Why Ukraine exposure might benefit Ferrexpo
As the political tensions heighten in Ukraine following last week’s ousting of President Viktor Yanukovych, the beleaguered country’s currency – the hryvnia – has suffered too, plunging to a 10-year low today.
The outcome of the crisis is still unknown but analysts are already speculating on a possible upside for Ukraine-focused iron ore producer Ferrexpo.
“Obviously this is good news for US dollar-translated local costs in the short term … but could lead to inflationary pressures on domestic costs in the longer term,” said Nick Hatch, analyst at Westhouse Securities.
A major devaluation of the Hryvnia is not unprecedented. In 2008, the currency devalued by 60 per cent.
“Since immediately prior to the October 2008 devaluation and the first half of 2013, [production] cash costs grew by four per cent, so the inflationary impact is not necessarily severe,” said Hatch.
Around 70 per cent of [Ferrexpo’s] production costs are in local currency. A 45 per cent devaluation could lower total US$ cash costs by around 30 per cent – without any assumption of increased inflation.
Speculation over severed ties with Russia and a new support package for Ukraine from the International Monetary Fund could also provide a silver lining for the FTSE 250-quoted miner, according to Investec.
“This could be a positive development for Ferrexpo, which is owed $300m in VAT from Ukraine, as the IMF could insist that creditors are repaid if a bail out solution is agreed,” said the research.