Ferrexpo (LON: FXPO) is a Ukraine based iron ore producer undergoing some obvious problems at present. Actual fighting isn’t quite the problem but the effects of it are. The share price is down from over £4 to the current just above £1 as a result. So, the big question is not the why – that we know, overall at least – it’s when might we expect some sort of return to normality. Or even, given that we don’t know when normality will arrive – that’s a military decision – what might we expect when it does?
The biggest risk right at the start of all this was that Ferrexpo would just disappear as an investment. Russia winning would, well it’s a reasonable enough surmise, lead to a re-examination of all privatisation decisions over the years. It’s not obvious that a commodity producer would survive that without that ownership being “reallocated”. OK, so we can see that’s not going to happen. So, one risk gone and done.
Ferrexpo’s basic business
The business itself is the production of iron ore pellets and that’s largely a commodity business. That is, producers are – largely – price takers. There’s an international price for iron ore and that’s what they get. That’s been elevated these recent years and that’s a part of the formerly high price at Ferrexpo. However, that’s not wholly and entirely true. FXPO produces DRI pellets as well as good quality iron ore. Leave the technicalities aside and this is the new stuff that is going to replace the old way of making steel. It’s also in demand in Europe as we’re the place that worries more about CO2 emissions – which DRI reduces if not eliminates.
While production hasn’t been directly affected it has been indirectly. The closure of the ports means that one method of exporting is now not possible. It’s the rivers and canals to Europe that have to be used now. Energy is in short supply, so the DRI production has had to be stopped – for the moment at least. The transport constraints mean that Ferrexpo cannot even operate at full capacity.
But what’s the future?
Well, OK – but what does this mean for the future? Sure, it’s a bit heartless talking about money in a war but then that’s what we’re doing here, talking about money. The threat of expropriation has receded (the “arrest” of shares affects one shareholder, not the company) as the idea that there’s going to be a change of power also recedes. As and when actual hostilities cease – if of course – then we can expect transport options to improve. Sure, that’ll not be immediate, clearing ports requires time. But once insurers are willing to insure ships and cargos out of Black Sea ports again then exports will restart and increase.
There’s no shortage of good quality ore at the mines, now physical damage to the processing plants. At some point after cessation of hostilities the power situation will be sorted – and industrial plants will be at the front of the queue as they always are. There’s no shortage of demand for the high quality iron ore and DRI pellets.
So, what we end up with is a fundamentally sound business affected by outside events. It’s always possible for such outside events to entirely bankrupt an otherwise sound business but we’d probably conclude that that risk has passed.
Good, but when?
So, Ferrexpo is a buy, right? Artificially depressed price as a result of world events? Which is a perfectly fair reading to be honest. It’s just that it’s not enough to make a trading decision. Because trading depends upon timing. Which means we need to know – or at least, have to be willing to speculate upon – when that desired normality is going to return. Which is the tricky little bit. It’s entirely reasonable to expect FXPO to get back up to the £2 and £3 levels (the £4 and above was rather driven by anomalously high iron ore price globally) as and when. But when’s when?
That’s just the thing we don’t know. But a reasonable guide would be that as it becomes obvious that events are settling themselves then the Ferrexpo price will rise in response.
All too often in investing – or trading – it’s the what which is the thing we don’t know. Here with Ferrexpo we’re pretty sure of the what, given the situation, it’s just the when we’re not sure about. Oh well. After all, if we all knew both the what and the when then it would already have happened, right?