A fall in iron ore prices and weaker premiums on pellets for two consecutive quarters could force Ukrainian iron ore pellets producer Ferrexpo Plc into default, S&P Global Ratings said.
In an Oct. 11 note in which the credit agency affirmed its junk-grade CCC/C rating on the miner, with a negative outlook, analyst Elad Jelasko wrote that the recent high iron ore prices had benefited the company, but a sustained fall in the price of the commodity below US$45 per ton put the group at high risk of default or debt restructure.
"In our view, a drop in iron ore prices to $45 per ton from the current price of about $55/ton, together with some softness in pellet premiums for two consecutive quarters, would result in Ferrexpo generating insufficient EBITDA to cover its interest expenses and quarter debt maturities of about $50 million," the report read.
The report comes after a summer in which Ferrexpo's London-traded stock has surged on the back of higher iron ore prices, as Beijing funneled credits into the construction and infrastructure sectors in an attempt to kick-start the country's slowing economy.
The result was higher iron ore and steel prices, but some analysts have warned that the higher prices are temporary.
Ferrexpo's stock closed at 87.27 pence in London Oct. 11.
If iron ore prices stayed at current levels in the third quarter, Ferrexpo would generate approximately US$40 million to US$50 million in free cash flow, enabling the miner to build up a "cash cushion" by the end of the year, according to S&P Ratings.
"That said, we expect iron ore prices to soften in 2017 to about $45/ton as the impact of stimulus measures in China fades, reflecting industry supply and demand dynamics," according to the report.
Under the low-price scenario, Jelasko estimated Ferrexpo's free operating cash flow at US$80 million to US$90 million in the coming 12 months, compared to US$200 million in maturing debt over the same period. He estimated cash on hand at between US$60 million and US$70 million.
"Unless Ferrexpo secures new funds that help it to match its cash flows with a more comfortable maturity schedule, the company could run out of funds by mid-2017."
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.