Why Ferrexpo Plc has 30%+ upside after record sales volumes

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iron casting foundry

Shares in iron ore producer Ferrexpo(LSE: FXPO) have risen by over 7% today after it released a positive update. It shows that the company made good progress in 2016 and is well positioned to perform even better in 2017. Its sales volumes rose to record levels and alongside reduced costs and lower debts, it could rise by over 30% in 2017 and beyond.

Strong performance

Sales volumes of 11.7 metric tonnes (MT) were a record for the company. This was up on 2015's level of 11.3 MT and shows that global demand for the group's iron ore pellets has improved versus a year ago. The average pellet price received in 2015 increased slightly compared to 2015, which reflected a modest recovery in the price of iron ore during the year. Alongside this, the company was able to reduce cash costs of production from $31.9 per tonne in 2015 to $29 per tonne. This shows that the efficiency of the business continues to improve, which should help to boost earnings in the coming years.

Alongside higher sales and lower costs, Ferrexpo is now in a better position thanks to improved finances. Its cash balance increased by $110m to $145m in 2016. It also retired $196m of debt during the year. This provides it with greater financial flexibility and should allow it to better cope with the inevitable ebbs and flows of the iron ore market in future.

Outlook

In terms of its growth potential, Ferrexpo is expected to increase its bottom line by 21% in the current year. It currently trades on a price-to-earnings (P/E) ratio of 6.2, which indicates that there's significant upward re-rating potential on offer. Its price-to-earnings growth (PEG) ratio of 0.3 shows that capital gains of over 30% wouldn't be difficult to justify. Even if the company trades on a P/E of only 6.7 next year and is able to deliver on its growth potential, its shares would be 30% higher than they are today.

Of course, the outlook for the iron ore industry is uncertain. Demand from China may fail to rise significantly over the long run as it gradually shifts away from growth driven by capital expenditure and towards a more consumer-focused economy. However, 2016 has showed that the construction industry in China remains relatively buoyant and so demand for iron ore could stabilise this year and provide modest growth in future years. This should help to improve Ferrexpo's financial performance and make gains of 30% relatively likely.

A better idea?

Also forecast to deliver improved performance within the resources sector is Premier Oil(LSE: PMO). It's due to update the market this week on its restructuring plans and so its shares could be volatile in the short run. However, it should benefit from an improved outlook for oil, with OPEC's supply cuts set to cause a continued rise in the price of black gold over the first half of 2017. Alongside Premier Oil's lower costs and improved asset base, this could boost its performance. But since Ferrexpo has a better track record of profitability, it remains the superior buy at the present time.

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Peter Stephens owns shares of Ferrexpo. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.