It’s very bad.
“Following the close of business on the 17th of September 2015, the National Bank of Ukraine made an announcement on its website stating that it had adopted a decision to declare Bank F&C insolvent.”
But just how bad is the situation?
“As of the 16 September 2015, the group’s total cash balance was approximately $280m after the payment of the interim dividend. Of this cash balance, approximately $174m was held at Bank F&C with the remainder held offshore.”
Its operations “are not currently affected,” the miner added, and the board is assessing the situation and will update the market as necessary.
A supplier of iron ore pellets to the steel industry, Ferrexpo had a net debt position of $653m in the first half (1H) of the year ending 30 June, for a net leverage of 1.9x (1.2x on 31 December 2014). Revenues have plunged and operating cash flow have declined fast in recent months, and these trends are likely to persist, in my view.
Even if we assume that its level of adjusted operating cash flow (Ebitda) in the second half will be in line with 1H at $176m, then its net leverage could easily soar to between 2.4x and 2.8x, based on its cash balances, according to my calculations.
Also noteworthy is that the group’s net leverage must stay within “net debt to Ebitda covenant of 3x“, according to the agreement with its lenders, and this could be a real problem.
A dividend cut is a base-case scenario right now, in my view, yet more bad news could be around the corner. Incidentally, Citigroup raised its price target from 38p to 58p on Thursday, but the stock today plunged from 59p to 39p. The analysts, who have a sell recommendation, could not predict what was about to hit Ferrexpo, and I’d agree that its valuation wasn’t incredible high — yet its price-to-book value already testified to a very risky investment.
Elsewhere in the resources space, Metals Exploration announced today that it had “obtained commitments to raise US$5 million via the issue of a total of 108m new ordinary shares (…) at a price of 3 pence per new ordinary share, from certain existing shareholders.“
It stock traded around 3.3p around midday.
A much smaller entity with a market cap of less than £50m, and whose stocks trade on thin volumes, it kindly reminds us what kind of risk we face investing in tiny explorers, and why diversification rules!
Moreover, the group said that “is in final discussions to receive commitments from certain shareholders to raise up to a further $5m for working capital and contingency purposes by way of the creation and issue of debt securities up to a maximum nominal amount of $5m.”
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