PELLET MARKET
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Kt pellets % of 65% Fe output FXPO F E R R E X P O H A S A S T R O N G B U S I N E S S P R O F I L E NICHE PRODUCER LONG LIFE RESOURCE BASE YE 4.0BT BROVARIKOVSKO 3.4BT MANUILOVSKOYE YE 2.8BT KHARCHENKOVSKO 1.4BT VASILIEVSKOYE 1.5BT ZARUDENSKOYE 0.2BT 1.7BT GALESCHINSKOYE PRODUCTION DEVELOPMENT LICENCE MAINTENANCE BELANOVSKOYE 1.2BT YERISTOVSKOYE FSU SOVIET 13.1 6.7 JORC CLASSIFIED RESOURCES CLASSIFIED RESOURCES GPL 3.5BT LOW POSITION ON COST CURVE (incl fines & lump) Breakeven price of seaborne exporters, CFR China, 62% Fe sinter fines, $/ dry t 70 60 50 40 30 20 10 0 0 250 500 750 1000 1250 Source: CRU Jan 2017, CFR China, 62% Fe sinter fines equivalent WORLD CLASS ASSET +$2BN INVESTED SINCE IPO Logistics: $312M FYM: $595M FPM: $1.1BN INCREASING QUALITY & RELIABLE PRODUCTION Total pellet production 12,000 % of 65% Fe pellet production 10,000 8,000 6,000 4,000 2,000 100% 80% 60% 40% 20% ACCESS TO MARKETS VIA ESTABLISHED LOGISTICS ROUTES 0 07 08 09 10 11 12 13 14 15 16 0% 3
C A P I TA L I N V E S T M E N T H A S D E L I V E R E R D T O P Q U A L I T Y C U S T O M E R S 2017 REVENUE UNDERPINNED BY PELLET PREMIUM Platts Atlantic pellet premium trading above $40 per tonne GROWING MARKET SHARE IN PREMIUM MARKETS Significant growth in shipments to premium markets since 2009 DIVERSIFIED SALES PORTFOLIO 6000 2009 2016 WESTERN EUROPE CENTRAL & EASTERN EUROPE 17% 48% CHINA & SOUTH EAST ASIA 13% 5000 4000 3000 2000 TURKEY, MIDDLE EAST & INDIA 6% 16% NORTH EAST ASIA 1000 0 Central & Eastern Europe Western Europe North East Asia China & South East Asia Turkey, Middle East & India Ukraine/CIS 4
FY 2007 1H 2008 2H 2008 1H 2009 2H 2009 1H 2010 2H 2010 1H 2011 2H 2011 1H 2012 2H 2012 1H 2013 2H 2013 1H 2014 2H 2014 1H 2015 2H 2015 1H 2016 2H 2016 A N D I M P R O V E D M A R G I N S A S R E A L I S E D P E L L E T P R E M I U M I N C R E A S E D W H I L E C O S T S R E D U C E D NICHE PRODUCT, TOP CLASS CUSTOMERS, WELL INVESTED LONG LIFE ASSET BASE & LOW POSITION ON COST CURVE DELIVERS HIGH MARGINS EVEN AT THE LOW POINT IN THE CYCLE Average EBITDA margin since 2007 35.6% (or $44/ tonne) EBITDA Margin 62% Fe iron ore fines price CFR China $ per tonne 50% 45% 40% 35% 30% 25% 20% 15% 35.2% 43.9% 46.2% 20.0% 22.4% 40.9% 48.1% 46.9% 42.9% 32.9% 23.8% 31.5% 32.5% 42.3% 27.9% 34.4% 30.5% 34.9% 41.1% 180 160 140 120 100 80 60 10% 40 5% 0% Iron ore price 9 year low 20 0 EBITDA % Iron ore fines price 5
% consumption P E L L E T S A R E M O S T E F F I C I E N T S O U R C E O F I R O N F O R A S T E E L F U R N A C E PELLETS (C.10MM SIZE) Agglomerated iron ore product forming a uniform high quality feedstock for the blast furnace Produced from magnetite ore of <40% Fe (found in N America, CIS, Europe, China) c. 26% of global iron ore production Highest value form of iron ore - pellets are the most efficient source of iron ore for a steel furnace Sold for a premium based on value in use Uniform in size quality and iron content (c.62-65%) RATIO OF PELLET CONSUMPTION VARIES AT STEEL MILL: Pellets are a direct charge input and require less processing Steel mills balance the benefit of pellets vs. cost. Pellets allow steel mills to: Improve productivity per cubic meter of blast furnace capacity (65% pellets vs 62% sinter) Limit harmful emissions as pellets emit less CO2, fine dust and air pollution compared to sinter Lower coking coal per tonne of pig iron (65% pellets vs 62% fines) Lower capital intensity at the steel mill: pellets are less capital intensive as no investment in agglomeration required USAGE VARIES BUT TREND IS TOWARDS PELLETS - EXAMPLES OF BURDEN COMPONENTS AT STEEL MILLS 47% 15% 36% 23% 16% 12% 5% 10% 18% 18% 23% 59% 61% 70% 85% EU 1 EU 2 NE Asia 1 China 1 China 2 Sinter Lump Pellet Scrap 6
N O T A L L P E L L E T S G O I N T O T H E B F M A R K E T. D R P E L L E T S A R E A B S O R B I N G C A PA C I T Y TOP PELLET EXPORTERS Million tonnes 2016 Total Blast furnace Direct reduction Vale (Brazil + Oman) 38.0 23.6 14.3 LKAB (Sweden) 18.5 12.0 6.5 Ferrexpo (Ukraine) 11.7 11.7 - Rio Tinto (IOC, Canada) 9.8 8.2 1.7 Cliffs (Canada) 6.8 6.8 - ArcelorMittal (QCM Canada) 5.8 5.7 0.2 Severstal (Russia) 4.9 4.9 - India (Various) 4.8 4.8 - Metalloinvest (Russia) 4.0 4.0 - Metinvest (Ukraine) 3.4 3.4 - Bahrain Steel (Bahrain) 3.0-3.0 Grange (Australia) 2.6 2.6 - CMP (Chile) 2.4 2.4 - Cliffs (USA) 1.3 1.3 - Evraz (Russia) 0.4-0.4 Other 3.1 3.1 - Total pellet export market 120.5 94.4 26.1 Ferrexpo s market share 10% Source: CRU, Government statistics, Bloomberg, Ferrexpo internal analysis Samarco expected to re-enter market in 2018 at c.20mt (previous capacity 30MT) Vale intends to restart 7Mtpa Sao Luis pellet plant in 1H 2018 (following license approval, and investment into plant), which last produced in 2008 7
T H E P E L L E T M A R K E T H A S H I G H B A R R I E R S T O E N T R Y LIMITED HISTORIC GROWTH IN TOTAL PELLET SUPPLY Exports of iron ore MT 2000 2016 increase % of total increase Pellet feed 18 71 53 5.0% Pellets 106 111 5 0.5% Lump 79 247 168 15.8% Sinter fines 266 1,105 839 78.7% Total 468 1,534 1,066 Source: CRU, Market Outlook January 2017 WHILE DEMAND FORECAST TO GROW THE STRONGEST Consumption of iron ore MT 2016 2021 increase CAGR Pellets 416 523 107 4.7% Lump 310 352 42 2.6% Sinter Fines 1,347 1,320-27 -0.4% Total 2,074 2,195 122 1.1% Source: CRU, Market Outlook January 2017 COST OF MOST RECENT CAPACITY ADDITIONS AROUND $100/T FOR PELLET PLANT ALONE New pellet capacity Duration Tonnes Cost Cost/tonne Description Samarco Metalloinvest NMLK 2011-2014 2012-2015 2011-2016 8.3MT 5MT 6MT Source: Company announcements R$6.459BN ($3.251BN at the time) RUB16BN ($460M at the time) RUB41BN ($1.4BN at the time) $391/t $92/t $233/t Construction of 9.5MT concentrator Construction of slurry pipeline with 20MT capacity Construction of 8.3MT pelletising plant Increase of capacity at port facilities by 9MT (new stacker, reclaimer, shiploader) Construction of pellet plant Construction of pellet plant $680M or $113/t Expanded mining & beneficiation capacity 8
W H AT D R I V E S T H E P E L L E T P R E M I U M : C H I N A V S R E S T OF T H E W O R L D IMPORTS OF PELLETS BY REGION 2016 (MT) Europe: 44 Middle East: 12 Africa: 5 C&S America: 4 North America: 10 NE Asia: 20 China: 15 SE Asia: 1 PELLET MARKET IS DIVIDED BETWEEN CHINA & ROW: China is largely self sufficient in pellets Chinese apparent pellet production was 120MT in 2016 Chinese pellet capacity utilisation 49% Chinese pellet production constrained by supply of local concentrate (at pricing below $80/t - depending on coking coal prices) Overcapacity in Chinese steel reduces demand for pellets at higher premiums Premiums will rise as environmental pressures increase & capacity decreases Ferrexpo does not target the Chinese market CIS: 2 Source: CRU, Market Outlook April 2017 ATLANTIC VS. CHINESE PELLET PREMIUM (US$/T) 50 45 40 35 30 25 20 15 10 5 0 China pellet premium Atlantic pellet premium Source: Platts 9
AT L A N T I C P E L L E T P R E M I U M I S S E T B Y VA L E & L E A D I N G S T E E L M I L L S I N E U R O P E & N O R T H E A S T A S I A VALE S MARGINAL COST OF PRODUCTION IS AROUND US$30 PER TONNE Pellet conversion costs, $/t (nominal) 2016 Vale is the market leader & the swing producer Cost curve is also supported by high cost large suppliers: IOC, LKAB, Cliffs Note: Costs include mining, processing, pelletising and inland logistics costs only. Royalties are excluded Source: CRU March 2017, Ferrexpo internal analysis 10
P E L L E T P R E M I U M S R E M A I N S TA B L E : F E R R E X P O P E L L E T I S I N G C O S T S C. $ 1 0 P E R T O N N E V S AV E R A G E P R E M I U M S O F C. $ 3 0 / T ( 2 0 0 7 T O 2 0 1 7 ) PELLET PREMIUMS ARE RELATIVELY STABLE COMPARED TO THE IRON ORE FINES PRICE $ per tonne 166 154 155 166 135 140 27 62 85 98 56 58 57 53 12 44 37 30 32 37 34 45 32 63 63 67 33 32 34 34 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F Iron ore fines 62% CFR China Blast furnace pellet premium to non-chinese markets Source: CRU, Market Outlook January 2017 Ferrexpo s pelletising cost is $8/t to $11/t through the cycle depending on cost inflation 11
T H A N K Y O U 12