It’s been a remarkable week for Ferrexpo (LSE:FXPO). Since close of business on 25 April, the FTSE 250 iron ore pellet producer’s share price has risen 40%. And compared to 4 April, the company’s now worth 62% more.
Yet during this period — as far as I can see — there hasn’t been any good news to report. In fact, the opposite appears to be the case.
Cash flow problems
That’s because, on 17 April, the group said that the Ukrainian tax authorities are not going to settle its February VAT reclaim of $11.1m. It follows a similar decision to hold on to the $12.5m claimed for January. And the consequences are significant.
The group’s advised that the decision is “placing financial pressure on [its] liquidity and has forced a reduction in production to 25% of full capacity”.
The suspension of the repayments is due to the imposition of personal sanctions on Kostiantyn Zhevago, the Ukrainian billionaire and largest shareholder in Ferrexpo. It’s believed that he controls just under 50% of the group’s shares. The company’s directors are keen to point out that the sanctions are personal in nature and that the group hasn’t been sanctioned in any way.
However, at this stage, it’s uncertain how – or when – the issue will be resolved. Therefore, it appears likely that future claims will also be suspended.
At 31 December 2024, Ferrexpo had $106m of cash on its balance sheet. I suspect it won’t take long for this to be depleted if the Ukrainian VAT continues to be withheld.
It’s a shame because the group claims to have reserves of over 5bn tonnes, which could keep it going for at least 50 years. It specialises in producing higher grades of iron ore. When used in the manufacturing process, this helps improve productivity and lower carbon emissions.
A confusing picture
However, given the uncertain backdrop, it makes the recent upward movement in the share price a bit of a mystery. Usually, concerns about a company’s liquidity would have the opposite effect.
But the share price rally could have something to do with the announcement that the long-awaited US- Ukraine minerals deal has been signed. I wonder if investors think this could lead to American (or other) investors launching a takeover bid. This seems unlikely to me. My understanding is that the agreement is about establishing an investment fund to discover new mineral deposits, not exploit existing ones.
Long-suffering shareholders will be delighted with the recent movement in the group’s share price. It will enable them to recoup some of their paper losses. Since May 2020, the group’s stock market valuation has fallen 41%.
However, the present situation makes me nervous. Without any obvious reason to justify the movement, it looks as though some speculative investors are taking a position. This means the share price could fall as quickly as it’s risen. It’s just too risky for me.
For this reason, I’m going to watch from the sidelines and see how the situation unfolds.
