HSBC initiates Ferrexpo at a buy

Analysts at HSBC initiated coverage of Ferrexpo with a recommendation to 'buy' and a 210.0p target price.

The broker highlighted how the iron ore pellet producer's unit costs had more than halved during 2014 to 2016, helped by a weaker currency (the Ukrainian hryvnia), ramp-up at its Yeristovo mine and lower energy costs.

Country risk was "manageable", HSBC added, given how the the company's sales and borrowings were largely priced in US dollars and therefore not impacted by changes in the value of the currency.

Its mining operations were located far from the conflict area too, HSBC said.

Yet the broker still applied a 20% discount to its discounted cash flow valuation for the shares, due to geopolitical risk.

On a more positive note, HSBC commented: "We believe this is a conservative assumption as the majority of the borrowing/ sales are USD denominated, operations are located away from the conflict area and the shares are listed on the LSE."

If one assumed stable pellet premiums and that they were independent from changes in iron ore prices then the sensitivity of Ferrexpo's earnings per share to every 10% variation in the greenback was roughly 22%, according to the analysts.

The fact that iron ore prices rose in times of dollar weakness also meant the outfit had a natural hedge.

"As such, we see lower earnings sensitivity despite single commodity exposure," they said.

HSBC also highlighted how it expected the firm to be in a net cash position by 2019. So with no major capital expenditure plans in the pipeline over the medium-term it would be able to return cash to shareholders in the form of higher dividend pay-outs or stock buy-backs.