Credit Suisse and Jefferies weigh in on Ferrexpo

Ferrexpo´s break-even price - that at which it begins to make money on the metal it sells - of $35 per metric tonne (post capex, tax and interest costs) meant it was capable of generating so-called free cash flow at spot prices and even below the broker´s iron ore price forecast for 2017 of $45 per tonne, they explained in a research note sent to clients on 4 August.

Admittedly, the miner´s high levels of debt continued to be a concern but the improvement in cash flows should allow it to continue to progress on deleveraging in the second half of 2016 and to refinance maturing debt.

"We continue to forecast lower iron ore prices in 2017 ($45/t vs spot of c$62/t). However [...] supply driven price risk is limited over the rest of 2016 and steel demand trends remain relatively strong," they added.

The Swiss broker hiked its target price from 28p to 60p and upgraded its recommendation on the shares from 'underperform' to 'neutral'.

It also noted how, "while the shares have recovered from the lows, the company has still lagged all of its major peers over the past 12 months".

Credit Suisse applied a discount rate to the shares of 16% when calculating the net present value of its cash flows, under the assumption of a long-term iron ore price (from 2020) of $60 per metric tonne and average prices between 2016 and 2019 of just over $40 per tonne.

The company´s valuation was "very leveraged" to the price of iron ore, the broker emphasised, explaining to clients that at spot prices Ferrexpo was trading at an EV/EBITDA multiple for 2017 of below 3.0 and offering a FCF yield of about 50%.

Seth Rosenfeld at Jefferies had a less upbeat view on the miner´s value, reiterating his 'underperform' stance albeit while at the same time hiking his target price by 20.0p to 30.0p

"FXPO reported 1H16 results yesterday that highlighted solid cost control but also a balance sheet that is still recovering from the liquidation of its transactional bank. FXPO remains focused on debt reduction and credit metrics improvement, but this will take a protracted period and also makes a restart of the dividend unlikely. Reiterate Underperform recommendation."