate capacity and the
construction of new pelletiser capacity usually requiring significant capital
investment to establish production facilities and the associated
infrastructure required to support the production and transportation of bulk
commodities to customers. Consequently, there has been limited new pelletising
capacity come on line in the past five years. Supply-side disruption has been
prominent factor in recent years, with the failure of two tailings dams in
Brazil resulting in significant volatility in supply from two of the largest
pellets exporters to the global steel industry. Both of the companies involved
in these incidents have now resumed production from the affected production
facilities, and therefore the market is absorbing the return of this
production at increasing rates.
Should reputational concerns over the Group and its UBO affect existing or
potential relationships, the Group may no longer be able to realise the same
level of pellet premiums as previously experienced.
Risk mitigation
Despite being one of the largest iron ore pellet exporters, the Group's market
share is not sufficient to be a price setter. Consequently, therefore the
Group realised pellet premiums tend to follow the level set by larger market
participants.
To mitigate this, the Group's strategy is to be a low cost producer.
Historically, the Group has operated as one of the lower costs pelletising
operators, and therefore swing producers have tended to moderate the pellet
premium at times of low pricing by withdrawing from the market supporting a
floor in prices due to a tightening in supply. The Group has had to operate
below its nameplate capacity during 2023 due to the ongoing war in Ukraine. As
such, pelletising costs marginally increased to US$30 per tonne in 2023 (2022:
US$29 per tonne). Despite this increase, the Group has managed to keep
pelletising costs below the prevailing pellet premium for the year.
The strategy of targeting low cost production is enhanced through Ferrexpo's
location in Ukraine, with the Ukrainian hryvnia having a close correlation to
commodity pricing, which therefore tends to devalue at times of low commodity
pricing, reducing the Group's cost base.
3.4. Freight rates (external risk)
The pricing of a bulk commodity, such as Ferrexpo's iron ore products,
typically includes a component of the net realised pricing that considers the
cost of transporting material to the customer. For Ferrexpo, this pricing
typically refers to either the C3 or C2 freight indices (published by the
Baltic Exchange), as these are reflective of the shipping cost for accessing
either the Asian or European market (respectively). Freight rates are a
deduction from the pricing received from the pellet, and therefore higher
freight rates will result in lower net realised pricing for the Group, and
vice versa.
The factors driving freight rates include the prevailing fuel cost for ships,
the availability of vessels at a given point in time, and insurance policies
required for ships to service the required route (the latter being a
significant factor for chartering parties looking to ship via the Black Sea
during the present time).
As a guide, the C3 freight index (representing a seaborne Brazil-China trade
route on a capesize vessel) was US$24.99 per tonne at the end of 2023 compared
to US$20.07 per tonne at the end of 2022 12 .
Additionally, the war in Ukraine has had an impact on the Group's ability to
charter vessels with ship owners, as the limited availability of Ukrainian
Black Sea ports has reduced the Group's access to the seaborne market. Whilst
the increased costs associated with trading within the Black Sea have been
reflected in Black Sea freight rates since the outset of the war, the Group
has on occasion chartered vessels from alternative Black Sea ports due to the
Group's strong relationships with ship owners. Only recently, since January
2024, the Group has resumed shipments from the Port Pivdenniy in Ukraine,
while continuing to closely monitor the risk of access to the Black Sea ports
in Ukraine. Further freight-related realised effects, or potential risks, of
the war in Ukraine include an increase in the insurance premiums required for
vessels travelling to Black Sea ports (Ukrainian ports or otherwise), and the
delayed loading and unloading times which can result in increased demurrage
costs.
The Group is also aware of potential risks that relate to recent events with
the Group's UBO which may affect Ferrexpo's ability to conduct business
relationships with freight providers. Should third party concerns relating to
these matters prevent Ferrexpo from engaging in business relationships with
specific freight providers, then the Group may incur higher freight rates and
a smaller pool of ship owners prepared to work with the Group.
Risk mitigation
The Group has its own in-house freight specialist, which helps the Group to
receive a competitive rate for freight cargoes. The Group's management team
regularly visit and speak with ship owners around world and it is therefore
possible to maintain a detailed understanding of both the global freight
market and ship owners.
As a result of the Group's operations being located in Ukraine, seaborne
freight chartering has been reduced in 2023 (following Russia's closure of the
Black Sea to Ukrainian ports), and as such the Group has increasingly relied
on its European customer network for sales. Despite this, the international
freight rate is still relevant for the business, as many contracts reference a
quoted freight rate and the Group has maintained some seaborne sales.
The Group currently does not enter into hedging arrangements for freight
rates, which is an approach consistent with the Group's strategy on other
forms of hedging. This approach is continually reviewed by the Group's
management team, and such arrangements may be entered into if it is deemed to
be beneficial to the Group.
The Group's freight department regularly monitors freight-related risks
associated with the war in Ukraine, or otherwise, with an aim of ensuring
effective decision making in light of changes to the operating landscape.
4. Operating risks
4.1. Risks relating to producing our products
The Group's operations involve the mining of iron ore, which requires detailed
planning of blasting, excavation and haulage activities, to deliver sufficient
quantities of iron ore in a timely manner to the Group's processing plant,
which crushes, grinds and beneficiates the material from in-situ iron ore
grades (ranging approximately 25-30% Fe) to high-grade concentrate (either 65%
or 67% Fe) for Ferrexpo's direct sale or pelletising. In the pelletising
facilities, the concentrate is converted into pellets via a series of kilns,
operating at approximately 1,300(o)C. The above processes are complex and
carry inherent risks as a result. The Group is able to mitigate such risks
through a range of activities and the collective experience of the Group's
executive management and operating teams, but it may not be possible to
eliminate all risk factors.
As a business with its main operating assets located in Ukraine, the Group has
faced significant risks relating to the ongoing war in Ukraine. The Group has
also faced a number of indirect consequences of the war in its operations,
such as a number of skilled personnel departing Ferrexpo's operations to
either serve in the Armed Forces of Ukraine or relocating away from the
conflict, the Ukrainian authorities requiring the delivery of specific
equipment for military use (typically light vehicles), interruptions in the
availability of specific materials relevant for the conflict such as
detonators, nitre, fuel and restrictions on operating practices, such as
scheduled blasting in the pits.
Outside of risks that directly relate to the war in Ukraine, the Group faces
material risks relating to its mining operations that include (but are not
limited to) health and safety related risks, the risk of a pit wall failure or
fall of ground incident in the Group's mines, equipment failure (either due to
operator oversight, failures in maintenance practices or failure despite
acceptable levels of maintenance), weather events preventing access to the
Group's operations, poor planning processes resulting in a lack of high-grade
iron ore for processing, or the failure of drilling to optimise face
availability or identify the correct location of ore and waste material. Risks
in the processing plant, covering the beneficiation and pelletisation of
material, also include (but are not limited to) equipment failure and
unscheduled equipment downtime, a lack of spare parts, a lack of key input
materials, unsuitable equipment for processing of certain ore types, operating
restrictions and extreme weather events (or other events potentially related
to climate change) that may impact the ability to produce or store the Group's
products. As operations continue to be modernised, the Group also faces
cybersecurity-related risks from cyber threats and other factors that may
impair the Group's ability to operate its electronic equipment.
The risks described above are typically short-term events and the Group also
faces longer-term risks, such as climate change and country risks related to
Ukraine. Potential risks related to climate change are also detailed in this
report, and have been identified through the Group's recent collaboration with
environmental consultants Ricardo Plc.
The Group is also aware of potential risks that relate to recent events with
the Group's UBO, which may affect Ferrexpo's ability to source key input
materials and labour either within Ukraine or overseas. Should third party
concerns relating to these matters prevent Ferrexpo from engaging in business
relationships with specific providers of materials and labour, then the Group
may have challenges in its ability to produce, or incur higher costs relating
to the sourcing of the same inputs from a smaller group of providers or group
of people. Despite the current limitations, the Group continues to maintain
production and retains the ability to increase production depending on
logistics availability. The availability of skills however, is becoming more
challenging due to conscription and emigration.
Risk mitigation
The Group employs an experienced management team and has a management
structure in place to monitor, and where necessary, manage risks as and when
these risks escalate. The Group's business model is in a sector that has
inherent risk in the mining and processing of materials, with these risks
being manageable and, where possible, mitigation measures are utilised to
ensure the safe operation of the Group's facilities to ensure the efficient
production of the Group's iron ore products. The Group maintains a risk
register of more than 40 risk areas, which is monitored on a frequent basis by
the Group's operational teams and reported to the relevant management
committees. Where an operational risk is deemed to be sufficiently significant
in terms of potential impact or likelihood, appropriate risk mitigation
measures are sought, often with the assistance of third party specialists,
where relevant.
Efforts aimed at maintaining equipment include ongoing repairs, keeping stocks
of replacement parts and materials, and supporting contractors. To ensure
stable energy supply, the Group cooperates with governmental organisations
through joint projects to upgrade of the energy structure. The Group also has
its own solar power plant capacity to meet its minimum power requirements.
To manage the availability of skills, the Group has expanded its recruitment
and training programmes to attract and train more people.
4.2. Risks relating to delivering our products to customers
The Group is a producer of a bulk commodity, meaning that its business model
relies on timely and consistent access to a logistics network with sufficient
capacity to transfer a large volume of material to the Group's customer base
around the world. Any interruption to the scale, availability or reliability
of this logistics network has the potential to significantly affect the
Group's ability to operate its business model and generate cash flow. The
nature of being a producer of a bulk commodity means that should an
interruption of logistics occur, there may be limited time or sufficient
funding available to efficiently remedy the situation or stockpile excess
material, potentially resulting in a temporary suspension of the Group's
production facilities and an associated effect on the Group's ability to
generate revenues and maintain a strong balance sheet.
The Group's logistics network is multi-nodal, including the Group's use of the
railway network in Ukraine and further afield across Europe, a stake in a
berth at a port facility in south west Ukraine (used for loading vessels for
the seaborne market), and an inland waterway logistics business along inland
waterways.
Examples of risks relating to the Group's logistics network, aside from those
specifically relating to the ongoing Russian invasion of Ukraine, range from
those potentially affecting railway logistics, which include (but are not
limited to) the unexpected closure or suspension of sections of the railway
network in Ukraine or Europe required for deliveries, a reduction in rail
capacity related to the phasing out of outdated equipment and insufficient
investment in replacement equipment, potential political interference in the
Group's ability to book railway access and wagons (including the restriction
on the use of one type of FPM's rail cars noted in Note 14 Commitments,
contingencies and legal disputes to the Consolidated Financial Statements).
Extreme weather events (either related to climate change or otherwise) and a
lack of personnel to operate rail locomotives and infrastructure effectively.
The Group faces similar risks relating to its use of inland waterway
logistics, including on the River Danube, and in addition includes risks
relating to abnormally high and low water levels, which may impede passage of
vessels. Such risks are expected to be exacerbated in the future by the
potential impact of climate change. Similar risks are posed to the Group and
its ability to access seaborne markets should extreme weather events (either
climate change related or otherwise) affect operations at the Port of
Pivdennyi or other ports used by the Group, or shipping routes such as the
Suez Canal and Red Sea.
The Group is also aware of potential risks that relate to recent events with
the Group's UBO, which may affect Ferrexpo's ability to secure bookings on key
logistics routes either within Ukraine or overseas. Should third party
concerns relating to these matters prevent Ferrexpo from engaging in business
relationships with specific logistics providers, then the Group may incur
difficulties in its ability to ship products, or may incur higher costs
relating to the sourcing of logistics options along alternative routes.
It should be noted that during 2023 the Group benefited from more stable rail
transportation within Ukraine. Also, the Group operated from its own pellet
trans-shipment site on the Ukrainian border, in addition to various warehouses
in Ukraine and in other countries to endure the stable supply of its goods to
its customers.
Risk mitigation
Since listing in 2007, the Group has sought to invest in its logistics
capabilities and overall capacity, to ensure cost effective and sufficient
access to a logistics network. This has involved the purchase of railcars,
including a fleet of over 3,000 wagons, which helps ensure availability,
despite the freeze of part of own wagons (as disclosed in Note 14 Commitments,
contingencies and legal disputes to the Consolidated Financial Statements),
reduce operating costs and ensure product quality whilst pellets are in
transit to customers. Similarly, the Group owns a 49.9% stake in a berth at
the Port of Pivdennyi in south-west Ukraine, along with a trans-shipment
vessel ("Iron Destiny"), which permits the Group to load trans-shipment
vessels for the seaborne market. Iron Destiny was outside of Ukrainian waters
undergoing routine maintenance at the time of Russia's invasion of Ukraine on
24 February 2022, ensuring safe ownership. The Group also owns its inland
waterway logistics provider (First-DDSG), which is based in Vienna, Austria,
and has locations along the River Danube and other inland waterways.
To maintain timely access to its logistics network, the Group maintains close
working relationships with logistics providers and related parties that are
key players in the Group's logistics operations.
4.3. Risks relating to health and safety
Effective management of health and safety related risks is important due to
the inherent risks involved in the nature of mining and processing operations.
The processes involved in the mining and processing of metalliferous rock has
progressed significantly in recent years, but risks remain if policies and
procedures are not followed correctly, or if equipment is not maintained and
used correctly.
Mining activities involve the use of large scale heavy equipment, such as haul
trucks, excavators and bulldozers, with each item of equipment weighing a
considerable number of tonnes and which are expected to regularly move around
to a number of locations throughout a shift. The operation of mining equipment
is inherently dangerous if operators are not correctly trained, or if due care
and attention are not applied when operating each item of equipment.
Activities within a mine include the drilling and blasting of rock, excavation
and transport of ore to either the processing plant or waste dumps, watering
of surfaces to reduce dust emissions and the construction of waste dumps to a
specified design. Activities are typically conducted 24 hours a day, at which
during certain time, poor weather and low light conditions are a risk for
operators, even though the Group has extensive lighting on equipment during
dark hours.
Risk mitigation
The Group's approach to mitigating safety risks is to understand the causal
factors of safety incidents, through creating risk registers for each activity
being undertaken or area within the Group's main operations. The Group also
records leading indicators of safety, with an aim to monitor and improve these
factors, to reduce the risk of a safety-related incident occurring. Examples
of leading indicators include the number of training courses undertaken, high
visibility safety tours by senior managers, safety inspections and hazard
reports completed. In the instance of a safety-related event occurring, the
Group aims to learn from each event, to reduce the risk of a repeat
occurrence. Lagging indicators of safety help the Group's management team to
record the effectiveness of safety measures being implemented, and the main
indicators used to track performance are the Group's lost time injury
frequency rate ("LTIFR"), total recordable injury frequency rate and
fatalities.
Throughout its operations, the Group is seeking to implement modern forms of
technology, including autonomous equipment, which help to remove operators
from hazardous working environments.
4.4. Risks relating to operating costs
The Group's business comprises a number of open-pit mining operations, an iron
ore processing complex and a range of ancillary activities that support the
safe production of the Company's products, which requires a range of input
goods and services. The Group's costs are subject to a range of factors, some
of which are controlled by the Group, whilst others are outside of the Group's
control, meaning that resulting profitability may fluctuate.
The Group operates in an energy intensive industry, and therefore requires a
range of commodity-based inputs such as diesel and natural gas, as well as
electricity, which are subject to market factors outside of Ferrexpo's control
and can influence the Group's overall profitability. Examples include natural
gas prices which increased significantly during 2022, though have abated in
2023.
Further to energy costs, inflationary pressures continued to be absorbed
during 2023. Cost inflation has the potential to affect a wide range of the
Group's input costs at its operations, with the Group potentially not able to
effectively counter such pressures due to the benchmark pricing of the Group's
products.
A primary cause of cost inflation has been the Group's inability to operate at
its nameplate capacity due to the war in Ukraine, resulting in the absorption
of fixed cost on lower production, i.e. increasing unit costs. Additionally,
inflationary pressures have been seen on a global basis since 2022, a
reflection in energy prices, though in turn equipment and maintenance costs,
salaries and wages. Consumer price inflation in Ukraine in 2023 is estimated
to have slowed to 12.9% (2022: 26.6%), reflecting the exceptional
circumstances experienced since 2022 in Ukraine, but also globally. Given that
the Russian invasion of Ukraine remains ongoing, it is expected that the
negative impacts of the war will continue to be experienced by the Group, such
as lower production and higher unit costs.
The use of natural gas is a key component of the Group's pelletising
operations and its use is therefore essential for the production of iron ore
pellets.
The Group is also aware of potential risks that relate to recent events with
the Group's UBO, which may affect Ferrexpo's ability to source key input
materials and labour either within Ukraine or overseas. Should third party
concerns relating to these matters prevent Ferrexpo from engaging in business
relationships with specific providers of materials and skills, then the Group
may incur difficulties in its ability to produce, or incur higher costs
relating to the sourcing of the same inputs from a smaller group of providers
or people.
The Group benefits open access to the energy market, allowing it to obtain
energy resources at market prices. Additionally, the cost of production is
supported by the depreciation of the national currency and long-term
relationships with suppliers of key standardised materials.
Risk mitigation
The Group has operated through a number of commodity cycles and the Group's
operations have been in production for over 50 years, and through this
experience of operating, the Group's management team has developed an
understanding of cost effective production and the required level of goods and
services to optimise the Group's profitability at any given level of
production.
The Group has a number of measures in place to reduce and minimise operating
costs, where possible, to maintain profitability throughout any given
commodity cycle. For input goods that are a requirement of the production of
pellets, the Group aims to minimise use and develop substitutes for use in the
Group's operations, which may help reduce reliance on a single input (or
limited number of inputs), and thereby reduce risks relating to the cost and
supply of individual inputs. As an example, a partial substitute would be the
use of sunflower husks in the Group's pelletiser, which is used to fuel the
pelletiser. In 2023, the Group successfully sourced 32% of the pelletiser's
heating energy from sunflower husks (2022: 21%). Other examples of
substitution of goods within the Group's operations include the use of
different manufacturers of mining equipment, with different suppliers of spare
parts, which reduces operational risks and can reduce operational costs.
4.5. Risks relating to information technology ("IT") systems and cybersecurity
The Group is increasingly adapting to modern technologies for the safe,
efficient and cost effective production of its products and the associated
ancillary services. With IT systems becoming increasingly important to the
Group's business activities, the risks associated with IT security and the
continued availability of IT systems have increased in recent years,
particularly in light of the increased complexity of cyberattacks on IT
systems. Cybersecurity threats may take the form of, but are not limited to
malware, ransomware, phishing, denial-of-service attacks, and password
attacks.
Cyberattacks, such as malware and ransomware, are often unreported in the
mainstream media by companies and governments wishing to avoid negative
publicity. It is therefore difficult to ascertain the full extent to which the
Group is facing cybersecurity risks. In the past, published cyberattacks
affecting companies and governments have closed or limited a company's ability
to produce, or have withheld or disclosed confidential information, and have
withheld access to key operational infrastructure.
A consequence of the war is a shortage of IT personnel due to conscription.
The availability of skilled IT people is becoming a challenge in Ukraine and
replacing people can take longer than before the war.
The Group is exposed to heightened risks related to cybersecurity at the
present. The war takes place in a number of environments, including attacks on
IT systems in Ukraine. Attacks can be expected on any IT system in Ukraine as
a result of the war, and therefore, organisations such as Ferrexpo may be the
target of an attack due to its location, or as part of a hybrid war to damage
the economy of Ukraine. Consequently, it is difficult for the Group to predict
the source, scale or nature of any cyberattack.
Risk mitigation
The Group's IT department conducts regular reviews of the general IT landscape
and provides regular cyber awareness training for employees as well as ad hoc
notification when new threats are identified. The Group also regularly reviews
requirements on data protection, with email security bulletins circulated to
ensure internal IT users are provided with up-to-date information on
cybersecurity. The Group has also implemented a dynamic approach to
anti-malware policies, to ensure an adaptive approach for new threats as they
emerge.
In 2023, the Group's IT infrastructure was adapted to meet the needs of longer
war. The Group invested resources and efforts in strengthening cross-backup
infrastructure to meet updated Group disaster recovery policies.
Following a series of cyberattacks on different corporate networks this year,
the Group's IT department initiated a project to upgrade the Group's global
network connectivity links and their underlying technology. As a result of
these efforts, the Group was able to withstand a DoS attack this year with
minimal disruption to its production and communication processes.
Additionally, the IT department, together with the executive committee,
constantly assess the need of ISO 2700x compliance audits on bi-quarterly or
quarterly term. In parallel, the Group must respond to the possibility of
cyberwarfare and conventional warfare tactics, for example by commissioning of
additional IT infrastructure in bomb shelters. Other examples of vigilance
include the deployment of extensive power control systems, and urgent upgrades
and migrations due to vulnerabilities.
Further to existing practices and protocols, the Group regularly updates the
software and hardware in use throughout its business, to reduce the Group's
exposure to known weaknesses in cybersecurity.
5. Risks relating to climate change
Climate change represents a challenge for the modern world, with multiple
stakeholders seeking to adapt to a low-emissions future.
Climate change poses a number of physical and transition risks as the world
seeks to reduce emissions and its reliance on technologies and activities that
are relatively intensive for the emission of greenhouse gases. See Note 2
Basis of preparation to the Consolidated Financial Statements for details on
potential impact on the consolidated financial statements. Physical risks are
those that affect the physical environment - such as increased heat events,
prolonged droughts and low water levels, dust emissions, and the increased
severity of precipitation events. Transition risks are those that relate to
society's shift to a low emissions future, such as reputational risks and the
risk of technologies becoming redundant in a lower emissions future. A review
of potential climate change related risks was conducted as part of the work
carried out with environmental consultants Ricardo Plc in 2022, with this work
detailed in the Group's Climate Change Report. A materiality assessment as
part of this work identified the following as the main risk areas facing
Ferrexpo: (a) demand for low carbon emissions steelmaking, (b) shipping:
targets and regulations on carbon emissions and (c) carbon pricing/tax:
targets and regulations on carbon emissions. Further details of the work
completed in collaboration with Ricardo Plc are available in Ferrexpo's
Climate Change Report on the Group's website.
At this stage in the global development curve on climate change science and
decarbonisation efforts, there is a heightened degree of stakeholder focus on
decarbonisation efforts. Given this focus, there is an associated expectation
of progress being made that may not match the availability of relevant
technology and equipment, or the financial viability of any technology, and
therefore there is a risk of rising stakeholder concern if a company's
decarbonisation plans and targets are not effectively communicated, or are
deemed insufficient. Should stakeholders require further action or increased
efforts for decarbonisation of a business, this may create additional
financial, operational and reputational risks for the business.
Risk mitigation
The Group understands the importance of climate change, both in its impact on
the business, as well as the Group's potential impact on climate change. The
Group aims to reduce its emissions over time and has set a series of reduction
targets for its greenhouse gases (principally carbon dioxide) for the medium
and long term (2030 and 2050, respectively). In December 2022, the Group
published its inaugural standalone Climate Change Report, which represents the
first phase of work completed with environmental specialists Ricardo Plc. This
report details a number of measures that the Group is either utilising today
to reduce emissions, or plans to use in the future, in order to achieve these
emissions targets.
The Group has a streamlined approach to reducing emissions, focusing where
possible on activities that generate the greatest emissions, as well as
identifying low cost solutions that may reduce the impacts of the Group's
activities. The main source of the Group's overall emissions (being Scopes 1,
2 and 3 collectively) is the downstream use of iron ore pellets in
steelmaking, which accounted for 85% of total emissions in the Group's
baseline year of 2019. In order to reduce this aspect of emissions, one of the
Group's objectives is to increase its focus on production of direct reduction
("DR") pellets, which are used in an alternative method of steelmaking (the
direct reduced iron - electric arc furnace process), which results in DR
pellets generating 37% lower emissions when converted to steel, compared to
the Group's blast furnace pellets, as assessed by Ricardo plc. With regard to
Scope 1 and 2 emissions, the Group has initiated a number of projects to
reduce these categories of emissions, including a clean power purchasing
strategy. The Group is continuing to study options to reduce diesel
consumption by installing clean electricity powered pantograph-trolley-assist
technology to haul trucks out of the open pit mines.
Through these projects, the Group stated objective was to produce iron ore
pellets on a net zero basis by 2050. For further details of the net zero
pathway identified through working with Ricardo Plc, as well as the Group's
carbon emissions reduction targets.
The Board and management team understand that further reductions in these
emissions are possible in the coming years, however, due to a protracted war
there is no certainty that these can be fully achieved. This means that the
Board will need to assess its targets and possibly restate the Group's Net
Zero pathway.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
Statement by the Directors under the UK Corporate Governance Code
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare such financial statements for
each financial year. Under that law the Directors are required to prepare the
Group financial statements in accordance with International Financial
Reporting Standards as adopted in the United Kingdom ("UK adopted IFRS") and
have also chosen to prepare the Parent Company financial statements in
accordance with the United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards, comprising FRS 101 Reduced Disclosure
Framework, and applicable law).
Under company law, the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Group and the Parent Company and of their profit or loss for
that period.
In preparing the financial statements, the Directors are required to:
· select suitable accounting policies and apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable UK adopted International Financial Reporting
Standards have been followed for the Group financial statements and United
Kingdom Accounting Standards, comprising FRS 101 Reduced Disclosure Framework
have been followed, subject to any material departures disclosed and explained
in the financial statements; and
· prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Group's and Parent Company's transactions
and disclose with reasonable accuracy at any time the financial position of
the Group and Parent Company and enable them to ensure that its financial
statements comply with the Companies Act 2006. The Directors are also
responsible for safeguarding the assets of the Group and Parent Company and
for taking reasonable steps for the prevention and detection of fraud and
other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Responsibility Statement of the Directors in respect of the Annual Report and
Accounts
We confirm that to the best of our knowledge:
(a) the Group financial statements, prepared in accordance with UK adopted
IFRS, give a true and fair view of the assets, liabilities, financial position
and profit of the Company and the subsidiary undertakings included in the
consolidation taken as a whole and attention is drawn to the material
uncertainty in terms of the Group's ability to continue as a going concern in
Note 2 Basis of preparation of the Consolidated Financial Statements on pages
46 to 48;
(b) the Parent company financial statements, which have been prepared in
accordance with United Kingdom Accounting Standards, comprising FRS 101
Reduced Disclosure Framework, give a true and fair view of the Company's
assets, liabilities and financial position of the Parent Company;
(c) the Strategic Report includes a fair review of the development and
performance of the business and the position of the Company and the subsidiary
undertakings included in the consolidation taken as a whole, together with a
description of the Principal Risks and uncertainties that they face; and
(d) the Annual Report and financial statements, taken as a whole, is fair,
balanced and understandable, and provides the information necessary for
shareholders to assess the Group's and Company's position, performance,
business model and strategy.
This responsibility statement was approved by the Board of Directors on 17
April 2024 and is signed on its behalf by:
Lucio Genovese
Executive Chair
Nikolay Kladiev
Executive Director/Chief Financial Officer
17 April 2024
INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF FERREXPO PLC ON THE
PRELIMINARY ANNOUNCEMENT OF FERREXPO PLC
As the independent auditor of Ferrexpo Plc we are required by UK Listing Rule
LR 9.7A.1 (2) to agree to the publication of Ferrexpo Plc's preliminary
statement of annual results for the year ended 31 December 2023.
The preliminary statement of annual results for the year ended 31 December
2023 includes the 2023 full year results and the disclosures required by the
Listing rules including:
· Financial Highlights and 2023 Financial Summary;
· Executive Chair Statement;
· Chief Financial Officer Statement;
· Management commentary included under the following headings;
Operating During a Time of War, Operational Review, Market Review, Financial
Review, Responsible Business Review Sections, Risk Management, Principal Risks
Sections;
· Statement of Directors' Responsibilities;
· Consolidated Income Statement;
· Consolidated Statement of Comprehensive Income;
· Consolidated Statement of Financial Position;
· Consolidated Statement of Cash Flows;
· Consolidated Statement of Changes in Equity;
· Notes to the Consolidated Financial Statements; and
· Alternative Performance Measures.
The Directors of Ferrexpo Plc are responsible for the preparation,
presentation and publication of the preliminary statement of annual results in
accordance with the UK Listing Rules.
We are responsible for agreeing to the publication of the preliminary
statement of annual results, having regard to the Financial Reporting
Council's Bulletin "The Auditor's Association with Preliminary Announcements
made in accordance with the requirements of the UK Listing Rules".
Status of our audit of the financial statements
Our audit of the annual financial statements of Ferrexpo plc for the year
ended 31 December 2023 is complete and we signed our auditor's report on 17
April 2024. Our auditor's report is not modified although included a separate
section with regard to material uncertainties related to going concern as a
result of the ongoing war and the application of local legislation in Ukraine
in respect of the outcome of the proceedings in which the Group is involved.
The audit report also drew attention to the uncertainty in the application of
local legislation in Ukraine in respect of the outcome of the proceedings in
which the Group is involved and to the uncertainty related to the estimate of
the recoverable amount of certain assets of the Group as result of the ongoing
war and ongoing legal proceedings in Ukraine.
Procedures performed to agree to the preliminary announcement of annual
results
In order to agree to the publication of the preliminary announcement of annual
results of Ferrexpo Plc we carried out the following procedures:
Confirmed that the preliminary statement includes the minimum information
required by the Listing Rules.
Checked that the figures in the preliminary statement have been accurately
extracted from the audited financial statements.
Checked the consistency of presentation of the financial information in the
preliminary statement with the audited financial statements.
Read management commentary, the financial information in the consolidated
financial statements and notes thereof and considered if the management
commentary is:
· Fair, balanced and understandable
· Materially consistent with the financial statements and with the
contents of the annual report
· Consistent with the information and our knowledge obtained in the
course of the audit of the financial statements of Ferrexpo Plc for the year
ended 31 December 2023.
Considered if for Alternative Performance Measures (APMs) and associated
narrative:
· APMs are clearly defined and have been given meaningful labels
· The use and relevance of APMs is explained
· APMs have been reconciled to the most relevant figures in the
financial statements
· Comparatives have been included
Considering whether the financial information in the preliminary announcement
is misstated, either because it is stated incorrectly or because it is
presented in a misleading manner.
Rakesh Shaunak FCA
Senior Statutory Auditor
For and on behalf of MHA,
Statutory Auditor
London
17 April 2024
MHA is the trading name of MacIntyre Hudson LLP, a limited liability
partnership in England and Wales (registered number OC312313)
Consolidated Income Statement
US$000 Notes Year ended Year ended
31.12.23 31.12.22
Revenue 4 651,795 1,248,490
Operating expenses 3/5 (616,107) (1,192,046)
Other operating income 4,067 9,233
Operating foreign exchange gains 6 31,371 339,439
Operating profit 71,126 405,116
Recognition of provisions for legal disputes 14 (131,117) −
Share of (loss)/profit from associates (372) 557
(Loss)/profit before tax and finance (60,363) 405,673
Net finance expense 7 (104) (3,517)
Non-operating foreign losses 6 (7,934) (63,497)
(Loss)/profit before tax (68,401) 338,659
Income tax expense 8 (16,352) (118,662)
(Loss)/profit for the year (84,753) 219,997
(Loss)/profit attributable to:
Equity shareholders of Ferrexpo plc (84,775) 219,995
Non-controlling interests 22 2
(Loss)/profit for the year (84,753) 219,997
(Loss)/earnings per share:
Basic (US cents) 9 (14.41) 37.41
Diluted (US cents) 9 (14.41) 37.35
Consolidated Statement of Comprehensive Income
US$000 Notes Year ended Year ended
31.12.23 31.12.22
(Loss)/profit for the year (84,753) 219,997
Items that may subsequently be reclassified to profit or loss:
Exchange differences on translating foreign operations (54,855) (664,296)
Income tax effect 8 1,479 13,036
Net other comprehensive loss that may be reclassified to profit or loss in (53,376) (651,260)
subsequent periods
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gains on defined benefit pension liability 899 5,336
Net other comprehensive income not being reclassified to profit or loss in 899 5,336
subsequent periods
Other comprehensive loss for the year, net of tax (52,477) (645,924)
Total comprehensive loss for the year, net of tax (137,230) (425,927)
Total comprehensive loss attributable to:
Equity shareholders of Ferrexpo plc (137,244) (425,919)
Non-controlling interests 14 (8)
(137,230) (425,927)
Consolidated Statement of Financial Position
US$000 Notes As at As at
31.12.23 31.12.22
Assets
Property, plant and equipment 10 826,034 807,861
Right-of-use assets 6,852 6,342
Goodwill and other intangible assets 6,368 8,249
Investments in associates 4,616 5,167
Inventories 11 5,883 6,277
Other non-current assets 38,104 37,451
Deferred tax assets 8 10,149 14,471
Total non-current assets 898,006 885,818
Inventories 11 201,429 224,454
Trade and other receivables 82,321 24,699
Prepayments and other current assets 21,380 13,352
Income taxes recoverable and prepaid 8 2,432 4,674
Other taxes recoverable and prepaid 26,291 88,762
Cash and cash equivalents 12 115,241 112,945
Total current assets 449,094 468,886
Total assets 1,347,100 1,354,704
Equity and liabilities
Issued capital 121,628 121,628
Share premium 185,112 185,112
Other reserves (2,676,294) (2,636,891)
Retained earnings 3,482,883 3,580,329
Equity attributable to equity shareholders of Ferrexpo plc 1,113,329 1,250,178
Non-controlling interests 81 67
Total equity 1,113,410 1,250,245
Interest-bearing loans and borrowings 3/13 1,009 1,354
Defined benefit pension liability 16,518 16,456
Provision for site restoration 2,780 4,284
Deferred tax liabilities 8 2,729 1,347
Total non-current liabilities 23,036 23,441
Interest-bearing loans and borrowings 3/13 5,939 5,194
Trade and other payables 35,310 30,509
Provisions 14 128,050 −
Accrued and contract liabilities 17,328 19,593
Income taxes payable 8 15,202 20,564
Other taxes payable 8,825 5,158
Total current liabilities 210,654 81,018
Total liabilities 233,690 104,459
Total equity and liabilities 1,347,100 1,354,704
The financial statements were approved by the Board of Directors and
authorised for issue on 17 April 2024 and signed on behalf of the Board.
Lucio
Genovese
Nikolay Kladiev
Executive
Chair
Chief Financial Officer and Executive Director
Consolidated Statement of Cash Flows
US$000 Notes Year ended Year ended
31.12.23 31.12.22
(Loss)/profit before tax (68,401) 338,659
Adjustments for:
Depreciation of property, plant and equipment, right-of-use assets and 57,669 96,977
amortisation of intangible assets 5
Net finance (income)/expense 7 (2,536) 746
Losses on disposal and liquidation of property, plant and equipment 5 11 1,665
Write-offs and impairments 5 978 260,308
Share of loss/(profit) from associates 372 (557)
Movement in allowance for doubtful receivables 4,403 6,729
Movement in site restoration provision (1,377) 1,578
Employee benefits 3,518 3,745
Share-based payments 830 490
Recognition of provisions for legal disputes 14 131,117 −
Operating foreign exchange gains 6 (31,371) (339,439)
Non-operating foreign exchange losses 6 7,934 63,497
Operating cash flow before working capital changes 103,147 434,398
Changes in working capital:
(Increase)/decrease in trade and other receivables (71,946) 210,267
Decrease/(increase) in inventories 15,930 (90,385)
Increase/(decrease) in trade and other payables (including accrued and 6,724 (55,529)
contract liabilities)
Decrease/(increase) in other taxes recoverable and payable (including VAT) 62,554 (84,110)
Cash generated from operating activities 116,409 414,641
Interest paid (223) (918)
Income tax paid 8 (12,779) (110,243)
Post-employment benefits paid (2,238) (2,220)
Net cash flows from operating activities 101,169 301,260
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets 10 (101,247) (161,010)
Proceeds from disposal of property, plant and equipment and intangible assets 91 103
Interest received 4,608 894
Dividends from associates − 711
Net cash flows used in investing activities (96,548) (159,302)
Cash flows used in financing activities
Repayment of loans and borrowings 13 − (42,209)
Principal elements of lease payments 13 (5,410) (5,786)
Dividends paid to equity shareholders of Ferrexpo plc 9 (456) (155,095)
Net cash flows used in financing activities (5,866) (203,090)
Net decrease in cash and cash equivalents (1,245) (61,132)
Cash and cash equivalents at the beginning of the year 112,945 167,291
Currency translation differences 3,541 6,786
Cash and cash equivalents at the end of the year 12 115,241 112,945
Consolidated Statement of Changes in Equity
Attributable to equity shareholders of Ferrexpo plc
US$000 Issued capital Share premium Other reserves Retained Total Non-controlling interests Total
earnings
capital and reserves equity
At 1 January 2022 121,628 185,112 (1,986,131) 3,510,793 1,831,402 75 1,831,477
Profit for the year − − − 219,995 219,995 2 219,997
Other comprehensive (loss)/income − − (651,250) 5,336 (645,914) (10) (645,924)
Total comprehensive (loss)/income for the year − − (651,250) 225,331 (425,919) (8) (425,927)
Share-based payments − − 490 − 490 − 490
Equity dividends to shareholders of Ferrexpo plc − − − (155,795) (155,795) − (155,795)
At 31 December 2022 121,628 185,112 (2,636,891) 3,580,329 1,250,178 67 1,250,245
Loss for the year − − − (84,775) (84,775) 22 (84,753)
Other comprehensive loss − − (53,368) 899 (52,469) (8) (52,477)
Total comprehensive loss for the year − − (53,368) (83,876) (137,244) 14 (137,230)
Share-based payments − − 830 − 830 − 830
Equity dividends to shareholders of Ferrexpo plc (Note 9) − − − (435) (435) − (435)
Effect from transfer of treasury shares − − 13,135 (13,135) − − −
At 31 December 2023 121,628 185,112 (2,676,294) 3,482,883 1,113,329 81 1,113,410
Although accounts are published in US dollars and dividends are declared in US
dollars, the shares are denominated in UK pounds sterling and dividends are
therefore paid in UK pounds sterling. See Note 9 Earnings per share and
dividends paid and proposed for dividends paid during the year.
Notes to the Consolidated Financial Statements
Note 1: Corporate information
The financial information set out in this statement does not constitute
statutory accounts as defined in section 435 of the Companies Act 2006. This
set of financial results was approved by the Board on 17 April 2024. The
financial information for the years ended 31 December 2023 and 31 December
2022 has been extracted from the statutory accounts for each year.
The auditors' report on the 2023 statutory accounts was (i) unqualified, (ii)
did not contain a statement under section S498(2) or S498(3) of the Companies
Act 2006, but (iii) included a separate section with regard to material
uncertainties related to going concern as a result of the ongoing war and the
application of local legislation in Ukraine in respect of the outcome of the
proceedings in which the Group is involved. The audit report also drew
attention to the uncertainty in the application of local legislation in
Ukraine in respect of the outcome of the proceedings in which the Group is
involved and to the uncertainty related to the estimate of the recoverable
amount of certain assets of the Group as result of the ongoing war and ongoing
legal proceedings in Ukraine. Further details on those uncertainties are
provided in Note 2 Basis of preparation, Note 10 Property, plant and equipment
and Note 14 Commitments, contingencies and legal disputes included in this
announcement.
The audited statutory accounts for the year ended 31 December 2022 have been
delivered to the Registrar of Companies. The auditors' report on those
accounts was (i) unqualified, (ii) did not contain a statement under section
S498(2) or S498(3) of the Companies Act 2006, but (iii) included a separate
section with regard to material uncertainties related to going concern as a
result of the ongoing war and the application of local legislation in Ukraine
in respect of the outcome of the proceedings in which the Group is involved.
The audit report also drew attention to the uncertainty in the application of
local legislation in Ukraine in respect of the outcome of the proceedings in
which the Group is involved and to the uncertainty related to the estimate of
the recoverable amount of certain assets of the Group as result of the ongoing
war and ongoing legal proceedings in Ukraine.
Ferrexpo plc will publish on or around 30 April 2024 its Annual Report and
Accounts for the year ended 31 December 2023 on its corporate website
www.ferrexpo.com. The audited statutory accounts for the year ended 31
December 2023 will be delivered to the Registrar of Companies following the
Company's annual meeting convened for 23 May 2024.
Organisation and structure
Ferrexpo plc (the "Company") is incorporated and registered in England, which
is considered to be the country of domicile, with its registered office at 55
St James's Street, London SW1A 1LA, UK. The Company is listed on the London
Stock Exchange and is a member of the FTSE 250 Index. Ferrexpo plc and its
subsidiaries (the "Group") operate two mines and a processing plant near
Kremenchuk in Ukraine, have an interest in a port in Odessa and sales and
marketing activities around the world including offices in Switzerland, Dubai,
Japan, China, Singapore and Ukraine. The Group also owns logistics assets in
Austria, which operate a fleet of vessels operating on the Rhine and Danube
waterways and an ocean-going vessel, which provides top-off services. The
Group's operations are vertically integrated from iron ore mining through to
iron ore concentrate and pellet production and subsequent logistics. The
Group's mineral properties lie within the Kremenchuk Magnetic Anomaly and are
currently being extracted at the Gorishne-Plavninske-Lavrykivske ("GPL") and
Yerystivske deposits.
The ongoing war in Ukraine continued to have a serious impact on the Group's
activities in the 2023 financial year, as the Ukrainian Black Sea ports were
unavailable for a large part of the year. Following Russia's withdrawal from
the Black Sea Grain Agreement, a new alternative corridor for shipments from
the Ukrainian Black Sea ports was established, which was also used for
non-grain shipments. Although it does have a significant impact on the Group's
revenue and its ability to commit to sales volumes to customers in other
markets than Europe, the Group has refrained from using this new corridor
during the financial year 2023. The Group has managed to continue its
operations throughout the 2023 financial year, albeit at a significantly lower
level, and had to align its mining and processing plans with the logistics
network available for sales to its customers in the various markets as it was
done during the financial year 2022. The power supply stabilised in the second
quarter of the financial year 2023 and no longer had an adverse effect on the
Group's production. As at the date of the approval of these consolidated
financial statements, the war is still ongoing and poses a significant threat
to the Group's mining, processing and logistics operations within Ukraine. See
Note 2 Basis of preparation, Note 4 Revenue and Note 10 Property, plant and
equipment for further information.
The largest shareholder of the Group is Fevamotinico S.a.r.l.
("Fevamotinico"), a company incorporated in Luxembourg. Fevamotinico is
ultimately wholly owned by The Minco Trust, of which Kostyantin Zhevago and
two other members of his family are the beneficiaries. At the time this report
was published, Fevamotinico held 49.3% (49.5% as at the time of publication of
the 2022 Annual Report and Accounts) of Ferrexpo plc's issued voting share
capital (excluding treasury shares).
Note 2: Basis of preparation
Whilst the preliminary announcement has been prepared in accordance with
International Financial Reporting Standards ("IFRS") adopted for use in the
United Kingdom ("UK adopted IFRS") and with the Companies Act 2006, as
applicable to companies reporting under international accounting standards,
this announcement does not itself contain sufficient information to comply
with IFRS. The Board approved the full financial statements that comply with
IFRS on 17 April 2024. The financial statements have been prepared under the
historical cost convention as modified by the recording of pension assets and
liabilities and the revaluation of certain financial instruments.
The Group's principal risks likely to affect its future development,
performance and position are set out on pages 25 to 38. The financial position
of the Group, its cash flows, liquidity position and borrowing facilities are
described in the Financial Review on pages 15 to 20.
Going concern
As at the date of the approval of these consolidated financial statements, the
war in Ukraine is still ongoing and the duration is difficult to predict.
During the financial year 2023, the Group continued to demonstrate a high
level of commitment and resilience that enabled it to operate at a constant,
but lower capacity, with a high degree of flexibility to adapt its operations
to such changing circumstances.
The ongoing war and the situation in the country continues to represent a
material uncertainty in terms of the Group's ability to continue as a going
concern. In addition to the war-related material uncertainty, the Group is
also exposed to the risks associated with operating in a developing economy,
which may or may not be exacerbated by the war and/or the current
circumstances facing the Group's controlling shareholder (see Ukraine country
risk on pages 26 to 29). As a result, the Group is exposed to a number of risk
areas that are heightened compared to those expected in a developed economy,
such as an environment of political, fiscal and legal uncertainties, which
represents another material uncertainty as at the date of the approval of
these consolidated financial statements.
The war related material uncertainty is predominantly related to the provision
and availability of logistics capacity required for the delivery of the
Group's products to customers in its key markets, subject to the availability
of Black Sea ports in Ukraine. As in the previous financial year, the Group
had to adjust during the financial year 2023 its production level to the sales
currently possible, which continues to have an impact on the Group's cash flow
generation and profitability. However, the Group continued to adapt within the
difficult environment by proactively planning how to manage existing
uncertainties throughout the year in order to ensure the production of the
volumes committed to the Group's customers. The Group's ability to operate its
assets also depends on sufficient supply of key input materials required for
the mining and production process as well as maintaining an adequate number of
experienced and skilled members of the workforce in Ukraine. Further details
are outlined in the Principal Risks on pages 25 to 38.
The adverse impact on the Group's cash flow generation from the ongoing war is
reflected in the periods covered by the Group's long-term model used for the
going concern assessment. As mentioned above, the level of the Group's
production remains predominantly dependent on the access to logistic routes
within Ukraine as production volume needs to be aligned to possible sales to
minimise working capital outflow and maintain a solid net cash position.
As at 31 December 2023, the Group had produced 3,845 thousand tonnes of iron
ore pellets, representing a decrease of 36% compared to the year ended 31
December 2022, and sold 4,174 thousand tonnes of its products, compared to
6,183 thousand tonnes during the financial year 2022, which included two
months of operations at pre-war levels.
Despite the challenging situation during the financial year 2023, the Group's
net cash position increased from US$106,397 thousand at the beginning of the
year to US$108,293 thousand as at 31 December 2023, demonstrating the Group's
capability to adjust its business operation to the changed environment in
order to preserve the available liquidity as much as possible. As at the date
of the approval of these consolidated financial statements, the Group is in a
net cash position of approximately US$91,300 thousand with an available cash
balance of approximately US$96,200 thousand. The decrease of the net cash
position is driven by the increase of the Group's production during the first
quarter of 2024 to benefit from favourable market conditions and the available
alternative shipping corridor in the Black Sea. In addition to the available
cash balance, the Group has an outstanding trade receivable balance of
approximately US$48,900 thousand from its pellet and concentrate sales in the
first quarter of 2024, which are expected to be collected in the next few
months, and finished goods already stockpiled at different ports or storage
locations other than the plant of 668 thousand tonnes.
The Group's volume of finished goods inventory is expected to reduce over the
next few months, but is dependent on the number of shipments using the
alternative shipping corridor.
As part of management's going concern assessment, the Group continuously
adjusts its long-term model in order to reflect the latest developments in
terms of possible production and sales volumes as well as latest market prices
and production costs, which are adversely affected by the lower production
volumes. This long-term model is also used for the impairment test of the
Group's non-current operating assets and the key assumptions used when
preparing this model are disclosed in Note 10 Property, plant and equipment on
pages 56 and 57.
The latest base case of the long-term model shows that the Group has
sufficient liquidity to continue its operations at a reduced level for the
entire period of the management's going concern assessment, covering a period
of 18 months from the date of the approval of these consolidated financial
statements, even allowing for reasonably possible or plausible adverse changes
in respect of realised prices, lower production and sales volumes as well as
higher production costs. This base case assumes a production volume of 45% of
the pre-war level for the financial year 2024, before an increase to
approximately 80% in 2025 and an expected recovery to pre-war levels in 2026.
However, as mentioned above, the production and sales volumes are dependent on
the logistics network available to the Group and other potential adverse
effects on the Group's operation as a result of the ongoing war. The
sensitivities prepared for reasonable adverse changes show tighter available
liquidity under some scenarios, but sufficient available liquidity to operate
as planned for the next 18 months.
The Group also prepared reverse stress tests for more severe adverse changes,
such as a combination of all reasonably possible or plausible adverse changes
in respect of realised prices and production costs, which is unlikely to
happen in combination as a result of the historical natural hedge between iron
ore prices and prices for key input materials, as well as lower production and
sales volumes, but also for a further delay of the full recovery by another
year. The stress test for the most severe adverse changes shows that the Group
would deplete its available cash balance by September 2024, without making use
of any available mitigating actions within its control, such as further
reductions of uncommitted development capital expenditure and operating costs.
As disclosed in the Group's 2022 Annual Report & Accounts, the ongoing war
in Ukraine and other circumstances facing the Group have led to an escalation
of a number of risks, including risks relating to the political environment
and the independence of the legal system in Ukraine, which could have a
material negative impact on the Group's business activities and reputation,
although the financial impact cannot be reasonably quantified. The Group
announced on 29 January 2024 that a Ukrainian court of appeal has confirmed a
claim against Ferrexpo Poltava Mining ("FPM") in the amount of UAH4,727
million (US$124,450 thousand as at 31 December 2023), in respect of contested
sureties (see Note 14 Commitments, contingencies and legal disputes for
further details). The claim and court decision are another example of the risk
of operating in a dynamic and adverse political landscape in Ukraine, which
creates additional challenges for both the Group's subsidiaries in Ukraine and
also for the Group itself. Although the Group's management is of the opinion
that this claim is without merit and FPM has appealed this decision to the
Supreme Court of Ukraine, considering the magnitude of this specific claim and
the risks associated with the judicial system in Ukraine, the outcome of this
ongoing legal dispute represents a material uncertainty in terms of the
Group's ability to continue as a going concern. In accordance with the
requirements of IAS 37 Provisions, contingent liabilities and contingent
assets, the Group recorded a full provision for this claim as at 31 December
2023, with a consequent significant impact on the Group's result for the
financial year 2023. A future cash outflow, which also depends on the details
and technicalities of a possible enforcement in the event of a negative
decision by the Supreme Court, is likely to have a significant impact on the
Group's future cash flow generation and available liquidity.
The Group has assessed that, taking into account:
i) its available cash and cash equivalents;
ii) its cash flow projections, adjusted for the effects caused by the war
in Ukraine, for the period of management's going concern assessment
covering a period of 18 months from the date of the approval of
these consolidated financial statements;
iii) the feasibility and effectiveness of all available mitigating actions
within the Group management's control for identified uncertainties; and
iv) the legal merits in terms of the ongoing legal dispute mentioned above
and potential future actions available to protect the interests of the Group
in case of a negative decision from the Supreme Court,
there remains a material uncertainty in respect of the ongoing war and the
legal dispute in Ukraine, which are outside of the Group management's control,
with the duration and the impact of the war still unable to be predicted, and
the uncertainty in relation to the independence of the judicial system and its
immunity from economic and political influences in Ukraine.
In respect of the contested sureties claim mentioned above, no enforcement
procedures have commenced as at the date of the approval of these consolidated
financial statements. Furthermore, on 1 April 2024 the Supreme Court suspended
the possible enforcement of the decision of the Ukrainian court of appeal, so
that such enforcement procedures cannot be initiated by the claimant until a
final decision is made by the Supreme Court, or the Supreme Court's suspension
order is otherwise lifted. As at the date of the approval of these
consolidated financial statements, no decision has been made by the Supreme
Court in the contested sureties claim and the next hearing is scheduled for 27
May 2024. The commencement of the enforcement procedures could potentially
have a material negative impact on the Group's business activities and its
ability to continue as a going concern. See Note 14 Commitments, contingencies
and legal disputes for further information, which should be read in
conjunction with this note.
A supplier and related party to the Group filed in February 2024 an
application to open bankruptcy proceedings ("creditor protection proceedings")
against FPM for an amount of UAH2.2 million, which subsequently increased to
UAH4.6 million (c. US$117 thousand as at 15 April 2024). It is the Group's
intention to settle this debt or seek to extend the payment terms, but noting
a previous extension request has been refused by the supplier prior, to avoid
the opening of such creditor protection proceedings. However, a possible
opening of the creditor protection proceedings might affect FPM's ability to
continue as a going concern and, as a consequence, also the Group. See Note 14
Commitments, contingencies and legal disputes for further information, which
should be read in conjunction with this note.
As at the date of the approval of these consolidated financial statements, the
Group's operations, located adjacent to the city of Horishni Plavni, have not
been directly affected by the ongoing war, but this remains a risk. Should the
area surrounding the Group's operations become subject to the armed conflict,
there would be a significant risk posed to the safety of the Group's workforce
and the local community, as well as a significant risk to key assets and the
infrastructure required for the Group to operate effectively. See the update
on the Group's Principal Risks section on pages 25 to 38 for further
information.
Considering the current situation of the ongoing war and legal disputes in
Ukraine, mainly the contested sureties claim, the Group's ability to swiftly
adapt to the changing circumstances, as demonstrated during the financial
years 2023 and 2022, and the results of the management's going concern
assessment, the Group continues to prepare its consolidated financial
statements on a going concern basis. However, as explained above, many of the
identified uncertainties in respect of the ongoing war and legal disputes in
Ukraine are outside of the Group management's control and are unpredictable,
which may cast significant doubt upon the Group's ability to continue as a
going concern, including a potential seizure or forced sale of the Group's
assets in Ukraine, including movable, immovable and financial assets, in
respect of the contested sureties claim. See Note 10 Property, plant and
equipment and Note 11 Inventories for further information.
For more information on critical judgements made by management in preparing
these consolidated financial statements, see also Note 14 Commitments,
contingencies and legal disputes in respect of other ongoing legal proceedings
and disputes.
If the Group is unable to continue to realise assets and discharge liabilities
in the normal course of business, it would be necessary to adjust the amounts
in the statement of financial position in the future to reflect these
circumstances, which may materially change the measurement and classification
of certain figures contained in these consolidated financial statements.
Impact of climate change on the Group's financial statements
The Group acknowledges the potential impact of climate change on its
operations and understands that there are potential direct and indirect
financial implications from the climate change in future periods.
As published in the Group's Responsible Business Reports, the Group has
committed to reduce its Scope 1 and Scope 2 carbon emissions by 50% by 2030,
compared to the baseline year of 2019, and is targeting a net zero production
for Scope 1 and Scope 2 carbon emissions by 2050.
Despite the ongoing war in Ukraine, the Group remains committed to its net
zero pathway, however, it is important to acknowledge that the Group is
operating in a challenging environment, which requires the fast adaption to
new circumstances and uncertainties that are outside of the Group's control.
As a result, there is a risk that the Group may also need to adapt its carbon
emission reduction and net zero targets, depending on the duration and impact
of the ongoing war in Ukraine. See Going concern on pages 46 to 48 for further
information.
The ongoing war in Ukraine continues to have an impact on the Group's cash
flow generation and profitability. As a result, certain projects related to
the Group's Scope 1 and Scope 2 carbon emission targets and the net zero
pathway have been halted at the start of the war in February 2022 and, as a
consequence, the Group has not entered into any significant commitments for
the renewal and replacement of its processing and mining equipment at
Ukrainian operations.
Physical risks
The Group is aware of the potential increased risks that climate change could
pose to its assets in Ukraine. However, there is no immediate risk at this
time and the Group will continue to monitor and consider these risks when
planning the renewal and replacement of its existing non-current operating
assets.
Transition risks
The Group is aware of a potential shift towards a low-carbon economy and the
potential implications for its business models, which could affect market
demand for its iron ore products in the medium to long term. The Group is
already in the position to produce Direct Reduction ("DR") pellets and
continues to monitor the market and invests in customer relationships in order
to secure fixed supply volumes in the short, medium and long term. The shift
does not affect the Group's finished goods on stock as at 31 December 2023 as
these are still in demand and expected to be sold in the coming months.
The transition risks as well as the Group's Scope 1 and Scope 2 carbon
emission targets and the net zero pathway could also have an impact on the
Group's processing and mining equipment required in the future. In absence of
any significant commitments for processing and mining equipment as at 31
December 2023, there is no significant impact on the expected remaining useful
lives of the Group's non-current operating assets at this time. Furthermore,
the Group assumes that its critical non-current operating assets will continue
to be an essential part of the Group's business activities in the future. The
Group will continue to monitor and consider these risks when planning the
renewal and replacement of its existing non-current operating assets.
At the time of approval of these consolidated financial statements, no
significant changes to the Group's mine plan are expected that could have a
material impact on the Group's non-current operating assets, which are
amortised using the unit of production method, or on the recognised site
restoration provisions.
There are a number of work streams underway to develop the Group's
decarbonisation pathway and creating a structure on which to plan and
prioritise future investments. This pathway is however also dependent on the
duration and impact of the ongoing war in Ukraine. The Group's business model
will be updated as soon as there is more clarity about the current situation
in Ukraine and the exact path of the Group's decarbonisation pathway,
including commitments made for the renewal and replacement of processing and
mining equipment.
For further information see Risks relating to climate change in the Group's
Principal Risk section on page 38.
Changes in accounting policies
New standards and interpretations adopted
The accounting policies and methods of computation adopted in the preparation
of the consolidated financial statements are consistent with those followed in
the preparation of the Group's annual financial statements for the year ended
31 December 2022 except for the adoption of new standards, interpretations and
amendments to UK adopted IFRS effective as at 1 January 2023.
All new standards, interpretations and amendments adopted as of 1 January 2023
did not have a material impact on the Group's consolidated financial
statements for the year ended 31 December 2023. Full disclosure of the list of
new standards, interpretations and amendments adopted during the year will be
provided in Note 3 New accounting policies included in the Group's 2023 Annual
Report and Accounts.
Furthermore, the Group does not expect an impact on its consolidated financial
statements from all other standards, interpretations and amendments issued at
the reporting date, but not yet to be adopted for these consolidated financial
statements.
Use of critical estimates and judgements
The preparation of consolidated financial statements in conformity with IFRSs
requires management to make estimates and judgements that affect the amounts
reported in the consolidated financial statements and accompanying notes.
These estimates and judgements are based on information available as at the
date of authorising the consolidated financial statements for issue. Actual
results could therefore differ from those estimates and judgements.
The Group identified a number of areas involving the use of critical estimates
and judgements made by management in preparing the consolidated financial
statements and supporting information is embedded within the following
disclosure notes:
Critical estimates
Note 10 Property, plant and equipment - impairment consideration as a result
of the ongoing war in Ukraine
The most critical estimate made by the management is in respect of the timing
when the Group's operation is expected recover to pre-war levels. As disclosed
in Note 10 Property, plant and equipment, there is a risk of material
adjustments in future periods in case of a delay of the recovery to pre-war
levels. In addition, the duration and impact of the ongoing war in Ukraine
could pose a further risk for significant adjustments in future periods.
Critical judgements
Note 2 Basis of preparation - going concern assumption
Note 8 Taxation - transfer pricing claims, tax legislation in Ukraine and
development in international tax environment
Note 14 Commitments, contingencies and legal disputes - assessment of matters
in an environment of political, fiscal and legal uncertainties
The consideration of the impact of climate change on the Group's financial
statements did not require critical estimates and judgements when preparing
the consolidated financial statements as at 31 December 2023. See Note 2 Basis
of preparation for further details.
Note 3: Segment information
The Group is managed as a single segment, which produces, develops and markets
its principal product, iron ore pellets, for sale to the metallurgical
industry. While the revenue generated by the Group is monitored at a more
detailed level, there are no separate measures of profit reported to the
Group's Chief Operating Decision-Maker ("CODM"). In accordance with IFRS 8
Operating segments, the Group presents its results in a single segment, which
are disclosed in the consolidated income statement for the Group.
Management monitors the operating result of the Group based on a number of
measures, including underlying EBITDA, gross profit and net cash.
Underlying EBITDA and gross profit
The Group presents the underlying EBITDA as it is a useful measure for
evaluating its ability to generate cash and its operating performance.
US$000 Notes Year ended Year ended
31.12.23 31.12.22
(Loss)/profit before tax and finance (60,363) 405,673
Losses on disposal and liquidation of property, plant and equipment 11 1,665
Share-based payments 830 490
Write-offs and impairments 5 978 260,308
Recognition of provisions for legal disputes 14 131,117 −
Depreciation and amortisation 57,669 96,977
Underlying EBITDA 130,242 765,113
In agreement with the Group's definition of the underlying EBITDA (see page 66
in the Alternative Performance Measures "APMs" section), the Group's
underlying EBITDA includes operating foreign exchange gains of US$31,371
thousand as of 31 December 2023 (2022: US$339,439 thousand). These foreign
exchange differences are predominantly dependent on the fluctuation of the
exchange rate of the Ukrainian hryvnia against the US dollar. See Note 6
Foreign exchanges losses and gains for further information.
US$000 Notes Year ended Year ended
31.12.23 31.12.22
Revenue 4 651,795 1,248,490
Cost of sales 5 (362,495) (582,445)
Gross profit 289,300 666,045
Net cash
Net cash as defined by the Group comprises cash and cash equivalents less
interest-bearing loans and borrowings.
US$000 Notes As at As at
31.12.23 31.12.22
Cash and cash equivalents 12 115,241 112,945
Interest-bearing loans and borrowings - current 13 (5,939) (5,194)
Interest-bearing loans and borrowings - non-current 13 (1,009) (1,354)
Net cash 108,293 106,397
Net cash is an APM. Further information on the APMs used by the Group,
including the definitions, is provided on pages 66 and 67.
Disclosure of revenue and non-current assets
The Group does not generate significant revenues from external customers
attributable to the UK, the Company's country of domicile. The information on
the revenues from external customers attributed to the individual foreign
countries is given in Note 4 Revenue. The Group does not have any significant
non-current assets that are located in the country of domicile of the Company.
The vast majority of the non-current assets are located in Ukraine.
Note 4: Revenue
Revenue for the year ended 31 December 2023 consisted of the following:
US$000 Year ended Year ended
31.12.23 31.12.22
Revenue from sales of iron ore pellets and concentrate 598,909 1,144,079
Freight revenue related to sales of iron ore pellets and concentrate 652 43,557
Total revenue from sales of iron ore pellets and concentrate 599,561 1,187,636
Revenue from logistics and bunker business 45,343 54,491
Revenue from other sales and services provided 6,891 6,363
Total revenue 651,795 1,248,490
The sales through the Black Sea port of Pivdennyi to the markets outside of
Europe have represented approximately half of the Group's sales prior to the
Russian invasion into Ukraine in February 2022. As a result of the ongoing war
in Ukraine, the Group's seaborne sales through the port of Pivdennyi have
still been suspended as the port was unavailable for a large part of the year.
The Group continued to divert its iron ore pellet sales during the financial
year 2023 to the European market through the available railway network and its
barging operations on the Danube. The market in Europe was, however, not able
to absorb all the volumes that would have been sold to other markets with
ocean-going vessels. Following Russia's withdrawal from the Black Sea Grain
Agreement, a new alternative corridor for shipments from the Ukrainian Black
Sea ports was established, which was also used for non-grain shipments.
Although it does have a significant impact on the Group's revenue and its
ability to commit to sales volumes to customers in other markets than Europe,
the Group has refrained from using this new corridor during the financial year
2023 due to the associated risks.
Revenue for the year ended 31 December 2023 includes the effect from the
derecognition of contract liabilities of US$75 thousand (2022: US$7,648
thousand) deferred as revenue in the comparative year ended 31 December 2022
as the performance obligations were not fulfilled and were included in the
balance of the contract liabilities. There was no deferral of freight related
revenue for the year ended 31 December 2023 due to the absence of sales under
the Incoterms CFR.
Total sales of iron ore pellets and concentrate by geographical destination
showing separately countries that individually represented 10% or more of
total sales in either the current or prior year were as follows:
US$000 Year ended Year ended
31.12.23 31.12.22
Europe, including Turkey 599,869 944,859
Austria 258,853 460,492
Czech Republic 115,873 148,128
Slovakia − 138,302
Turkey 122,556 86,640
Germany 64,981 38,195
Others 37,606 73,102
China & South East Asia (83) 164,397
North East Asia − 47,496
Middle East & North Africa (225) 29,982
North America − 902
Total sales of iron ore pellets and concentrate 599,561 1,187,636
The Group markets its products across various regions. The disclosure of the
segmentation reflects how the Group makes its business decisions and monitors
its sales. The Group's sales of iron ore pellets and concentrate were
significantly impacted by the ongoing war in Ukraine during the financial
years 2023 and 2022. Due to the start of the war at the end of February 2022,
the Group's operations in the financial year 2022 include two months at
pre-war levels, as the Group's seaborne sales through the port of Pivdennyi
have been suspended and sales had to be diverted to the market in Europe at
the point of time of the Russian invasion into Ukraine.
During the year ended 31 December 2023, sales made to four customers accounted
for 81% of the revenues from sales of iron ore pellets and concentrate (2022:
70%).
Sales to customers that individually represented more than 10% of total sales
in either current or prior year are as follows:
US$000 Year ended Year ended
31.12.23 31.12.22
Customer A 258,853 461,394
Customer B 115,873 148,128
Customer C − 138,302
Customer D 109,661 86,633
Considering the constraints imposed by the ongoing war, the Group was not able
to fulfil the demands from all its customers since the beginning of the war in
Ukraine in February 2022 and sales volumes were therefore allocated to markets
and customers based on logistics and market considerations. Relationships with
long-standing customers are maintained and the Group expects to be able to
meet their demand again as soon as the geopolitical situation in Ukraine
improves.
Note 5: Operating expenses
Operating expenses for the year ended 31 December 2023 consisted of the
following:
US$000 Year ended Year ended
31.12.23 31.12.22
Cost of sales 362,495 582,445
Selling and distribution expenses 161,315 236,085
General and administrative expenses 63,509 63,847
Other operating expenses 28,788 309,669
Total operating expenses 616,107 1,192,046
Total operating expenses include:
US$000 Year ended Year ended
31.12.23 31.12.22
Inventories recognised as an expense upon sale of goods 339,349 540,010
Employee costs (excl. logistics and bunker business) 73,924 92,144
Inventory movements 3,910 (52,953)
Depreciation of property, plant and equipment and right-of-use assets 56,294 95,127
Amortisation of intangible assets 1,375 1,851
Royalties 24,693 43,461
Costs of logistics and bunker business 57,739 55,916
Audit and non-audit services 1,924 2,073
Community support donations 3,781 14,536
Write-offs and impairments 978 260,308
Losses on disposal and liquidation of property, plant and equipment 11 1,665
US$000 Notes As at As at
31.12.23 31.12.22
Write-off of inventories 177 269
Write-off of property, plant and equipment 10 606 5,562
Write-off of receivables and prepayments 195 −
Total write-offs 978 5,831
Impairment of property, plant and equipment 10 − 219,931
Impairment of goodwill and other intangible assets − 29,103
Impairment of other non-current assets − 5,443
Total impairments − 254,477
Total write-offs and impairments 978 260,308
Impairment of property, plant and equipment, goodwill and other intangible
assets as well as of other non-current assets for the comparative year ended
31 December 2022 are caused by the Russian invasion into Ukraine in February
2022. See Note 10 Property, plant and equipment for further information.
Auditor remuneration
US$000 Year ended Year ended
31.12.23 31.12.22
Audit services
Ferrexpo plc Annual Report and Accounts 1,334 1,631
Subsidiary entities 317 185
Total audit services 1,651 1,816
Audit-related assurance services 273 255
Total audit and audit-related assurance services 1,924 2,071
Non-audit services
Other services − 2
Total non-audit services − 2
Total auditor remuneration 1,924 2,073
Auditor remuneration paid is in respect of the audit of the financial
statements of the Group and its subsidiary companies and, when applicable,
for the provision of other services not in connection with the audit. Audit
services for the comparative year ended 31 December 2022 include US$242
thousand relating to year-end audit for the financial year 2021 for additional
costs incurred as a result of the war in Ukraine.
Note 6: Foreign exchange gains and losses
Foreign exchange gains and losses for the year ended 31 December 2023
consisted of the following:
US$000 Year ended Year ended
31.12.23 31.12.22
Operating foreign exchange gains
Conversion of trade receivables 31,685 340,189
Conversion of trade payables (177) (623)
Other (137) (127)
Total operating foreign exchange gains 31,371 339,439
Non-operating foreign exchange losses
Conversion of interest-bearing loans (11,740) (77,678)
Conversion of cash and cash equivalents 1,895 9,711
Other 1,911 4,470
Total non-operating foreign exchange losses (7,934) (63,497)
Total foreign exchange gains 23,437 275,942
The translation differences and foreign exchange gains and losses were in the
past predominantly dependent on the fluctuation of the exchange rate of the
Ukrainian hryvnia against the US dollar and the outstanding US dollar
denominated receivable balances in Ukraine. A devaluation of the local
currency has generally a positive effect on the Group's production costs and
results in operating foreign exchange gains on the conversion of the Ukrainian
subsidiaries' trade receivables denominated in US dollar. The effect arising
on the translation of non-US dollar functional currency operations, mainly in
Ukrainian hryvnia, are included in the translation reserve.
The Ukrainian hryvnia remained unchanged at 36.568 to the US dollar from 21
July 2022 to 30 September 2023, when the National Bank of Ukraine ("NBU")
lifted the peg that had been in place since the devaluation of the local
currency from 29.255 to 36.568 (34%). As a result of the significant balance
in foreign currencies currently held by the NBU, the local currency remained
relatively stable until the end of the financial year 2023, compared to a
depreciation of the Ukrainian hryvnia of c. 34% during the financial year 2022
resulting in significant foreign exchange gains and reduction of the Group's
net assets as assets and liabilities of the Ukrainian subsidiaries are
denominated in the local currency.
The table below shows the closing and average rates of the most relevant
currencies of the Group compared to the US dollar.
Average exchange rates Closing exchange rates
Against US$ As at As at Year ended Year ended
31.12.23 31.12.22 31.12.23 31.12.22
UAH 36.574 32.342 37.982 36.569
EUR 0.925 0.951 0.906 0.934
Note 7: Net finance expense
Finance expense and income for the year ended 31 December 2023 consisted of
the following:
US$000 Year ended Year ended
31.12.23 31.12.22
Finance expense
Interest expense on loans and borrowings − (479)
Less capitalised borrowing costs − 479
Net interest on defined benefit plans (2,640) (2,678)
Bank charges (1,118) (871)
Interest expense on lease liabilities (85) (233)
Other finance costs (859) (664)
Total finance expense (4,702) (4,446)
Finance income
Interest income 4,602 888
Other finance income (4) 41
Total finance income 4,598 929
Net finance expense (104) (3,517)
With the exception of lease liabilities, the Group does not have any
outstanding interest-bearing loans and borrowings and borrowing costs are
therefore no longer capitalised.
Note 8: Taxation
Critical judgements
Tax legislation
The Group operates across a number of jurisdictions through its value chain
and prices its sales between its subsidiaries using international benchmark
prices for comparable products covering product quality and applicable freight
costs. The Group judges these to be on terms which comply with applicable
legislation in the jurisdictions in which the Group operates.
Two audits were initiated by the State Tax Service of Ukraine ("STS"),
formerly known as State Fiscal Service of Ukraine ("SFS"), on 18 February 2020
in relation to the sale of iron ore products by the Group's major subsidiary
in Ukraine during the financial years 2015 to 2017. On 14 June 2021, the STS
commenced another tax audit for the financial years 2015 to 2017 for
cross-border transactions of another Ukrainian subsidiary with the same two
subsidiaries of the Group outside of Ukraine. The Group's two major
subsidiaries in Ukraine received the tax audit reports on 13 September 2023
and 8 November 2023, stating potential claims for underpayment of corporate
profit taxes in Ukraine of UAH2,162 million (US$56,921 thousand as at 31
December 2023), including fines and penalties, and UAH259 million (US$6,819
thousand as at 31 December 2023), without fines and penalties, respectively.
Both subsidiaries filed the objections against the potential claims stated in
the tax audit reports received. The amount stated in one of the tax audit
reports is excluding potential fines and penalties and the magnitude of fines
and penalties for this specific claim will be known only once the final tax
reports are issued by the tax authorities.
Based on past experience, it is to be expected that no agreements will be
reached with the tax authorities and that the claims will be heard by the
courts in Ukraine.
In relation to claims made by the SFS regarding a tax audit of cross-border
transactions for the period from 1 September 2013 to 31 December 2015 at the
Group's major subsidiary in Ukraine, the Supreme Court of Ukraine ruled on 27
June 2022 partially in favour of the SFS, despite two favourable verdicts
received by the Group's subsidiary from lower courts. As a result of this
court decision, an amount of UAH234 million (US$7,999 thousand) became a
legally binding obligation and was paid in July 2022.
Despite the partially negative verdict of the Supreme Court mentioned above,
the Group continues to believe that it has complied with the applicable legal
provisions in all its cross-border transactions based on the relevant
technical grounds, including those during the financial years 2015 to 2017 for
which substantial claims have been received. It is the Group's position that
the STS used the previous verdict of the Supreme Court as a precedent for the
claims made, although the court did not appropriately consider relevant
technical grounds and the applicable legislation when ruling on this specific
case.
In terms of the new claims received, the Group will continue to defend its
methodology applied to determine the prices between its subsidiaries in the
Ukrainian courts, but there is a risk that the independence of the judicial
system and its immunity from economic and political influences in Ukraine is
not upheld. As at the date of the approval of these consolidated financial
statements, no final court decisions have been made for the claims received by
two of the Group's Ukrainian subsidiaries totalling UAH2,162 million
(US$56,921 thousand as at 31 December 2023) and UAH259 million (US$6,819
thousand as at 31 December 2023) and, as a consequence, no provisions have
been recorded as at 31 December 2023, neither for the claims received nor for
any subsequent years, which might also be material, as it is impossible to
reasonably quantify the potential exposure. See Note 14 Commitments,
contingencies and legal disputes on page 59 for further information.
Separate from the cases mentioned above, on 23 June 2020 Ferrexpo Poltava
Mining ("FPM") received a court ruling, which grants access to information and
documents to the State Bureau of Investigation in Ukraine ("SBI") in relation
to the sale of iron ore products to two subsidiaries of the Group outside of
Ukraine during the years 2013 to 2019. FPM cooperated with the SBI and
provided the requested information as per the court ruling in order to support
these investigations. There had been no actions or any new requests from the
SBI until 20 October 2023, when the SBI raided the offices of FPM with the
intention to collect documents and information for ongoing transfer pricing
investigations.
As required by IFRIC 23 Uncertainty over income tax treatments, the Group
reviewed and reassessed its exposure in respect of all uncertain tax
positions, including the claims received and for cross-border transactions in
subsequent years under the provisions of this interpretation. The Ukrainian
legislation and regulations on taxation are not always clearly written and are
therefore subject to varying interpretations and inconsistent enforcement by
local, regional and national tax authorities. Considering the uncertainties of
the legal and tax framework in Ukraine, the Group will defend its pricing
methodology applied during all the years in the courts in Ukraine. An
unfavourable outcome of any future court proceedings would have an adverse
impact on the Group's total income tax expense and effective tax rate in
future periods, as it was the case during the financial year 2022 in respect
of the legally binding decision of the Supreme Court. See also the Principal
Risks section on pages 26 to 29 for further information on the Ukraine country
risk.
Except for the matters in Ukraine mentioned above, the Group is not aware of
any significant challenges by local tax authorities in any jurisdictions in
which the Group operates. However, the application of international and local
tax legislation and regulations can be complex and requires judgement to
assess possible associated risks, particularly in relation to the Group's
cross-border operations and transactions.
The income tax expense for the year ended 31 December 2023 consisted of the
following:
US$000 Year ended Year ended
31.12.23 31.12.22
Current income tax
Current income tax charge 12,672 100,064
Amounts related to previous years (1,601) 6,389
Total current income tax 11,071 106,453
Deferred income tax
Origination and reversal of temporary differences 5,281 12,209
Total deferred income tax 5,281 12,209
Total income tax expense 16,352 118,662
The net balance of income tax payable changed as follows during the financial
year 2023:
US$000 Year ended Year ended
31.12.23 31.12.22
Opening balance (15,890) (36,502)
Charge in the consolidated income statement (11,071) (106,453)
Booked through other comprehensive (loss)/income 1,479 13,036
Tax paid 12,779 110,243
Translation differences (67) 3,786
Closing balance (12,770) (15,890)
The net income tax payable as at 31 December 2023 consisted of the following:
US$000 As at As at
31.12.23 31.12.22
Income tax receivable balance 2,432 4,674
Income tax payable balance (15,202) (20,564)
The weighted average statutory corporate income tax rate is calculated as the
average of the statutory tax rates applicable in the countries in which the
Group operates, weighted by the profits and losses before tax of the
subsidiaries in the respective countries, as included in the consolidated
financial information. The weighted average statutory corporate income tax
rate for the financial year 2023 was 11.7%, before the effect of the
recognised provisions for legal disputes in the amount of US$131,177 thousand
in the consolidated income statement (2022: 13.8%).
The Group operates across a number of jurisdictions and its effective tax rate
is subject to various factors outside of the Group's control. This includes
the volatility in the global iron ore pellet market and foreign exchange rate
movements, primarily between the Ukrainian hryvnia and the US dollar. The
effective tax rate of the financial year 2023 was 26.1%, before the effect of
the recognised provisions for legal disputes in the amount of US$131,177
thousand in the consolidated income statement, compared to 35.0% for the
comparative year ended 31 December 2022.
The effective tax rate for the financial year 2023, before the effect of the
recognised provisions for legal disputes, was affected by the release of a tax
provision for a previous year of US$7,174 thousand, an additional allowance on
deferred tax assets of US$10,145 thousand and withholding tax expense on
intercompany dividends of US$3,943 thousand to be included in the corporate
profit tax expense of the financial year 2023. Without these effects, the
effective tax rate for the financial year 2023 would have been 15.1%. The
effective tax rate for the comparative year ended 31 December 2022 was
affected by the fact that no deferred tax asset was recognised for the
temporary differences resulting from a recorded impairment loss of US$254,477
thousand on the Group's non-current operating assets, which is not tax
deductible in Ukraine. Further to that, the Group recorded an allowance of
US$10,749 thousand on deferred tax assets recognised by two of the Group's
subsidiaries in Ukraine. Without these two effects, the effective tax rate for
the financial year 2022 would have been 18.2%.
The net deferred income tax assets as at 31 December 2023 consisted of the
following:
US$000 As at As at
31.12.23 31.12.22
Total deferred tax assets 10,149 14,471
Total deferred tax liabilities (2,729) (1,347)
Net deferred tax assets 7,420 13,124
The net deferred tax asset balance of US$7,420 thousand (2022: US$13,124
thousand) includes net deferred tax assets totalling US$9,524 thousand (2022:
US$14,448 thousand) related to temporary differences of the Group's two major
subsidiaries in Ukraine, with the remaining balance reflecting deferred tax
liabilities of subsidiaries outside of Ukraine. The recoverability of these
deferred tax assets depends on the level of taxable profits realised by the
two subsidiaries in future periods and the duration of the unwind of the
temporary differences. Considering the material uncertainty in terms of the
Group's going concern, the relevant period for the recovery of the recognised
net balance of deferred tax assets has been aligned to the period of the going
concern assessment. Considering the expected taxable profits of the Ukrainian
subsidiaries for the period covered by the going concern assessment,
additional allowances of US$10,145 thousand were booked during the financial
year 2023 as a result of uncertainties in terms of the timing of the unwind of
some of the temporary differences. The level of taxable profits in Ukraine
depends on many factors, such as the volatility in the global iron pellet
market and foreign exchange rate changes, but also on the implications of the
ongoing war in Ukraine, mainly in terms of the available logistics network.
As at 31 December 2023, the Group had available tax loss carry forwards in the
amount of US$86,883 thousand (2022: US$83,105 thousand) for which no deferred
tax assets were recognised. US$41,614 thousand (2022: US$39,585 thousand) of
those losses do not expire and are related to losses incurred in Ukraine and
Hungary. US$38,406 thousand (2022: US$30,252 thousand) expires after seven
years or more and are related to losses incurred in Hungary and Ukraine. The
remaining balance of US$6,863 thousand (2022: US$13,268 thousand) expires in
less than seven years and is primarily related to losses incurred in Hungary.
No deferred tax liabilities have been recognised on temporary differences in
the amount of US$517,838 thousand (2022: US$663,536 thousand) arising from
undistributed profits from subsidiaries as no distributions are planned. Other
temporary differences of US$442,192 thousand have not been recognised as at 31
December 2023 (2022: US$270,939 thousand). The vast majority relates to
provisions for legal disputes totalling US$128,050 thousand recognised as at
31 December 2023 in Ukraine and to an impairment loss of US$254,477 thousand
recorded during the comparative year ended 31 December 2022, mainly in
Ukraine, on property, plant and equipment.
BEPS - Pillar Two
Whilst the Group's consolidated revenues are less than EUR750 million for the
financial year 2023, it is considered to be in the scope of the BEPS Pillar
Two Model Rules as the consolidated revenues for the financial years 2022 and
2021 were well above the threshold set.
The Group makes use of the temporary exception issued by the IASB in May 2023
in respect of the accounting requirements for deferred taxes under IAS 12. As
a result, the Group does neither recognise nor disclose any information on
deferred tax assets and liabilities related to Pillar Two income taxes in its
consolidated financial statements for the financial year 2023.
Although the Group's effective tax rate for the financial year 2023 is well
above the minimum tax rate of 15.0%, there are still some jurisdictions with
enacted statutory tax rates where the Group is operating below the minimum tax
rate set under the BEPS Pillar Two Model Rules. The Group currently operates
in two key jurisdictions with relevant statutory income tax rates below 15.0%.
On 22 December 2023, the Swiss government, where Ferrexpo plc, the parent
company of the Group, has its tax domicile, enacted the Pillar Two income
taxes legislation effective from 1 January 2024. The legislation in
Switzerland currently only provides for the Qualifying Domestic Minimum Top-up
Tax ("QDMTT") and the implementation of the other elements of the BEPS Pillar
Two Rules, including the Income Inclusion Rule ("IIR") and the Undertaxed
Profits Rule ("UTPR") is postponed.
As a result of the legislation enacted in Switzerland, the Group's
subsidiaries in Switzerland will become subject to the QDMTT for the taxable
profits from the financial year 2024 onwards. Based on the BEPS Pillar Two
Global Anti-Base Erosion ("GloBE") Model Rules, the parent company of the
Group, Ferrexpo plc with its tax domicile in Switzerland, is considered to be
the Ultimate Parent Entity ("UPE"). Considering the fact that Switzerland
postponed the implementation of the IIR, profits generated in jurisdictions
with tax rates below the global minimum tax rate of 15.0% are expected to be
taxed by another jurisdiction in which the Group operates, until the IIR is
also implemented by Switzerland. Considering the circumstances under which the
Group has to operate due to the ongoing war in Ukraine, it is currently
impossible to reasonably forecast the profit split by jurisdiction for the
financial year 2024 and beyond.
Based on the profit split for the financial year 2023 and considering the
effects from the QDMTT and the IIR under the BEPS Pillar Two GloBE Model
Rules, the impact on the Group's income tax expense is expected to be
insignificant.
The Group's future effective tax rate, before any special items included in
the profit before tax for the period and the income tax expense, is expected
to be in a range of 16.0% to 19.0%. The Group's effective tax rate is also
dependent on the volatility in the global iron ore pellet market and on
foreign exchange rate movements, primarily between the Ukrainian hryvnia and
the US dollar, and any one-off events, such as impairment losses that might
not be tax deductible in some jurisdictions.
Note 9: Earnings per share and dividends paid and proposed
Distributable reserves
Ferrexpo plc (the "Company") is the Group's holding company, with no direct
operating business, so its ability to make distributions to its shareholders
is dependent on its ability to access profits held in the subsidiaries. The
Group's consolidated retained earnings shown in the consolidated statement of
changes in equity do not reflect the profits available for distribution in the
Group as at 31 December 2023.
Year ended Year ended
31.12.23 31.12.22
(Loss)/earnings for the year attributable to equity shareholders - per share
in US cents
Basic (14.41) 37.41
Diluted (14.41) 37.35
(Loss)/profit for the year attributable to equity shareholders - US$000
Basic and diluted (loss)/earnings (84,753) 219,997
Weighted average number of shares - thousands
Basic number of Ordinary Shares outstanding 588,274 588,017
Effect of dilutive potential Ordinary Shares 8,847 931
Diluted number of Ordinary Shares outstanding 597,121 588,948
Dividends proposed and paid
The Group announced on 18 January 2024 an interim dividend of 3.3 US cents,
which was due for payment to the shareholders on 23 February 2024. Following
subsequent and unexpected events in Ukraine relating to a claim against one of
the Group's Ukrainian subsidiaries (see Note 14 Commitments, contingencies and
legal disputes for further information), the Group announced on 20 February
2024 the decision to withdraw the interim dividend. Taking into account the
provisions of the Companies Act 2006 and relevant thin capitalisation rules,
the total available distributable reserves of Ferrexpo plc is US$119,520
thousand as at 31 December 2023 (2022: US$118,624 thousand).
Future distributable reserves at the Ferrexpo plc level are also dependent on
the payment of dividends by the subsidiaries to the respective parent
companies within the Group. Distributable profits at subsidiaries' level are
also subject to potential impairment losses to be or already recorded in the
respective stand-alone statutory financial statements as a result of
war-related uncertainties. Certain Group companies are currently restricted
from paying dividends outside of Ukraine as a result of Ukrainian currency
control measures imposed under Martial Law. Furthermore, the uncertainties
related to the political environment and the independence of the legal system
and other circumstances facing the Group (see Note 14 Commitments,
contingencies and legal disputes) could also have a negative impact on
Ferrexpo plc's ability and potential for future dividend payments. As at 31
December 2023, one of the Group's subsidiaries in Ukraine recognised
provisions for legal disputes totalling US$128,050 thousand reducing the
distributable profits of this subsidiary by this amount. Although this
subsidiary still has a considerable amount of distributable profits, an
outflow of funds in this amount would have an adverse impact on the Group's
available liquidity for potential future dividend payments.
US$000 Year ended
31.12.23
Dividends paid during the year
Dividends on vested awards 456
Total dividends paid during the year 456
Dividends paid during the financial year 2023 totalled US$456 thousand and
related to the Group's share-based scheme.
Although accounts are published in US dollars and dividends are declared in US
dollars, the shares are denominated in UK pounds sterling and dividends are
therefore paid in UK pounds sterling.
US$000 Year ended
31.12.22
Dividends paid during the year
Final dividend for 2021: 6.6 US cents per Ordinary Share 38,679
Interim dividend for 2022: 13.2 US cents per Ordinary Share 76,899
Interim dividend for 2021: 6.6 US cents per Ordinary Share 39,517
Total dividends paid during the year 155,095
Note 10: Property, plant and equipment
During the year ended 31 December 2023, the additions to property, plant and
equipment totalled US$112,093 thousand (31 December 2022: US$200,329 thousand)
and the net book value of the disposals of property, plant and equipment
totalled US$4,216 thousand (31 December 2022: US$22,799 thousand). The total
depreciation charge for the year was US$58,888 thousand (31 December 2022:
US$94,162 thousand).
The carrying value of property, plant and equipment includes capitalised
borrowing costs on qualifying assets totalling US$32,110 thousand (31 December
2022: US$35,694 thousand).
See Note 2 Basis of preparation in respect of the impact of climate change on
the Group's financial statements.
Critical estimates
As at the date of the approval of these consolidated financial statements, the
war in Ukraine is still ongoing and the duration is difficult to predict.
During the financial year 2023, the Group continued to demonstrate a high
level of commitment and resilience that enabled it to operate at a constant,
but lower capacity, with a high degree of flexibility to adapt its operations
to changing circumstances.
The ongoing war continues to have an adverse impact on the Group's production
volume and cash flow generation and it is expected that this will continue to
be the case until the war comes to an end. The unavailability of the Port of
Pivdennyi in Ukraine had a significant adverse impact on the Group's seaborne
sales and consequently on its cash flow generation during the financial year
2023.
The Group's impairment test is based on cash flow projections over the
remaining estimated lives of the GPL and the Yerystivske deposits, which are
expected to expire in 2058 and 2048, respectively, according to the current
approved mine plans. The cash flow projection is based on a financial
long-term model approved by senior management and the estimated future
production volumes do not take into account the effects of expected future
mine life extension programmes. Several significant judgements and estimates
are used when preparing the financial long-term model of the Group, which are,
together with the key assumptions used, reviewed by the Audit Committee with
specific consideration given to the realistically plausible production volumes
in light of the current situation in the country, sales price and production
cost forecasts as well as the discount rate used to discount the cash flows.
The long-term model was updated in January 2024 using management's best
estimate of reasonably conservative key assumptions, taking also into account
the current circumstances the Group has to operate in. In terms of the key
assumptions used, an average iron ore price of US$105 per tonne of 65% Fe
fines CFR North China was used in the assumptions for the cash flow projection
for the next five years. When assessing its expected future long-term selling
price, the Group considers external and internal analysis of the short-term
and longer-term supply and demand dynamics on the international market for
iron ore products as well as more specific local supply and demand balances
affecting its major customers. The level of the Group's production remains
predominantly dependent on the access to logistic routes within Ukraine as the
production volume is still to be aligned to currently possible sales to
minimise working capital outflow and maintain a solid net cash position. As a
result, the production capacity used for the base-case cash flow projection is
expected to be approximately 45% of the pre-war level for the financial year
2024, before an increase to approximately 80% in 2025 and an expected recovery
to pre-war levels in 2026. The increase of the future production capacity
planned for years covered by the long-term model before the war started has
been adversely affected as the work on certain growth projects had to be
slowed down or even halted to preserve the Group's available liquidity in
light of the lower cash flow generation. There is no perpetual growth rate
applied for the cash flow projections beyond the last year covered by the
Group's long-term model. Expected production and shipping costs are determined
by considering local inflationary pressures, major exchange rate developments
between the Ukrainian hryvnia and the US dollar, the short-term and
longer-term trends in energy supply and demand and the expected movements in
steel-related commodity prices, which affect the cost of certain production
input materials. An average devaluation of the hryvnia of 6.5% per year was
assumed over the next five years in the Group's cash flow projection, with the
expected local inflation having an offsetting effect.
The key assumptions used for the preparation of the Group's long-term model
are:
Key assumptions Basis
Future sales and production Proved and probable reserves and available logistics capacity and power supply
Commodity prices Contract prices and longer-term price estimates
Capital expenditures Future sustaining capital expenditures
Cost of raw materials and other production/distribution costs Expected future cost of production
Exchange rates Longer-term predictions of market exchange rates
Nominal pre-tax discount rate Cost of capital risk adjusted for the resource concerned
The outcome of the Group's impairment test is predominantly dependent on the
forecasted cash flow generation and the nominal pre-tax discount rate to be
applied. The WACC of 23.0% (31 December 2022: 23.4%) is still significantly
higher than the pre-war WACC of 13.8% as at 31 December 2021 and reflects the
current situation in the country as underlying macro-economic data is still
adversely affected by the war in Ukraine. Based on the base case of the
Group's impairment test prepared for the 2023 year-end accounts, there is no
additional impairment loss on the Group's single cash-generating unit's
operating non-current assets, including property, plant and equipment as well
as other intangibles assets and other non-current assets, to be recognised as
at 31 December 2023. The key assumptions in respect of production and sales
volumes, and of production costs, are largely dependent on the easing of the
war-related risks facing the Group's business in Ukraine, and therefore a wide
range of alternative outcomes are possible, reflecting a high level of
uncertainty.
A delay of the recovery of the production and sales volumes to a pre-war level
by another year, with all other assumptions remaining unchanged, would reduce
the value in use of the Group's non-current operating assets by approximately
US$393,500 thousand. A reduction of the realised price by 10% in 2024 and 5%
for each year until 2048 would reduce the value in use by approximately
US$227,100 thousand and a decrease of the production and sales volume by 10%,
combined with an increase of the production costs by 5%, again for the entire
period of the assessment, would reduce the value in use by approximately
US$274,300 thousand whereas every 1.0% increase of the nominal pre-tax
discount rate would impact the value in use by approximately US$52,600
thousand, with all other assumptions remaining unchanged.
As at the end of the comparative year ended 31 December 2022, the Group
recorded an impairment loss of US$254,477 thousand, reflecting the difference
between the computed value in use of the Group's non-current operating assets
and the carrying value as at this date. Of the total impairment loss recorded,
US$219,931 thousand was allocated to various asset categories within property,
plant and equipment, US$29,103 thousand to Goodwill and other intangible
assets and US$5,443 thousand to other non-current assets. The impairment
losses recorded during the financial year 2022 will be re-assessed again at
the end of any future reporting periods. If there are positive developments in
the Group's future cash flow generation and the relevant macro-economic data,
the impairment loss or a portion of it might reverse in future periods.
Conversely, an adverse change in the above key assumptions might further
reduce the value in use of the Group's operating non-current assets. As at 31
December 2023, there is no partial or full reversal of the impairment loss
recognised during the financial year 2022 to be recorded.
As disclosed in Note 2 Basis of preparation and Note 14 Commitments,
contingencies and legal disputes, the Group announced on 29 January 2024 that
a Ukrainian court of appeal has confirmed a claim against Ferrexpo Poltava
Mining ("FPM") in the amount of UAH4,727 million (US$124,450 thousand as at 31
December 2023), in respect of contested sureties. Despite the fact that it is
management's view that FPM has compelling arguments to defend its position in
the Supreme Court of Ukraine, given the magnitude of this specific claim and
the underdeveloped and fragile judicial system in Ukraine, the Group recorded
a full provision for this claim as at 31 December 2023 in accordance with IAS
37 Provisions, contingent liabilities and contingent assets. If the ruling of
the Supreme Court is not in favour of FPM, there is a risk that some of the
Group's property, plant and equipment will be seized or subject to a forced
sales process as part of the enforcement proceedings. Although the Group has
recognised a provision for the full amount of the contested sureties claim,
there is a risk that any assets subject to seizure or a forced sales process
are valued at an amount which is different than their current carrying values
as at 31 December 2023. Note 2 Basis of preparation provides further
information in terms of the possible implications on the Group's ability to
continue as a going concern.
Note 11: Inventories
At 31 December 2023, inventories comprised:
US$000 As at As at
31.12.23 31.12.22
Raw materials and consumables 47,302 51,437
Spare parts 88,000 91,334
Finished ore pellets 45,040 52,625
Work in progress 18,844 25,832
Other 2,243 3,226
Total inventories - current 201,429 224,454
Weathered ore 5,883 6,277
Total inventories - non-current 5,883 6,277
Total inventories 207,312 230,731
Inventories classified as non-current comprised low-grade and weathered ore
that were, based on the Group's processing plans, not planned to be processed
within the next 12 months. The balances of weathered ore as at 31 December
2023 and 2022 are net of impairment losses of US$231,111 thousand recorded as
at 31 December 2021, as it could not be reliably predicted when additional
processing capabilities will be available to specifically process the
stockpiled low-grade and weathered ore. The stockpiled low-grade ore is still
considered as an asset for the Group and some or all of the impairment losses
might reverse in the future, once changed facts and circumstances can be
considered in the net realisable value test of this asset. However, the
ongoing war in Ukraine makes it currently difficult to accelerate the
commenced engineering studies for the exploration of possible options for new
processing capabilities for the specific purpose of processing low-grade ore,
so that there are no changes in facts and circumstances to be considered as at
31 December 2023.
During the comparative year ended 31 December 2022, low-grade ore totalling
US$9,690 thousand was extracted and directly recognised in the consolidated
income statement, included in the cost of sales. No such ore was extracted
during the year ended 31 December 2023, also a result of the lower mining
activity due to the ongoing war and the reduced operating activity.
As disclosed in Note 2 Basis of preparation and Note 14 Commitments,
contingencies and legal disputes, there is a risk that some of the Group's
inventories are seized or subject to a forced sales process, if enforcement
procedures in respect of an ongoing legal dispute commence. Although the Group
has recognised a provision for the full amount of the contested sureties
claim, there is a risk that the future net realisable value of finished goods
subject to any potential seizure or forced sales process is different than the
value recognised at cost in the consolidated statement of financial position
as at 31 December 2023.
Note 12: Cash and cash equivalents
As at 31 December 2023, cash and cash equivalents comprised:
US$000 As at As at
31.12.23 31.12.22
Cash at bank and on hand 115,241 112,945
Total cash and cash equivalents 115,241 112,945
The debt repayments net of proceeds during the period ended 31 December 2023
totalled US$5,562 thousand (31 December 2022: US$48,249 thousand) affecting
the balance of cash and cash equivalents.
Further information on the Group's gross debt is provided in Note 13
Interest-bearing loans and borrowings.
The balance of cash and cash equivalents held in Ukraine amounts to US$11,175
thousand as at 31 December 2023 (31 December 2022: US$45,229 thousand).
Despite the foreign exchange control measures imposed under Martial Law in
Ukraine (see Note 14 Commitments, contingencies and legal disputes), this
balance is fully available to the Group for its operations in Ukraine and is
therefore not considered restricted.
Note 13: Interest-bearing loans and borrowings
This note provides information about the contractual terms of the Group's
major finance facilities.
US$000 As at As at
31.12.23 31.12.22
Current
Lease liabilities 5,939 5,194
Total current interest-bearing loans and borrowings 5,939 5,194
Non-current
Lease liabilities 1,009 1,354
Total non-current interest-bearing loans and borrowings 1,009 1,354
Total interest-bearing loans and borrowings 6,948 6,548
The table below shows the movements in the interest-bearing loans and
borrowings:
US$000 Year ended Year ended
31.12.23 31.12.22
Opening balance of interest-bearing loans and borrowings 6,548 50,349
Cash movements:
Principal and interest elements of lease payments (5,562) (6,103)
Change of trade finance facilities, net - (42,146)
Total cash movements (5,562) (48,249)
Non-cash movements:
Additions to lease liabilities 5,812 5,340
Others (incl. translation differences) 150 (892)
Total non-cash movements 5,962 4,448
Closing balance of interest-bearing loans and borrowings 6,948 6,548
The interest elements of lease payments are included in the cash flows from
operating activities and not in the cash flows used in financing activities.
Note 14: Commitments, contingencies and legal disputes
Commitments
Commitments as at 31 December 2023 consisted of the following:
US$000 Year ended Year ended
31.12.23 31.12.22
Total commitments for the lease of mining land (out of the scope of IFRS 16) 52,739 50,963
Total capital commitments on purchase of property, plant and equipment 128,934 134,842
Commitments for investment in a joint venture 6,064 6,064
Legal
In the ordinary course of business, the Group is subject to various legal
actions and ongoing court proceedings. There is a risk that the independence
of the judicial system and its immunity from economic and political influences
in Ukraine is not upheld, and consequently Ukrainian legislation might be
inconsistently applied to resolve the same or similar disputes. See also the
Principal Risks section on pages 26 to 29 for further information on the
Ukraine country risk and Note 16 Events after the reporting period in terms of
another court order received.
Critical judgements
The Group is exposed to the risks associated with operating in a developing
economy, which may or may not be exacerbated by the war and/or the current
circumstances facing the Group's controlling shareholder (see Ukraine country
risk on pages 26 to 29). As a result, the Group is exposed to a number of risk
areas that are heightened compared to those expected in a developed economy,
such as an environment of political, fiscal and legal uncertainties, which
require a significant portion of critical judgements to be made by the
management team, mainly in respect of the contested sureties claim, for which
a provision was recorded as at 31 December 2023, and the other matters listed
under critical judgements below.
Critical judgements for ongoing legal proceedings and disputes with
corresponding provisions
Contested sureties claim
On 7 December 2022, FPM received a claim in the amount of UAH4,727 million
(US$124,450 thousand as at 31 December 2023) in respect of contested sureties.
These contested sureties relate to Bank F&C, a Ukrainian bank owned by the
Group's controlling shareholder and which the Group previously used as its
main transactional bank in Ukraine. Bank F&C is still going through the
liquidation process after having been declared insolvent by the National Bank
of Ukraine and put under temporary administration on 18 September 2015.
The counterparty in this claim alleges that it acquired rights under certain
loan agreements originally concluded between Bank F&C and various
borrowers, some of which are associated entities of the Group's controlling
shareholder, by entering into the assignment agreement with the State
Guarantee Fund on 6 November 2020. The counterparty further claims that
Ferrexpo Poltava Mining ("FPM") provided sureties to Bank F&C to ensure
the performance of obligations under these loan agreements. On 9 August 2023,
the court of first instance ruled in favour of the claimant and FPM filed an
appeal in September 2023. On 26 January 2024 a Ukrainian court of appeal
confirmed the claim against FPM in the amount of UAH4,727 million (US$124,450
thousand as at 31 December 2023). On 30 January 2024, FPM filed a cassation
appeal to the Supreme Court of Ukraine and the first hearing was scheduled for
20 March 2024, but the hearing did not take place as the presiding judge
recused himself. Following the appointment of a new panel of judges, on 1
April 2024 the Supreme Court suspended the possible enforcement of the
decision of the court of appeal. A Supreme Court hearing on 17 April 2024
considered primarily procedural matters and the next court hearing is
scheduled for 27 May 2024.
Notwithstanding the two negative court decisions of the lower courts and based
on legal advice obtained, management remains of the view that these claims are
without merit and FPM has compelling arguments to defend its position in the
Supreme Court. However, considering the magnitude of this claim and the risks
associated with the judicial system in Ukraine as further described above, the
Group recorded a full provision for this claim as at 31 December 2023, in
accordance with the requirements of IAS 37 Provisions, contingent liabilities
and contingent assets.
As at the date of the approval of these consolidated financial statements, no
enforcement procedures have commenced and, further to the Supreme Court's
order of 1 April 2024 suspending possible enforcement of the decision of the
court of appeal, such procedures cannot be initiated by the claimant until a
final decision is made by the Supreme Court, or the current suspension order
is otherwise lifted. If the final ruling of the Supreme Court is not in favour
of FPM, the claimant may take steps to appoint either a state or a private
bailiff and request the commencement of the enforcement procedures, which
could have a material negative impact on the Group's business activities and
its ability to continue as a going concern, as the assets of FPM could be
seized or subject to a forced sale. The potential seizure or forced sale of
FPM's assets, including moveable, immovable and financial assets, may have a
material adverse impact on the Group's cash flow generation, profitability and
available liquidity in future periods. As at the date of the approval of these
consolidated financial statements, it is not possible reasonably to assess the
implications of a potential seizure or forced sale of assets on the Group's
business activities, as the timing, scope and impact are unknown and outside
of the Group's control. However, the Group is considering and preparing a
number of mitigating actions and responses within its control in order to seek
to ensure continuation of production and generation of revenue streams. Beyond
that, in case of an enforcement, FPM will challenge orders and actions of the
bailiff in the court, which will allow the Group to continue to trade and
generate resources to meet its other liabilities as they fall due. See Note 2
Basis of preparation, Note 10 Property, plant and equipment and Note 11
Inventories for further information.
Critical judgements for ongoing legal proceedings and disputes without
corresponding provisions
Creditor protection application against Ferrexpo Poltava Mining ("FPM")
In February 2024, a supplier and related party to the Group filed an
application to open bankruptcy proceedings ("creditor protection proceedings")
against FPM, which was accepted by the relevant court for further
consideration. The amount of debt claimed by the supplier of FPM was initially
UAH2.2 million. The operation of FPM is not affected by this application and
the supplier continued to provide its services to FPM. The amount of debt
claimed by the supplier subsequently increased to UAH4.6 million (c. US$117
thousand as at 15 April 2024). A preparatory court hearing was scheduled by
the court for 12 March 2024. This hearing did not take place and a further
hearing scheduled for 9 April 2024 was also postponed. A new hearing is
scheduled for 30 April 2024. The creditor protection proceedings are a lengthy
process, which is not expected to limit the Group to continue to trade and
generate resources to meet its other liabilities as they fall due.
Furthermore, it is the Group's intention to settle this debt or seek to extend
the payment terms, but noting a previous extension request has been refused by
the supplier, to avoid the opening of such creditor protection proceedings.
See Note 2 Basis of preparation for further information.
Shares freeze in relation to claim from the Ukrainian Deposit Guarantee Fund
("DGF")
As announced on 7 March 2023 on the Regulatory News Service of the London
Stock Exchange, the Group became aware of a press release by the DGF
suggesting that a restriction has been placed on shares held by Ferrexpo AG
("FAG"), the Group's Swiss subsidiary, in three main operating subsidiaries of
the Group in Ukraine, covering 50.3% of the shares held in each subsidiary.
According to the subsequently published court order in the Ukrainian official
register of court decisions, the Kyiv Commercial Court ordered the arrest
(freeze) of 50.3% of FAG's shareholding in each of Ferrexpo Poltava Mining
("FPM"), Ferrexpo Yeristovo Mining ("FYM") and Ferrexpo Belanovo Mining
("FBM"). The court order also prohibits each of FPM, FYM and FBM from making
changes to the amount of its authorised capital. The court order does not
affect ownership of the shares in these three subsidiaries of the Group in
Ukraine, but prohibits the disposal by FAG of 50.3% of its shareholding in
each named subsidiary.
This court order was issued by the Kyiv Commercial Court during a hearing in
the commercial litigation between the DGF and Mr. Zhevago, the Group's
controlling shareholder, in relation to the liquidation of Bank F&C in
2015.
In addition to the restriction covering 50.3% of FAG's shareholding in each of
FPM, FYM and FBM, the court order also contains a prohibition on Fevamotinico
S.a.r.l. disposing of its shares in Ferrexpo plc and Ferrexpo plc disposing of
any of its shares in FAG. As at the date of the approval of these consolidated
financial statements, the Group has no intention, and never has had any
intention, of transferring the shares in FPM, FYM, FBM or FAG. The Group does
not expect an impact on its operations as a result of this court order.
The Group's subsidiaries affected by this court order, including FAG, filed
appeals in Ukraine in March 2023 to remove the restrictions. A hearing at the
Northern Commercial Court of Appeal took place on 21 June 2023 and the court
accepted FAG and the three Ukrainian subsidiaries as third parties to this
litigation. On 26 July 2023, the court of appeal dismissed the appeals of FAG,
FPM, FYM and FBM in relation to the restrictions covering 50.3% of the
corporate rights in FPM, FYM and FBM so that the imposed restrictions remain
effective. The Group's subsidiaries filed cassation appeals to the Supreme
Court of Ukraine in August 2023 and a first hearing of the case at the Supreme
Court took place on 8 November 2023, without any decision being taken. On 10
January 2024, the Supreme Court rejected the cassation appeals from the
Group's subsidiaries and the restrictions remain effective. After a review by
the Supreme Court of other cassation appeals related to the main dispute
between the DGF and Mr. Zhevago, to which the Group is not a party, the case
is expected to be sent to the court of first instance, the Kyiv Commercial
Court, to proceed with consideration of the main dispute between the DGF and
Mr. Zhevago.
Based on advice from Ukrainian legal counsel, management considers that the
court order was made in contradiction to Ukrainian law because the restricted
50.3% of corporate rights in the three Ukrainian subsidiaries are the property
of FAG and not of any other person as a matter of Ukrainian law. The Group
will file new applications and motions to challenge the validity of these
restrictions once the case is returned to the Kyiv Commercial Court.
However, as with other ongoing legal proceedings in Ukraine, there is a risk
that the independence of the judicial system and its immunity from economic
and political influences in Ukraine is not upheld and in that case the Group
might not be successful in procuring the cancellation of such restrictions.
Shares freeze in relation to claim from the National Bank of Ukraine ("NBU")
In addition to the case initiated by the Ukrainian Deposit Guarantee Fund
("DGF") as described above, there is a commercial litigation between the NBU
and Mr. Zhevago, the Group's controlling shareholder, in relation to the
personal surety given by Mr. Zhevago for the loan provided by the NBU to Bank
F&C prior to its insolvency. In respect of this commercial litigation, the
Chief State Bailiff of the Ministry of Justice of Ukraine issued in September
2023 a resolution on arrest (freeze) of property of Mr. Zhevago as part of
intended enforcement proceedings.
As part of this September 2023 resolution, the State Bailiff imposed an order
to arrest (freeze) 50.3% of the issued share capital of FYM and FBM, owned by
FAG, based on the incorrect assumption that these corporate rights are owned
by Mr. Zhevago. In reaching this decision to arrest these corporate rights,
the State Bailiff relied on conclusions made by the Northern Commercial Court
of Appeal that Mr. Zhevago is the ultimate beneficial owner of the Ukrainian
subsidiaries and that all companies in the Group are just nominal owners of
the assets ultimately owned by Mr. Zhevago. FAG filed a civil claim in October
2023 seeking to cancel the order and to block the enforcement procedure
initiated by the State Bailiff. On 30 November 2023, the Komsomolskyi Town
Court of Poltava Region, a court of first instance, suspended the enforcement
procedure, prohibiting the State Bailiff from taking any actions to forcefully
sell FAG's corporate rights in FYM and FBM. The State Bailiff filed an appeal,
but the Poltava Court of Appeal has not opened appeal proceedings to date. The
date of the first hearing at the Poltava Court of Appeal in these proceedings
is currently unknown. In parallel, the NBU made an application to stay the
main proceeding. On 9 January 2024, the court of first instance suspended the
court proceedings until there is a written decision from the Supreme Court of
Ukraine in respect of the restrictions imposed in the above-mentioned case
initiated by the DGF.
Shares freeze in relation to investigation in connection with Bank F&C
As part of the ongoing investigation in connection with Bank F&C, on 25
March 2024, the Group became aware of a court order dated 18 January 2024 in
the Ukrainian Register of Court Decisions regarding restrictions on certain
corporate rights in all of the Group's Ukrainian subsidiaries. These
restrictions are imposed on 49.5% of the shares in all of the Group's
Ukrainian subsidiaries, except for Nova Logistics LLC and TIS-Ruda LLC, an
associated company of the Group, where the relevant percentages restricted are
25.2% and 24.7%, respectively.
The restrictions do not affect ownership of the relevant shares, but prohibit
their transfer and restrict the right to use corporate rights of such shares,
including the right to vote. The Group is not a party to the proceedings in
which the restrictions have been imposed and these restrictions were imposed
without official notification to the Group and/or its subsidiaries. The Group
plans to file an appeal to seek the cancellation of these restrictions on the
corporate rights.
Currency control measures imposed in Ukraine
With the start of the Russian invasion into Ukraine on 24 February 2022, the
Ukrainian government introduced Martial Law affecting, among others, aspects
relating to lending agreements, foreign exchange and currency controls and
banking activities.
As a result of the introduced Martial Law, the National Bank of Ukraine
("NBU") has introduced significant currency and capital control restrictions
in Ukraine. These measures are affecting the Group in terms of its
cross-border payments to be made, which are restricted and may be carried out
only in exceptional cases. The maximum period for settlements of invoices
under export and import contracts was decreased as of 1 April 2022 from what
was previously 360 days to 180 days.
These measures put additional pressure on the Group's liquidity management as
the Ukrainian subsidiaries are currently not in the position to make cash
transfers outside of Ukraine. As it is essential to the Group that sufficient
liquidity is held outside of Ukraine in order to ensure that the Group's
liabilities can be settled when falling due, intercompany receivable balances
due to the Ukrainian subsidiaries have historically only been paid when
falling due and after considering the local cash requirements for the
operating activities and the capital expenditure programmes.
The currently lower operating activities and the reduced capital expenditure
programmes due to the ongoing war have reduced the local cash requirements and
consequently increased the imbalance between payments to be made into Ukraine
and local cash requirements. As a result of the imposed currency control
measures, the Group has to carefully manage the payments to be made into
Ukraine, as the local subsidiaries cannot transfer any surplus funds back to
the Group entities outside of Ukraine, if required.
Failure to comply with the currency control regulations can result in fines.
The offence against the currency control regulations would result in fines of
0.3% per day calculated on the cumulative overdue receivable balances. The
Group has implemented various measures to mitigate the impact of the currency
control regulations and reduce the risk of material fines, but there exists
legal uncertainty in the application of the currency control regulations
during the application of Martial Law in Ukraine. The currency control
regulations may also be subject to change in the future (including with
retrospective effect). Therefore, there is a risk that the Group may become
subject to challenges from regulatory authorities in connection with the
application of the regulations.
Given the amount of outstanding receivable balances between Group companies,
there is a risk of material fines becoming payable in the future. However, as
a result of different interpretations of the currency control regulations
during the application of Martial Law and the measures initiated by the Group
to mitigate the risk of potential fines, it is currently not possible to
reliably estimate the amount of a potential exposure.
Share dispute
On 23 November 2020, the Kyiv Commercial Court reopened court proceedings in
relation to an old shareholder litigation.
This old shareholder litigation started in 2005, when a former shareholder in
Ferrexpo Poltava Mining ("FPM") brought proceedings in the Ukrainian courts
seeking to invalidate the share sale and purchase agreement concluded in 2002
pursuant to which a 40.19% stake in FPM was sold to nominee companies that
were previously ultimately controlled by Mr. Zhevago, amongst other parties.
After a long period of litigation, all old claims were fully dismissed in 2015
by the Higher Commercial Court of Ukraine.
In January 2021, Ferrexpo AG ("FAG") received a claim from a former
shareholder in FPM seeking to invalidate the share sale and purchase agreement
concluded in 2002.
In February 2021, FAG became aware that an additional three new claims had
been filed by three other former shareholders in FPM. Taken together, four
claimants sought to invalidate the share sale and purchase agreement concluded
in 2002 pursuant to which a 40.19% stake in FPM was sold, similar to the
previous claims made back in 2005. The Kyiv Commercial Court ruled on 27 May
2021 in favour of FAG and the opposing parties filed their appeals in June
2021. The Northern Commercial Court of Appeal opened the appeal proceedings.
After several hearings, in September 2022 the Group received a judgment from
the appeal court, which stated that the share sale and purchase agreement
concluded in 2002 was invalid and ordered that 40.19% of the current share
capital in FPM should be transferred to the claimants.
Following the identification of numerous errors in the application of
Ukrainian law in the judgment of the Northern Commercial Court of Appeal by
the Group's Ukrainian legal advisors, FAG filed a cassation appeal and
requested the Supreme Court of Ukraine to review the ruling made by the
Northern Commercial Court of Appeal. During the hearing on 19 April 2023, the
judges of the Grand Chamber of the Supreme Court ruled in favour of the Group.
Allegations of bribery against the Head of the Supreme Court made by the
National-Anti-Corruption Bureau of Ukraine ("NABU") and the Specialised
Anti-Corruption Prosecutor's Office ("SAPO") in May 2023 make reference to the
ruling made by the Supreme Court on 19 April 2023 and the Group's controlling
shareholder. Following the subsequent removal of the Head of the Supreme
Court, investigations by NABU and SAPO are underway into the conduct of the
former Head of the Supreme Court and a lawyer who allegedly acted as the
intermediary in the alleged bribery. On 3 August 2023, NABU announced that the
Group's controlling shareholder had been issued with a notice of suspicion in
NABU's and SAPO's investigation.
If the Ukrainian Anti-Corruption Court concludes that a judge received a bribe
for the favourable decision in the share dispute case, and such verdict of the
Anti-Corruption Court remains valid after any potential appeal, then the
claimants may apply to the Supreme Court to review the decision of the Grand
Chamber of the Supreme Court given on 19 April 2023 due to exceptional
circumstances. In February 2024, all four claimants were dissolved according
to the records at the UK Companies House. As at the date of the approval of
these consolidated financial statements, no allegations have been made against
the Group in connection with the alleged bribery and it is currently not
possible to anticipate future developments in this case with any certainty.
If the case were to be reviewed by the Grand Chamber of the Supreme Court once
again, management remains of the view that FAG has compelling legal arguments
to defend its position. Based on the legal considerations and arguments in the
case and taking into account the advice received from the Group's Ukrainian
legal advisors, management remains of the view that the decision should be in
favour of the Group, but there is a risk that the independence of the judicial
system and its immunity from economic and political influences in Ukraine is
not upheld. A hypothetical reversal of the decision by the Grand Chamber of
the Supreme Court would result in the loss of a significant proportion of the
shareholding in the Group's main operating subsidiary in Ukraine, which holds
approximately 65% of the Group's non-current operating assets, and would have
a material adverse impact on the shareholders' equity attributable to the
shareholders of Ferrexpo plc. Due to the uncertainties, it is currently not
possible to reasonably estimate the financial impact, but it could be
material. A negative decision could also have an impact on potential future
dividends from FPM to FAG and, as result, on the distributable reserves of
Ferrexpo plc (see Note 9 Earnings per share and dividends paid and proposed
for further details).
No non-controlling interest has been recognised as of 31 December 2023 because
FPM remains wholly owned by FAG as at the date of the approval of these
consolidated financial statements. It is management's view that a hypothetical
reversal of the decision by the Grand Chamber of the Supreme Court will not
cast significant doubt on the Group's ability to continue as a going concern.
However, such a decision might complicate the daily business of the Group's
major subsidiary in Ukraine, as the intentions of the opposing parties, the
claimants in the share dispute case, are not clear at this point in time.
Other ongoing legal proceedings and disputes
Other ongoing legal proceedings and disputes with corresponding provisions
Challenge of squeeze-out of minority shareholders
Following the completion of squeeze-out procedures in 2019 in respect of the
one of the Group's subsidiaries in Ukraine, Ferrexpo Poltava Mining ("FPM"),
two former minority shareholders of FPM challenged the valuation of the shares
of FPM. This valuation formed the basis for the mandatory buy-out of minority
shareholders according to Ukrainian law.
On 19 September 2023, a court of first instance ruled in favour of the two
former minority shareholders and decided that FPM should pay UAH136 million
(US$3,720 thousand as at 31 December 2023) in aggregate to the two former
shareholders of FPM. Following the appeal filed by FPM, the court of appeal in
Kharkiv refused on 21 February 2024 to satisfy the appeal of FPM, and FPM
subsequently filed a cassation appeal to the Supreme Court of Ukraine. On 25
March 2024, the Supreme Court suspended the enforcement of the decision of the
court of appeal and scheduled a court hearing for 17 April 2024. On 17 April
2024, the Supreme Court heard the arguments of the parties and scheduled
another hearing for 27 May 2024.
The Group recorded a full provision for this claim as at 31 December 2023, in
accordance with the requirements of IAS 37 Provisions, contingent liabilities
and contingent assets.
Other ongoing legal proceedings and disputes without corresponding provisions
Royalty-related investigation and claim
On 3 February 2022, Ferrexpo Poltava Mining ("FPM") and Ferrexpo Yeristovo
Mining ("FYM") received letters from the Office of Prosecutor General
notifying them about an ongoing investigation into the potential underpayment
of iron ore royalty payments during the years 2018 to 2021. The amount of
underpayment was not specified in the letters. As part of the investigation,
the Office of Prosecutor General requested documents related to iron ore
royalty payments and requested four representatives of the Group's
subsidiaries to appear as witnesses for investigations.
On 8 February 2022, FPM received a tax audit report, which claims the
underpayment of iron ore royalty payments during the period from April 2017 to
June 2021 in the amount of approximately UAH1,042 million (US$27,434 thousand
as at 31 December 2023), excluding fines and penalties. The Group provided its
objections to the claims made in the tax audit report. On 11 August 2023, FPM
received a tax notification-decision, which claims the underpayment of royalty
payments in the amount of UAH1,233 million (US$32,462 thousand as at 31
December 2023), which is higher than the amount initially stated in the tax
audit report due to imposed fines and penalties. FPM challenged the
notification received as part of administrative procedures with the tax
authorities. On 20 October 2023, the tax authorities decided that the amount
in the notification-decision is final and not subject to changes. In November
2023, FPM filed a lawsuit before the court to challenge the tax authorities'
decision and the first court hearing took place on 29 January 2024. The
hearing scheduled for 18 March 2024 did not take place due to air raid alerts
and a reconvened court hearing on 15 April 2024 decided that the court
proceedings are suspended until the review of another case.
On 16 November 2022, detectives from the Bureau of Economic Security of
Ukraine conducted searches at FPM and FYM in connection with the
royalty-related investigation. On 3 February 2023, a notice of suspicion was
delivered to a senior manager of FPM, which claimed underpayment of royalty
payments in the amount of approximately UAH2,000 million (US$52,656 thousand
as at 31 December 2023). Bail of UAH20 million (US$527 thousand as at 31
December 2023) was approved by the court on 9 February 2023 and subsequently
paid by the Group.
On 6 February 2023, the court arrested the bank accounts of FPM. Following a
motion to change the scope of the arrest filed by FPM, the court on 8 February
2023 and on 16 February 2023 added exceptions to the original court order to
arrest the bank accounts of FPM in order to allow FPM to make payments for
salaries, local taxes, social security charges, payments for utilities as well
as payments to state and municipal companies. An appeal to cancel the arrest
of the bank accounts of FPM was heard by the court of appeal on 19 April 2023,
but the court did not satisfy the Group's appeal and the arrest order remains
in effect.
On 31 October 2023, a notice of suspicion was delivered to another senior
manager of FPM. On 13 November 2023, a court of first instance approved the
bail in the amount of approximately UAH800 million (US$21,062 thousand as at
31 December 2023). An appeal was filed by the Group's subsidiary and after
several scheduled court hearings were postponed, the next court hearing of the
court of appeal to determine the amount of the bail for this senior manager
was scheduled for 20 March 2024. However, this hearing was postponed and a
reconvened hearing was scheduled for 2 April 2024, but was postponed to 29
April 2024.
Based on legal advice obtained, it is management's view that FPM and FYM have
compelling arguments to defend their positions in the court and, as a
consequence, no associated liabilities have been recognised in relation to the
claim in the consolidated statement of financial position as at 31 December
2023. However, as with other ongoing legal proceedings, there is a risk that
the independence of the judicial system and its immunity from economic and
political influences in Ukraine is not upheld and, in that case, there could
be a material adverse impact on the Group.
Investigations on use of waste product and asset freeze
On 10 January 2023, the State Bureau of Investigations ("SBI") in Ukraine
performed several searches in respect of investigations on alleged illegal
extraction of minerals ("rubble"). The National Police of Ukraine also carried
out investigations on the same matter and made searches and collected samples
of the rubble on 17 January 2023 at Ferrexpo Poltava Mining ("FPM"). FPM's
position is that the minerals in question are not a separate mineral resource,
but that it is a waste product resulting from the crushing of iron ore during
the technical process for the production of iron ore pellets.
On 29 June 2023, the SBI issued notices of suspicion to three representatives
of FPM's senior management and the head of one division for allegedly selling
the rubble without the appropriate permit. The FPM employees were detained by
the SBI and subsequently released after FPM paid bails totalling UAH122
million (US$3,336 thousand at this point of time) that were approved by the
court.
On 22 September 2023, the National Police of Ukraine searched the private
residence of a senior manager of FPM and issued a notice of suspicion. The
senior manager was subsequently detained by the National Police of Ukraine. On
26 September 2023, a court of first instance approved bail in the amount of
UAH999 million (US$26,302 thousand as at 31 December 2023) and then on 30
October 2023 the court of appeal reduced the bail to UAH400 million (US$10,531
thousand as at 31 December 2023). Following payment of the bail by the Group,
the senior manager was released.
The sales of the rubble were subject to inspections by the State Service for
Geology and Subsoil of Ukraine for many years and the sales were suspended by
the Group in September 2021. The position of FPM is that based on the mining
license held, FPM complied with the relevant legislation. In the pre-trial
investigation of the rubble case and following an application from the
prosecutor to arrest (freeze) all rail cars and railway access tracks owned by
FPM, a court of first instance issued the order to do so. FPM filed an appeal
and at a hearing of the court of appeal on 30 October 2023 the court of appeal
confirmed the arrest (freeze) of assets, but refused to provide clarifications
on the exact scope of the order, which created an alleged restriction on the
use of one type of FPM's rail cars. Since that time FPM has not been using
this type of rail cars (totalling 1,339 units), but continues to use another
type of its rail cars (totalling 1,043 units). FPM filed new applications to
several courts to remove the arrest order. In the same pre-trial investigation
of the rubble case, some of the real estate assets and transport vehicles of
FPM were also arrested, but this arrest does not restrict the use of these
assets in operations. As disclosed under the royalty-related investigation and
claim on page 61, a court in Ukraine arrested on 6 February 2023 the bank
accounts of FPM. Following a motion to change the scope of the arrest filed by
FPM, the court on 8 February 2023 and on 16 February 2023 added exceptions to
the original court order to arrest the bank accounts of FPM in order to allow
FPM to make payments for salaries, local taxes, social security charges,
payments for utilities as well as payments to state and municipal companies.
On 5 March 2024, the same bank accounts were again arrested by another
governmental body, the National Police of Ukraine, but in respect of the
investigations on the use of waste products. FPM has filed again a motion to
the court to change the scope of the arrest to allow certain payments to be
made from these arrested bank accounts. A court of appeal hearing scheduled
for 16 April 2024 did not take place and a hearing is now scheduled for 14 May
2024.
No associated liabilities have been recognised in relation to this case in the
consolidated statement of financial position as at 31 December 2023 as no
damage has been claimed from FPM.
Ecological claims
As discussed in detail in the 2022 Annual Report and Accounts, the State
Ecological Inspection carried out an inspection of Ferrexpo Yeristovo Mining
("FYM") and on 1 October 2021 issued an order to remove a number of alleged
violations of environmental rules. After the court of first instance ruled in
favour of FYM on 19 July 2022 the State Ecological Inspection filed an appeal.
The court of appeal returned the appeal claim to the State Ecological
Inspection on 20 March 2023 due to procedural mistakes when filing the claim
and the State Ecological Inspection subsequently requested an extension of the
deadline for the filing of their next appeal. The State Ecological Inspection
subsequently filed another appeal and on 20 July 2023 the court of appeal
returned the appeal claim back to the State Ecological Inspection. There had
been no actions in respect of this dispute until 5 October 2023, when the
National Police of Ukraine reviewed land plots of FYM.
Based on legal advice obtained, it is management's view that FYM has
compelling arguments to defend its position in the court and, as a
consequence, no associated liabilities have been recognised in relation to
these matters in the consolidated statement of financial position as at 31
December 2023.
Cancellation of licence for Galeschynske deposit
On 24 June 2021, an Order of the President of Ukraine was published on the
official website of the President (the "Order"), which enacted the Decision of
the National Security and Defence Council of Ukraine on the application of
personal special economic and other restrictive measures and sanctions (the
"Decision"). Ferrexpo Belanovo Mining ("FBM") is included in the list of legal
entities which are subject to sanctions pursuant to the Decision. The Order
and the Decision do not provide any legal ground for the application of
sanctions. The sanction imposed on FBM is the cancellation of the mining
licence for the Galeschynske deposit, which is one of two licences held by
FBM.
The Galeschynske deposit is a project in the exploration phase that is
situated to the north of the Group's active mining operations. Following the
cancellation of this license and considering the fact that the outcome of the
proceedings is currently uncertain, all capitalised costs associated with this
licence totalling US$3,439 thousand were written off during the financial year
2021. A court hearing took place on 4 April 2023 and the judges considered the
evidence presented, but have not yet concluded on the legal merits of this
dispute. Another court hearing took place on 12 February 2024 with no decision
being taken and the date of the next hearing is unknown as at the date of the
approval of these consolidated financial statements.
Taxation
Tax legislation
As disclosed in Note 8 Taxation, following the completion of tax audits in
respect of its cross-border transactions, the Group's major subsidiaries,
Ferrexpo Poltava Mining ("FPM") and Ferrexpo Yeristovo Mining ("FYM") received
tax claims in the amount of UAH2,162 million (US$56,921 thousand as at 31
December 2023), including fines and penalties, and UAH259 million (US$6,819
thousand as at 31 December 2023), still subject to potential fines and
penalties, respectively. The Group's subsidiaries filed the objections to be
considered by the tax authorities. Based on past experience, it is expected
that no agreement will be made with the tax authorities and that the claims
will need to be heard by the courts in Ukraine. On 28 February 2024, a court
of first instance opened a case in relation to the lawsuit filed by FPM to
challenge the tax-notification-decisions dated 27 November 2023. The first
preparatory hearing took place on 1 April 2024 and the next hearing is
scheduled for 20 May 2024. As at the date of the approval of these
consolidated financial statements, the court preparatory hearings have just
commenced and, as a result, no final decisions have been made for the claims
received by the Group's subsidiaries in Ukraine. An unfavourable outcome would
have an adverse impact on the Group's cash flow generation, profitability and
liquidity.
See Note 8 Taxation and also the update on the Group's Principal Risks on
pages 26 to 29 in terms of the Ukraine country risk.
Note 15: Related party disclosures
During the years presented, the Group entered into arm's length transactions
with entities under the common control of Kostyantin Zhevago, a controlling
shareholder of Ferrexpo plc, with associated companies and with other related
parties. Management considers that the Group has appropriate procedures in
place to identify, control, properly disclose and obtain independent
confirmation, when relevant, for transactions with the related parties.
Entities under common control are those under the control of Kostyantin
Zhevago. Associated companies refer to TIS Ruda LLC, in which the Group holds
an interest of 49.9% (2022: 49.9%). This is the only associated company of the
Group.
Related party transactions entered into by the Group during the years
presented are summarised in the following tables:
Revenue, expenses, finance income and expense
Year ended 31.12.23 Year ended 31.12.22
US$000 Entities Associated companies Other Entities Associated companies Other
under common control related under common control related
parties parties
Other sales(a) 271 - 1 560 - 2
Total related party transactions within revenue 271 - 1 560 - 2
Materials and services(b) 6,473 - - 6,784 - -
Spare parts and consumables(c) 1,730 - - 7,056 - -
Other expenses(d) 1,289 - - 1,948 - -
Total related party transactions within cost of sales 9,492 - - 15,788 - -
Selling and distribution expenses(e) 5,825 20 - 6,542 3,819 -
General and administration expenses(f) 200 - 691 398 - 567
Other operating expenses(g) 1,019 - - 2,019 - -
Finance expense 3 - - 8 - -
Total related party transactions within expenses 16,539 20 691 24,755 3,819 567
Total related party transactions 16,810 20 692 25,315 3,819 569
A description of the most material transactions, which are in aggregate over
US$200 thousand in the current or comparative year, is given below.
Entities under common control
The Group entered into various related party transactions with entities under
common control. All transactions were carried out on an arm's length basis in
the normal course of business.
a Sales of scrap metal to OJSC Uzhgorodsky Turbogas totalling US$170
thousand (2022: US$361 thousand);
b Purchases of oxygen, scrap metal and services from Kislorod PCC
for US$1,020 thousand (2022: US$1,437 thousand);
b Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas for
US$4,552 thousand (2022: US$4,258 thousand); and
b Purchase of maintenance and construction services from FZ
Solutions LLC for US$779 thousand (2022: US$997 thousand).
c Purchases of spare parts from OJSC AvtoKraz Holding in the amount
of US$2 thousand (2022: US$1,799 thousand);
c Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship
Repair Plant ("KSRSSZ") in the amount of US$218 thousand (2022: US$902
thousand);
c Purchases of spare parts from OJSC Uzhgorodsky Turbogas in the
amount of US$746 thousand (2022: US$1,460 thousand);
c Purchases of spare parts from FZ Solutions LLC of US$372 thousand
(2022: US$1,125 thousand);
c Purchases of spare parts from Kislorod PCC in the amount of US$256
thousand (2022: US$410 thousand); and
c Purchases of spare parts from Valsa GTV of US$137 thousand (2022:
US$1,231 thousand).
d Insurance premiums of US$1,289 thousand (2022: US$1,948 thousand)
paid to ASK Omega for insurance cover in respect of mining equipment and
machinery.
e Purchases of advertisement, marketing and general public relations
services from FC Vorskla of US$5,823 thousand (2022: US$6,541 thousand).
g Insurance premiums of US$804 thousand (2022: US$1,085 thousand)
paid to ASK Omega for workmen's insurance and other insurances;
g Purchase of marketing services from TV & Radio Company of
US$210 thousand (2022: US$212 thousand); and
g Purchase of food under the Ferrexpo Humanitarian Fund from JSC
Kremenchukmyaso in the amount of US$798 thousand in the comparative year ended
31 December 2022. No such purchases as at 31 December 2023. See page 64 for
further information on the Ferrexpo Humanitarian Fund.
Associated companies
The Group entered into related party transactions with its associated company,
TIS Ruda LLC, which were carried out on an arm's length basis in the normal
course of business for the members of the Group.
e Purchases of logistics services in the amount of US$20 thousand
(2022: US$3,819 thousand) relating to port operations, including port charges,
handling costs, agent commissions and storage costs. The scope of the services
procured from TIS Ruda is heavily affected by the ongoing war in Ukraine as
the Group's seaborne sales through the port of Pivdennyi were suspended since
the beginning of the war.
Other related parties
The Group entered into various transactions with related parties other than
those under the control of a controlling shareholder of Ferrexpo plc. All
transactions were carried out on an arm's length basis in the normal course of
business.
f Legal and administrative services in the amount of US$510
thousand (2022: US$387 thousand) provided by Kuoni Attorneys at Law Ltd.,
which is controlled by a member of the Board of Directors of one of the
subsidiaries of the Group. The Directors' fees paid totalled US$100 thousand
for the financial year 2023 (2022: US$100 thousand).
Purchases of property, plant and equipment
The table below details the transactions of a capital nature, which were
undertaken between Group companies and entities under common control,
associated companies and other related parties during the years presented.
Year ended 31.12.23 Year ended 31.12.22
US$000 Entities Associated companies Other Entities Associated companies Other
under common control related under common control related
parties parties
Purchases in the ordinary course of business 3,499 - - 11,634 - -
Total purchases of property, plant and equipment 3,499 - - 11,634 - -
During the year ended 31 December 2023, the Group purchased major spare parts
and equipment from FZ Solutions LLC totalling US$3,499 thousand (2022:
US$11,598 thousand) in respect of the continuation of the Wave 1 pellet plant
expansion project.
The FPM Charity Fund owns 75% of the Sport & Recreation Centre ("SRC") in
Goryshnye Plavnye and made contributions totalling US$69 thousand during the
year ended 31 December 2023 (2022: US$154 thousand) for the construction and
maintenance of the building, including costs related to electricity, gas and
water consumption. The remaining stake of 25% is owned by JSC F&C Realty,
which is under the control of Kostyantin Zhevago.
Balances with related parties
The outstanding balances, as a result of transactions with related parties,
for the years presented are shown in the table below:
As at 31.12.23 As at 31.12.22
US$000 Entities Associated companies Other Entities Associated companies Other
under common control related under common control related
parties parties
Other non-current assets(g) 3,001 - - 3,847 - -
Total non-current assets 3,001 - - 3,847 - -
Trade and other receivables(h) 71 3,125 - 38 3,245 1
Prepayments and other current assets(i) 124 389 - 745 120 -
Total current assets 195 3,514 - 783 3,365 1
Trade and other payables(j) 1,219 - - 2,057 244 -
Total current liabilities 1,219 - - 2,057 244 -
A description of the balances over US$200 thousand in the current or
comparative year is given below.
Entities under common control
g Other non-current assets include prepayments for property, plant
and equipment totalling US$2,990 thousand (2022: US$3,787 thousand) were made
to FZ Solutions LLC mainly in relation to the Wave 1 expansion project of the
processing plant.
i Prepayments and other current assets to ASK Omega for insurance
premiums in the amount of US$233 thousand as at the comparative year ended 31
December 2022. No such prepayments as at 31 December 2023; and
i Prepayments and other current assets totalling US$89 thousand to
FZ Solutions LLC (2022: US$327 thousand) related to the purchase of spare
parts and services.
j Trade and other payables of US$703 thousand (2022: US$1,603
thousand) related to the purchase of spare parts and services from FZ
Solutions LLC; and
j Trade and other payables of US$317 thousand (2022: nil) related
to the purchase of spare parts from Uzhgorodsky Turbogas, OJSC.
Associated companies
h Trade and other receivables included US$3,125 thousand (2022:
US$3,245 thousand) related to dividends declared by TIS Ruda LLC.
i Prepayments and other current assets included US$389 thousand
(2022: US$120 thousand) related to cargo storage services from TIS Ruda LLC.
j Trade and other payables to TIS Ruda LLC related to purchases of
logistics services in the amount of US$244 thousand in the comparative year
ended 31 December 2022. No such purchases as at 31 December 2023.
Payments on behalf of a key management member
As disclosed in Note 14 Commitments, contingencies and legal disputes, the
Group is subject to various legal actions and ongoing court proceedings
initiated by certain governmental bodies in Ukraine. It is current practice of
these governmental bodies to issue notices of suspicion to members of the
senior management of the Group's subsidiaries in Ukraine and requesting
significant bail payments.
During the financial year ended 31 December 2023, the Group made bail payments
totalling UAH540 million (US$14,901 thousand at the applicable exchange rates
on dates of the payments) on behalf of four members of the senior management
of one of the Group's subsidiaries in Ukraine.
Due to their roles as key management members of the Group, the payments made
are considered to be related party transactions under the Listing Rules as the
payments were made to their benefit. As a result and as required by the
Listing Rules, the Group consulted its sponsor before making any of these
payments.
One bail payment made in November 2023 in the amount UAH400 million (US$11,062
thousand at the applicable exchange rate on date of payment) was a smaller
related party transaction for the purposes of Listing Rule 11.1.10R and, as
per the requirements of Listing Rule 11.1.10R, the Group has obtained written
confirmation from its sponsor that the terms of the transaction are fair and
reasonable as far as the shareholders of Ferrexpo plc are concerned. Further
to that, the Group made an announcement in accordance with Listing Rule
11.1.10R(2)(c) on 2 November 2023.
The Ferrexpo Humanitarian Fund
Following the Russian invasion into Ukraine in February 2022, the Group has
established the Ferrexpo Humanitarian Fund with total approved funding of
US$15,000 thousand in order to support local communities in Ukraine. The Group
procured during the previous financial year ended 31 December 2022 medicine
totalling US$404 thousand from Arterium LLC and food totalling US$798 thousand
from JSC Kremenchukmyaso, both under common control of Kostyantin Zhevago, a
controlling shareholder of Ferrexpo plc. During the financial year ended 31
December 2023, no procurements were made from these companies under the
Ferrexpo Humanitarian Fund.
Note 16: Events after the reporting period
As disclosed in Note 14 Commitments, contingencies and legal disputes,
following the end of the reporting year the Group received two negative
decisions from courts of appeal in Ukraine in respect of ongoing legal
proceedings and disputes that existed during the financial year 2023. The
first negative court decision related to a contested sureties claim, details
of which were announced on 29 January 2024 on the Regulatory News Service of
the London Stock Exchange, and the second negative court decision related to a
historic squeeze-out of minority shareholders in one of the Group's Ukrainian
subsidiaries. As a result of these negative court decisions, the Group
recorded provisions in the amount of US$124,450 thousand for the contested
surety claim, and US$3,720 thousand in relation to the claim from two former
minority shareholders of one of the Group's Ukrainian subsidiaries in respect
of a squeeze-out of minority shareholders. The outcome of the contested
sureties claim could have a material negative impact on the Group's business
activities and its ability to continue as a going concern. See Note 2 Basis of
preparation and Note 14 Commitments, contingencies and legal disputes for
further information
As announced on 20 February 2024, the Board of Directors decided not to
proceed with the interim dividend of 3.3 US cents per ordinary share, which
was announced on 18 January 2024 and was due to be paid to the shareholders on
23 February 2024. The decision to withdraw this dividend followed the
unexpected court decision in the contested sureties claim mentioned above. See
Note 9 Earnings per share and dividends paid and proposed for further
information.
As announced on 11 March 2024 on the Regulatory News Service of the London
Stock Exchange, a supplier and related party to the Group filed an application
to open bankruptcy proceedings ("creditor protection proceedings") against
Ferrexpo Poltava Mining ("FPM"), which was accepted by the relevant court for
further consideration. The initial amount of debt claimed by the supplier of
FPM was UAH2.2 million, which subsequently increased to UAH4.6 million (c.
US$117 thousand as at 15 April 2024). See Note 2 Basis of preparation and Note
14 Commitments, contingencies and legal disputes for further information.
The Group also announced on 11 March 2024 that FPM received a notification of
a court order issued at the request of the prosecutor in Ukraine to freeze the
bank accounts of FPM. The freeze of FPM's bank accounts is linked to an
ongoing investigation in Ukraine concerning the alleged illegal extraction of
minerals ("rubble"). See Note 14 Commitments, contingencies and legal disputes
for further information.
As announced on 26 March 2024 on the Regulatory News Service of the London
Stock Exchange, the Group became aware on 25 March 2024 of a court order dated
18 January 2024 in the Ukrainian Register of Court Decisions regarding
restrictions on certain corporate rights in all of Group's Ukrainian
subsidiaries. These restrictions are part of the ongoing investigation in
connection with Bank F&C and the Group is not a party to the proceedings
in which the restrictions have been imposed. See Note 14 Commitments,
contingencies and legal disputes for further information.
No other material adjusting or non-adjusting events have occurred subsequent
to the year-end other than the events disclosed above.
Alternative Performance Measures
When assessing and discussing the Group's reported financial performance,
financial position and cash flows, management may make reference to
Alternative Performance Measures ("APMs") that are not defined or specified
under International Financial Reporting Standards ("IFRSs").
APMs are not uniformly defined by all companies, including those in the
Group's industry. Accordingly, the APMs used by the Group may not
be comparable with similarly titled measures and disclosures made by other
companies. APMs should be considered in addition to, and not as a substitute
for or as superior to, measures of financial performance, financial position
or cash flows reported in accordance with IFRSs.
C1 cash cost of production
Definition: Non-financial measure, which represents the cash cost of
production of iron pellets from own ore divided by production volume of own
production ore. Non-C1 cost components include non-cash costs such as
depreciation, inventory movements and costs of purchased ore and concentrate.
The Group presents the C1 cash cost of production because it believes it is a
useful operational measure of its cost competitiveness compared to its peer
group.
US$000 Notes Year ended Year ended
31.12.23 31.12.22
C1 cash costs 294,213 503,975
Non-C1 cost components 45,136 36,035
Inventories recognised as an expense upon sale of goods 5 339,349 540,010
Own ore produced (tonnes) 3,845,325 6,053,397
C1 cash cost per tonne (US$) 76.5 83.3
Underlying EBITDA
Definition: The Group calculates the underlying EBITDA as profit before tax
and finance plus depreciation and amortisation, adjusted for net gains and
losses from disposal of investments property, plant and equipment, effects
from share-based payments, write-offs and impairment losses and exceptional
items. The underlying EBITDA is presented because it is a useful measure for
evaluating the Group's ability to generate cash and its operating performance.
See Note 3 Segment information to the consolidated financial statements for
further details.
Closest equivalent IFRSs measure: Profit before tax and finance.
Rationale for adjustment: The Group presents the underlying EBITDA as it is a
useful measure for evaluating its ability to generate cash and its operating
performance. Also it aids comparability across peer groups as it is a
measurement that is often used.
Reconciliation to closest IFRSs equivalent:
US$000 Notes Year ended Year ended
31.12.23 31.12.22
Underlying EBITDA 130,242 765,113
Losses on disposal and liquidation of property, plant and equipment 5 (11) (1,665)
Share-based payments (830) (490)
Write-offs and impairments 5 (978) (260,308)
Recognition of provisions for legal disputes 14 (131,117) −
Depreciation and amortisation (57,669) (96,977)
(Loss)/profit before tax and finance (60,363) 405,673
Net cash/(debt)
Definition: Cash and cash equivalents net of interest-bearing loans and
borrowings.
Closest equivalent IFRSs measure: Cash and cash equivalents.
Rationale for adjustment: Net cash/(debt) is a measurement of the strength of
the Group's balance sheet. It is presented as it is a useful measure to
evaluate the Group's financial liquidity.
Reconciliation to closest IFRS equivalent:
US$000 Notes As at As at
31.12.23 31.12.22
Cash and cash equivalents 12 115,241 112,945
Interest-bearing loans and borrowings - current 13 (5,939) (5,194)
Interest-bearing loans and borrowings - non-current 13 (1,009) (1,354)
Net cash 108,293 106,397
Capital investment
Definition: Capital expenditure for the purchase of property, plant and
equipment and intangible assets.
Closest equivalent IFRSs measure: Purchase of property, plant and equipment
and intangible assets (net cash flows used in investing activities).
Rationale for adjustment: The Group presents the capital investment as it is a
useful measure for evaluating the degree of capital invested in its business
operations.
Reconciliation to closest IFRSs equivalent:
US$000 Notes As at As at
31.12.23 31.12.22
Purchase of property, plant and equipment and intangible assets (net cash 10 101,247 161,010
flows used in investing activities)
Total liquidity
Definition: Sum of cash and cash equivalents, available committed facilities
and undrawn uncommitted facilities. No committed facilities outstanding as at
31 December 2023 and the end of the comparative year ended 31 December 2022.
Uncommitted facilities include trade finance facilities secured against
receivable balances related to these specific trades. See Note 13
Interest-bearing loans and borrowings for further information.
Closest equivalent IFRSs measure: Cash and cash equivalents.
Rationale for adjustment: The Group presents total liquidity as it is a useful
measure for evaluating its ability to meet short-term business requirements.
Reconciliation to closest IFRSs equivalent:
US$000 Notes As at As at
31.12.23 31.12.22
Cash and cash equivalents 12 115,241 112,945
1 The Group's JORC-compliant Ore Reserves and Mineral Resources shown above
are based on an independent review completed by Bara Consulting, and are shown
on a depleted basis as of 1 January 2024. The Group previously reported a
resource estimate of 326Mt for the Galeschynske deposit.
2 Source: S&P Global Commodity Insights.
3 Source: Baltic Exchange
4 Source: World Steel Association.
5 Source: S&P Global Commodity Insights
6 UAH per USD as per National Bank of Ukraine
7 Source: World Bank
8 Source: UNDP
9 Source: Transparency International.
10 Bloomberg
11 Source: S&P Global Commodity Insights.
12 Source: Baltic Index / S&P Global
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