FTSE 250 miner Ferrexpo (LSE:FXPO) is down 64% over the last year. And the fall has been sustained throughout 2022 despite iron ore – Ferrexpo’s main product – increasing in value as the year has progressed. The reason is that 70% of Ferrexpo’s mines are based in Ukraine. And since the Russian invasion, investors have been concerned about the company’s ability to continue its operations.
Looking cheap
Based on earnings from the previous year, Ferrexpo has a price-to-earnings (P/E) ratio of just 1.3! In most cases I’d say that’s astoundingly cheap, or most probably, that something must be wrong. The miner is valued at just over £1bn, but in the year ending December 31, Ferrexpo reported a pre-tax profit of $1.07bn. The firm didn’t have a particularly high P/E ratio prior to the Russian invasion of Ukraine, but the war explains the low ratio we see today.
2022 performance
Predicting Ferrexpo’s 2022 performance isn’t easy. The miner issued a production and trading update in early April, with the firm attempting to provide a clearer picture of its Ukrainian operations. It resulted in the stock regaining some of its lost ground, but not much.
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Ferrexpo said total first-quarter iron ore pellet production came to 2.7m tonnes, in line with the same period in 2021. However, the figure was 11% below the previous quarter due to “operational and logistical constraints” caused by the invasion.
Ferrexpo also said that sales for the quarter reached 2.6m tonnes and that it had scaled production activity to meet accessible pellet demand. The mining firm stated that logistics routes to markets in Europe via rail and barge remained open.
So there’s certainly a number of positive there and it seems, at least so far, that the firm is continuing to operate near previous levels. That’s definitely a positive sign.
However, Ferrexpo also said that exports via the Black Sea port of Pivdennyi were suspended. It described the company’s Ukraine situation as “complex”. Ferrexpo said that, in accordance with the Government of Ukraine’s request for economic activities to continue, it would carry on its operations as long as it didn’t impact the safety of staff. As such, the company, along with everyone else, will hope that the war is not further escalated.
Should I buy?
There’s a lot of risk here even if the fundamentals look good. It pretty much rests on the company’s capacity to carry on operating in Ukraine. According to Liberum, Ferrexpo’s production levels implied that it was operating at 70% of capacity during March. That’s certainly not bad considering the issues facing the firm.
However, the miner also announced that it would be suspending its dividend. At the current share price, I could have expected a dividend yield of nearly 20% before the company put it on hold.
Despite the risks involved, I’m bullish on this one. It is certainly trading at a discount and if it can sustain a decent level of production this year, the rewards could be great for me as an investor. So, I’m looking to add this miner to my portfolio.
