It’s unclear exactly why shares in Ferrexpo (LSE: FXPO) are sliding today. However, over the past 12 months the company has continually disappointed, and it’s clear that shareholders have lost their faith in the management.
It’s easy to see why. At the end of September, the company announced that it had lost $174m — approximately 62% of its cash balance — after Bank Finance and Credit JSC, a related party ultimately controlled by Ferrexpo’s largest shareholder Kostyantin Zhevago, collapsed. Not only was there an enormous conflict of interest here, but management’s decision to keep its cash with a bank that was at risk of collapsing, just because it was owned by Ferrexpo’s largest shareholder, shows a total disregard for the interests of minority shareholders.
What’s more, assuming Ferrexpo is unable to recover any of $174m held at the failed bank, the company’s net debt has now jumped by a more than third since the end of June. Over the same period, the price of iron ore has dropped by a fifth.
So overall, Ferrexpo’s net debt is rising, earnings are collapsing, and the company’s management cannot be trusted. Even though the company’s shares trade at a highly attractive forward P/E of 1.7, Ferrexpo looks like a value trap to me.
Vedanta (LSE: VED) is struggling to reduce the pile of debt it has built up over the past six years. Reported net debt is just over $8bn, 9.4 times estimated 2016 earnings before interest tax, depreciation, and amortization (EBITDA). A debt to EBITDA ratio of more than two times is usually considered excessive.
Vedanta has already axed its interim dividend payout as it looks to preserve cash ,although the group had previously promised to protect the dividend at all costs. Management will consider whether to payout a final dividend alongside full-year results.
To try and strengthen its balance sheet, Vedanta is trying to buy out the 40% of oil subsidiary Cairn India that it doesn’t already own. The merger will give Vedanta access to Cairn’s cash hoard, which can then be used to pay off debt. But it’s proving difficult to convince Cairn’s shareholders to sell. Vedanta’s management is targeting Q2 of 2016 as the completion date for the merger.
High cost of production
Unfortunately, just like Ferrexpo and Vedanta, KAZ Minerals (LSE: KAZ) is struggling to cope with depressed commodity prices. At the end of August, the copper miner announced that its full-year copper production cost guidance would be in the region of 260 to 280 cents per pound. But a few days after this announcement, the price of copper crashed to 220 cents per pound and prices haven’t stopped falling.
The price of copper is now around 210 cents per pound, a full 60 cents/lb less than KAZ’s production cost. As a result of these price movements, between 30 June and 30 September, KAZ’s net debt increased by $261m, from $1,589m to $1,850m.
The bottom line
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.