What does it take to make a company uninvestable?
In theory, bad news is no reason not to buy a stock, perhaps offering savvy investors a bargain. But a beaten-up company is worth buying only if its potential to earn money in the future is preserved.
Bank investors worldwide will be pondering this question this year. At some point so will those watching Ferrexpo, the London-listed iron-ore producer, which has bravely struggled on with its operations in war-torn Ukraine.
In peacetime, Ferrexpo has an attractive position. Its massive, low-cost resource base should means it should trade at a valuation closer to its iron ore peers at 4-5 times forward ebitda. Ferrexpo is closer to 3 times, on depressed earnings.
Its valuation, of course, also reflects the monumental challenges it faces. Ferrexpo’s operations have not been directly affected by the fighting, but about 10 per cent of its staff has left the country. Another 6 per cent is in active military service, of which 20 have died in service.
Though there are other reasons for a discounted valuation. Founder and majority shareholder Kostyantin Zhevago has been arrested. Discrepancies about the use of Ferrexpo funds in 2019 led to the resignation of its auditor in April 2019.
Under the circumstances Ferrexpo has done a remarkable job. Power outages affect its production. Its main export route — through the Black Sea port of Pivdennyi — remains closed as the area is under Russian control. It still manages to sell pellets into Europe and reroute some through other ports.
Last year it produced about 6.2mn tonnes, down by half since 2021. Though costs per tonne are up by almost half, the miner still earns a profit and sufficient cash flow to cover its needs.
That matters because Ferrexpo’s access to capital markets is pretty much closed. For now, the group has the balance sheet to cope — with no debt (apart from leases) and $113mn of cash. Iron ore prices have rebounded, and its pellets sell at a premium.
Barring further disruption, Ferrexpo should survive this tricky period. Nevertheless its depressed valuation means that the persistently high risk will only appeal to the hardiest investors.