Ferrexpo (LSE:FXPO) is a Ukraine-based FTSE 250 mining company that has been hit hard by the Russian invasion. It mines iron ore at several locations countrywide and converts the mineral into pellets before exporting it via a shipping port.
While most of its operations are largely outside the conflict zone, shipping via the Port of Pivdennyi has proven challenging. Supply chain disruption and logistical constraints have hit the share price hard this year, resulting in a 39% drawdown.
But a positive rating from Barclays last week followed by a decent earnings report two days later has given the price a boost. As markets opened on Monday (22 April), a rally began that added over 14% to the share price.
With the price still comparatively low, is this a cheap buying opportunity – or the start of a so-called sucker’s rally?
High risk remains
It’s difficult to gauge whether the price rally is the result of positive news regarding the conflict. US House representatives have passed a long-delayed $61bn military aid package to Ukraine. Russia responded with a promise to intensify attacks on storage bases for Western weapons. With Ukraine struggling to hold key defensive locations in the conflict area, there’s concern as to whether the aid package will arrive in time.
In addition to the Russian threat, Ferrexpo faces legal challenges from the state prosecutor. In early March, the prosecutor issued a court order to freeze the company’s bank accounts on suspicion of illegal mining activity. Ferrexpo has claimed the case is without merit but put aside $131m to cover any related costs, contributing to a $85m pre-tax loss reported for 2023.
Potential for recovery?
Despite a dip due to the ongoing logistical issues, Ferrexo’s 2023 revenue came in higher than expected. This could be the result of restarting a pelletiser operation that’s been dormant, suggesting an increase in European iron ore demand. It also reportedly holds $108m in cash reserves, helping prop it up in the event of any unforeseen circumstances.
Consensus estimates suggest the stock price is undervalued by around 77% based on future cash flows, with earnings expected to grow 116% per year going forward. But I’m unsure these small wins sufficiently outweigh the risks. The positive rating from Barclays is hardly a trend, with no other notable analysts highlighting the stock.
In my opinion, no estimates can overshadow the increasingly daunting threat of a war that doesn’t look likely to end any time soon. Sure, I appreciate a good bargain as much as the next person but my risk tolerance isn’t that high. Until there is definitive evidence of a sustained de-escalation in the Ukrainian conflict, I wouldn’t risk my capital on Ferrexpo stock.
That’s not to say it isn’t a solid company with great financials. In any normal situation, I would probably rate its prospects highly. But right now, it’s hard to argue that the company is in direct control of its future.
