What’s going on with the Ferrexpo (FXPO) share price?

The Ferrexpo (FXPO) share price is down 40% in three months but is it now trading at a massive discount? Zaven Boyrazian investigates.

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Since August, the Ferrexpo (LSE:FXPO) share price has had quite a rough ride. In fact, the stock is down almost 40% in the last three months. Although it’s worth noting that its one-year performance remains an impressive 97% return.

So what’s behind the recent crash? And is this a buying opportunity for my portfolio? Let’s take a closer look.

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The progress continues

I’ve explored this business before. But as a quick reminder, Ferrexpo supplies high-grade iron ore pellets to the global steel manufacturing industry. The group recently published its third-quarter production report, which in my opinion, looked fairly promising.

Total pellet production grew by a further 2% to 2.6 million tonnes on a year-on-year basis. This may not seem like much, but the firm has been slowly upgrading its pelletiser machines. This has caused production interruptions throughout the year and quarter while the work was carried out. 

In September, the fourth and final pelletiser upgrade was completed. And management now expects production volumes to increase between 0.5 and 1 million tonnes per year moving forward. Needless to say, this is positive news. And with the improved production capacity, Ferrexpo looks primed for growth. As does the FXPO share price. So why is the stock falling?

The Ferrexpo FXPO share price has its risks

The collapsing FXPO share price

Despite the encouraging progress made in production improvements, Ferrexpo is ultimately at the mercy of iron ore prices. This is a risk I’ve previously highlighted. And it appears to be the reason why the stock has had a bad run lately.

China is the heart of the global steel industry. So when the factories were temporarily shut down in 2020 as lockdown restrictions came into effect, the availability of steel worldwide plummeted. This is why iron ore prices went through the roof last year, as did the FXPO share price. But today, thanks to the relatively swift vacine rollout in China, around 79% of the population is double vaccinated.  And with factories back in full operation, the supply shortage of steel is now over. Consequently, iron ore prices have crashed in recent months back down closer to pre-pandemic levels.

Given that Ferrexpo’s business model is selling iron ore pellets, this drastic fall in prices will undoubtedly have a significant negative impact on sales for the remainder of 2021. So, I’m not surprised to see the share price crash with it.

The bottom line

Watching a seemingly solid business suffer due to external factors is quite frustrating. However, the fall in the share price may have created an excellent buying opportunity. Today the stock is trading at an exceptionally low P/E ratio of 2.4. The falling iron ore prices are concerning. However, the recent boost in production capacity should help mitigate any adverse impact. Therefore, given the low price, I am considering adding this business to my portfolio.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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