The Ferrexpo (LSE:FXPO) share price has had a rough month, so far, falling by around 20%. This recent decline follows what was an excellent growth period for the FTSE 250 stock. After all, over the last 12-months, even with the most recent drop, Ferrexpo saw its share price climb by over 120%.
So, the question is, what caused this upward momentum to reverse? And should I see it as a buying opportunity for my portfolio or a sign of trouble ahead? Let’s take a look.
The crumbling Ferrexpo share price
I’ve covered this business before. But as a quick reminder, Ferrexpo is a leading supplier of high-grade iron ore pellets for the global steel industry. The firm extracts the ore using its collection of mining sites before processing them into usable pellets for sale.
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At the start of August, management released its interim report. And despite what the Ferrexpo share price would indicate, these results were, in my opinion, extraordinary. Thanks to rising iron ore prices, Ferrexpo’s revenue shot up 74% over the last six months, compared to a year ago. This, in turn, translated into after-tax profits of $661m. That’s 165% higher than in 2020! So why did the FTSE 250 stock take a hit?
Like most commodity-based businesses, Ferrexpo is highly dependent on the underlying market price of its materials. Since the pandemic began, iron ore prices have been on the rise, due to supply chain disruptions. In fact, the metal’s value has increased so much that Ferrexpo achieved its recent stellar growth even though production fell by 1%.
With the vaccine rollout progressing worldwide and life moving back toward normality, iron ore prices have begun showing some weaknesses in the derivatives marketplace. Consequently, management said it expects performance throughout the rest of 2021 to be less impressive. Given that Ferrexpo’s share price has been driven predominantly by future growth expectations, I understand why selling pressure has risen this month.
So, what’s next for this FTSE 250 stock?
While falling commodity prices aren’t a pleasant sight, it’s far from a catastrophe. Ferrexpo hasn’t been sitting idly with its temporary sales surge. The firm is actively re-investing capital to increase capacity with upgrades to its pelletiser machines. This is why production fell in the first half of 2021, as these machines were taken offline while the work was carried out.
Today, three of the four production lines have been upgraded, with the last expected to be completed in the next quarter. Once finished, up to 1m tonnes of additional annual production capacity will be added. That’s roughly a 10% boost. And should help mitigate the impact of falling iron ore prices on the stock.
The bottom line
The last time I looked at this business, I mentioned that falling commodity prices could have a substantial impact. And looking at Ferrexpo’s share price this month, it seems I was spot on. However, I think investors may have overreacted slightly on the news.
Today, the company is trading at a price-to-sales ratio of 3. That looks exceptionally cheap to me, even with a potential drop in iron ore prices on the horizon. Therefore, I’m still tempted to add this business to my portfolio, despite the upcoming short-term volatility.
