Ferrexpo considers expanding out of Ukraine

Ferrexpo, the Ukraine-based iron ore producer, is considering expanding out of its home country at a time when booming iron ore prices are flushing its balance sheet with cash.

Kostyantin Zhevago, controlling shareholder and chief executive, told the Financial Times: “We are seriously looking at the right price, and the right time, and the right way, to diversify geography and diversify our markets.”

Mr Zhevago discounted the idea of London-listed Ferrexpo – one of Europe’s biggest iron ore producers – expanding regionally to become an eastern European champion. There were not enough iron ore deposits in the region, he said, adding that Ferrexpo would remain a “pure” iron ore company and would not consider diversifying into other commodities such as coking coal.

“We are looking at where the iron ore is,” he said. “We are looking at Canada, Australia, Brazil.” South Africa was too risky, he added, citing the country’s electricity deficit and other problems.

Despite high profits and rising iron ore prices, Ferrexpo was not in a hurry to double yearly iron ore pellet production to 20m tonnes by 2015, Mr Zhevago said. He cited “geological risks” as a barrier to rapid expansion, while the company also planned to use capital conservatively.

“In today’s environment it is better to have much cash on hand than the opposite,” he added. “We want to grow, but also be able to return cash to shareholders and keep the balance sheet flexible.”

The company is studying its options after a half-year period when pre-tax profits more than doubled from $166m to $352m. Surging cash flows pushed the company to a net cash position of $25m.

Ferrexpo’s available funds of nearly $1bn exceeded its planned capital spending of $380m for upgrading its sole mine in Poltava, central Ukraine. It will pay an interim dividend of 3.3 cents, payable from earnings per share that more than doubled from 23.62 cents to 49.8 cents.

Ukraine’s SBU state security service has probed the business empire of Mr Zhevago, who is also a politician. It seized documents from his Rosava tire factory, Avtokraz truck business, Finance and Credit Bank, as well as meat and pharmaceutical enterprises.

Ferrexpo did not appear to be targeted. The only criminal case launched relates to Mr Zhevago’s Vorskla soccer team, which is accused of “misspending funds”.

An investment banker in Kiev said the probes were an “obvious warning” to Mr Zhevago, a member of opposition leader Yulia Tymoshenko’s political faction, “to stay out of politics and avoid financing opposition politicians”.

Mr Zhevago brushed off the probes, saying businesses in Ukraine were being targeted by the government for additional sources of tax revenue.

Richard Knights, a mining analyst at Liberum Capital in London, said: “He [Mr Zhevago] could be worried about having all his eggs in the Ukrainian basket.”

However, the businessman denied that political risks had changed either for better or worse, saying, “I am a promoter of Ukraine.”

Shares in Ferrexpo closed down 1.4p at 429.3p.