Ukraine's Ferrexpo wary on iron prices, sees banking risks

(Adds quote from CFO, details on banking risk)

By Silvia Antonioli

LONDON, Aug 5 (Reuters) - Ukrainian iron ore pellet producer Ferrexpo (Other OTC: FEEXF - news) said on Wednesday prices could fall further and that it faced risks from the weakness of Ukrainian banks, as it reported a 45 percent drop in first-half core profit.

The Swiss-headquartered mining firm, whose facilities are located in the Poltava region in central Ukraine, has so far experienced only minor disruptions due to the separatist conflict in the east of the country, such as electricity shortages in the winter months.

On Wednesday, it said the steep depreciation of Ukraine's hryvnia currency, which has benefited the company by cutting its costs, has also put the local banking sector under stress, forcing it to recapitalise.

"We operate in Ukraine and because of that we hold a fair amount of liquidity inside the country and rely on the banking sector. Obviously any collapse in that can have certain consequences. That's the risk that we are flagging," said Chief Financial Officer Chris Mawe in a telephone interview.

He added, however, that the company kept substantial funding abroad too to minimize the risk.

The group, majority owned by Ukrainian billionaire and independent parliamentarian Kostyantin Zhevago, posted earnings before interest, taxes, depreciation, and amortisation (EBITDA) of $176 million for the first half of this year, down from $321 million in the same period last year.

To protect margins against a weaker iron price, the firm is focusing on cutting costs and producing higher quality iron pellet, which gets a premium to the standard quality product.

Under current conditions, the company can generate cash with benchmark iron ore prices at $50 per tonne or above, Mawe said. The steel ingredient is currently trading around $55 a tonne.

The company said, however, that prices could fall further due to excess supply coming on stream.

(Editing by Mark Potter)