Ferrexpo Holds Up Surprisingly Well Given Ukraine Problems

Ferrexpo PLC (LON: FXPO) shares are holding up surprisingly well given the talk of Russian hostilities breaking out concerning the Ukraine. Something like iron ore doesn’t fall particularly in value if transport is disrupted but even the smallest interruption to the transport links can play merry heck with cashflow and operations.

It’s almost an oddity in fact that the Ferrexpo share price hasn’t been reacting to these international worries. The reason being that it’s possible to build quite a strong bull case for the Ferrexpo stock price.

For example, we’ve already had the scandal concerning charitable donations and mysteriously moving money which means that we’re all aware that this is indeed a foreign company. So, the price already incorporates a certain amount of uncertainty.

We can also point to how the price is already off by near 50% from last summer’s highs. That was when the iron ore price was really zooming and it’s now fallen back. So there’s room for a rebound at least.

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We might also look at their production mix. The plant in Ukraine has pretty much stopped making low-grade ore and so value add is rising. More than that, they’re increasing the amount they’re making for direct reduction furnaces, that adds more value again. It also delinks their sales prices from whatever is about to happen to China’s property industry.

So, in operating terms we might indeed have that bull case. The iron ore price might go either way of course, but a plant continuing to add value looks good. Upgrading the quality of the product and so on.

On the other hand, we’ve got that rather grand political risk. There’s a lot of sabre rattling going on out there and that could turn into proper, full-blown, military action. That’s likely not the major risk to Ferrexpo though. What could really matter is if Russia does take over. Not necessarily by military conquest either. Perhaps the election or imposition of a pro-Russian administration. The problem there would be that the ownership of all major assets would be at risk. We probably would think that the Poltava iron ore mines would be something that oligarchal interest would cast an eye over.

Indeed, that’s all very speculative but changes of regimes over there can have this sort of effect, of putting ownership up for grabs.

Which does mean that we’ve a problem in trying to come up with a reasonable valuation of Ferrexpo shares. The business itself seems to be improving its operations. The oddity of charitable donations is in the past. The move to DRI feed rather than simple iron ore pellets might help to insulate from the China influence. Yet there’s that question of what Putin is actually going to do with respect to Ukraine. We’ve thus got a highly speculative stock that could go either way.