Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ferrexpo 2018 Preliminary Results Announcement. [Operator Instructions] I must advise you, the conference is being recorded today.
I'd now like to turn the conference over to your first speaker today, Steve Lucas. Please go ahead.
Thank you very much, operator. Thank you, everyone, for joining this morning's results call for Ferrexpo.
In 2018, Ferrexpo continued to benefit from strong demand for its product, receiving record pellet premiums, and so far in 2019, realized prices have continued at high levels. While our 2018 results were impacted by higher cost inflation, we continued to increase capital investment, reduce leverage and announce record dividends for the company.
Ferrexpo continues to operate competitively in a favorable market segment, which underpinned its cash flow generation. Given the company's low leverage, the Board now feels it is appropriate to readjust the use of available free cash flows from primarily deleveraging to include a more balanced focus on dividend and investment projects, whilst ensuring the group's credit metrics remain strong.
It's appropriate for me to mention Ferrexpo's charitable donations to Blooming Land at this stage as, after all, it was due to our internal review looking into the matter that delayed the publication of our 2018 results. Our auditors have concluded that Ferrexpo's accounts give a true and fair view of the group and due to the ongoing review into Blooming Land, it is not possible for them to conclude on Blooming Land. I'd like to reiterate that BL is a third-party organization that we made donations to in good faith. We stopped those payments almost a year ago in May 2018 and there is no suggestion that it involves additional amounts of money or that there was any wrongdoing on the part of Ferrexpo or its employees.
Now I'd like to move on to the group's financials, its operations and its market environment with Chris and Kostyantin. I'm confident in Ferrexpo's future, given the high barriers to entry into the pellet market, the long-term growth drivers underpinning pellet demand and the quality of Ferrexpo's asset base and management teams.
So over to Chris Mawe for the financial presentation.
Thank you, Steve. Good morning to everybody. Thank you for joining the conference call this morning.
So moving on to Slide #6, for those of you that can see it on your screen. The financial results for 2018 really demonstrate once again the very strong business profile of Ferrexpo as a quality -- high-quality pellet producer involved in the production of iron ore. Pellet production was 2% higher than the prior year. This reflects continued improvements in the production facilities, continued improvements particularly in mining. And we also did refurbish 1 of our 4 pellet lines during the year. We've now completed the refurbishment of 3 with a further one to be refurbished during 2019.
Sales volumes were in line with production. They were slightly lower as a result of year-end stock that was on the water, so a slight lower sales volume year-on-year. And overall, however, the market remained very strong with the average 62% fines price, in line broadly with the prior year.
What you will notice is that revenue is 6% higher, and that's despite sales volumes down 2% year-on-year as we increase stocks and a slightly weaker iron ore price, and that is a result of the higher pellet premium, which I'll come on to in the next slide.
The average C1 costs was $43.30, so we did see a cost increase of around about $11. I'll detail with that later with 3 main factors there: stable local currency; higher oil price; and local inflation, which came through. So, overall, cost of sales higher and gross profit in line with the prior year.
Selling and distribution costs were slightly higher as a result of C3 freight. We've seen that reverse coming into 2019, so those costs are now lower. Overall, that meant that the operating profit was $428 million, 13% below the prior year. EBITDA, however, $503 million, 9% below the prior year, so very strong set of results.
In terms of distributions to shareholders, we are very pleased to report profit for the year of $335 million. And we have announced dividends, which bring the full year dividend to $0.231 per share. It's a record dividend. Today, we've announced a special dividend of $0.066 a share payable in May with the final dividend subject to approval at the AGM of $0.066 per share.
Overall, we've been able to reduce net debt further, so that's 14% down compared to the prior year. And on a later slide, you'll be able to see a 30% increase in capital expenditure. So a very balanced picture from the business of higher dividends, higher CapEx and debt reduction. We've achieved all of the 3 targets that we set out to achieve at the beginning of the year.
I'll move on now to Slide #7, which explores EBITDA in a little more detail. You can see here the bridge between 2017 on the left-hand side and 2018 on the right-hand side. And essentially, there's 2 important factors here to pull out. Firstly, the very strong market for high-quality product that we saw in 2018. There were record steel margins, and that caused steel producers to use higher-quality materials and the premium for high-quality pellets and the premium for 65% iron ore increased. You can see $141 million benefit there as a result of higher pellet premiums. That was offset by C1 cost, $111 million. We did have high C1 cost inflation in the year, which was flagged. We would expect further cost increases in 2019, but at about half of that level. It's clearly dependent upon the oil price and dependent upon the development of the local currency.
Other items in the waterfall are inventories. As I noted at the beginning of the presentation, we increased inventories. That was really just due to sales timing at the end of the year with one shipment. The fines price was slightly lower. That was $19 million compared to the prior year and the C3 freight was higher.
I think in terms of the outlook for Ferrexpo, it's very important and you all know, certainly the analysts on the call know, that the market is very strong at the moment, particularly for pellets and higher-grade iron ore. And compared to 2018, currently, we'd expect pellet premiums to be up around $10. The current fines price is $25 above these levels, but you can safely or reasonably expect fines to be up between $10 and $15 on average.
C3 is currently down by $5, and that flows through to us. And cost inflation, obviously subject to oil, subject to the Ukrainian hryvnia, will be around $5 to $6 higher. So overall, you can see a benefit of around $25 compared to 2018 if you're just taking the spot position. That's clearly not a forecast for the future as we don't know where the iron ore price will end up, but just to point out that the situation, the market is very strong for high-quality ores at the current time.
Moving on to Slide #8. Here, I've got the costs slide. There are 3 charts that you can see that really cover, firstly, the bridge between the 2 years and where the cost inflation has been. The bottom-left chart really shows you the relationship between C1 cost and the historic iron ore price and the bottom chart shows the structure of our costs.
So starting with the last point I raised. The structure of the costs remains unchanged. Around 60% of our costs are commodity-related. As a result of that, we are influenced by, in particular, the oil price and how that develops, but also electricity prices and gas prices. Our C1 cash costs increased in the year from $32.30 to $43.30. And that is split $3.30 from commodity prices, particularly oil, $2.80 for local inflation, and that was principally in salaries, and we saw a stable local currency. So during the year, there was a narrowing in the gap of salaries paid in Ukraine compared to neighboring countries.
We invested in repairs and maintenance. As I noted earlier, we refurbished 1 of our 4 pellet lines with another pellet line to be refurbished in 2019. And during the year, we increased the stripping, that was a feature at the half year which we raised. And that was to access higher-grade ore in order to support sales volumes in an extremely buoyant market for high-quality ore and, in particular, high-quality agglomerated products, such as pellets.
In terms of 2019, a similar sort of picture but at a much reduced level. Clearly, the oil price is from a higher base. Local inflation is receding a little bit inside Ukraine. Repairs and maintenance have already been reflected in the current year, so there wouldn't be too many further increases in respect of that.
The final point before I move on to the cash flow, you can see the historic C1 cash cost versus the received price in the bottom left-hand chart with the EBITDA margin above in green. 2019 is being characterized by a supply-side disruption. In the past, we have had demand-side pull where commodity prices have tended to track the increase in the iron ore price, so our costs have gone up in tandem.
2019 is slightly different in that, that is more of a supply-side issue. So we're seeing particularly good margins at the current time, as you would expect, based on the current market position for iron ore.
So moving on to Slide #9, this is now the cash flow. There are a few points to make on the cash flow statement. Firstly, the EBITDA there is $503 million from the first slide. The working capital movements in the year, $76 million are working capital outflow. During 2014, 2015, 2016, in particular, we reduced working capital as far as we could. What you've seen in 2017 and '18 is a normalization now of the working capital levels, particularly in stocks of spare parts. In 2018, that was affected by increased stocks. Just at the year-end, that was reversed out to a certain extent at the current time. $12 million of VAT refund, which is overdue and then subsequently paid, and the increase in inventories, which relate to the increased volumes of inventories of spare parts and the cost of those spare parts.
The working capital in terms of stockpiled ore is $40 million. You will note that the C1 cost that I report to you is not including the value attributed to stockpile of lean ore. That was $40 million in the year or roughly $4 a tonne.
In 2019, we don't expect to be mining significant volumes of the so-called lean ore. So we -- in other words, we will not be adding to the stockpile of ore in 2019.
In terms of interest paid, that was $43 million. We have repaid the bond. So in 2019, the interest burden will be much lower. And the income tax paid reflected the higher profitability, particularly as more profits were being generated in the slightly higher-tax regions, so there's a bit of a mix effect there.
Overall, net cash flow from operating activities was $292 million. Capital expenditure, 30% higher, as noted, $135 million. The biggest increase there in terms of the capacity increase project, with another $35 million to be spent on that in 2019.
Dividend is $97 million. In terms of future dividends, we would expect to be in the year 2019 paying, subject to market, roughly $160 million of dividends.
2018, full year, you can see we repaid $309 million of borrowings and received $240 million of new borrowings, so we closed a new pre-export finance facility and repaid part of the bond. And we closed the year with net cash of $63 million and net debt of $339 million, a reduction of 14% year-on-year.
So moving on now to the final slide of my section before the summary is the position on the balance sheet. I think the left-hand chart really shows the improvement in the position of the company since 2015. We have significantly reduced net debt, so now at $339 million. Our targets towards the end of 2019 very much depend on pricing, but we do balance capital expenditure, dividend and debt reduction. We would hope to reduce debt down by $80 million to $100 million during the year 2019.
Moving on to the chart on the right-hand side. You see the debt maturity profile. The $173 million bond has been repaid. It was repaid on the 6th of April, so that has been reflected in a reduced cash position. And now really important to note for the company that the debt amortization profile is flat starting in Q1 2020 with $33 million, and that gives the company a lot of flexibility. We can choose to repay the debt as it falls due from own-generated cash flows, that's even in a low-commodity environment. Or we can extend the maturity of that debt and just push it out, that's relatively straightforward. Or if we chose to, we could take on additional debt facility. So we have a very strong balance sheet with a great deal of flexibility in it.
So that concludes my section. Slide 11 just gives you the bullets from that, so a very good set of financial results. Demand remains high. We have paid record dividends, and that's from very good generated cash flow, so the record dividend in a time where we've reduced debt at the same time. Industry dynamics remain positive and constructive for Ferrexpo, with high pellet demand with -- on the one side and supply restrictions on the other. And in terms of the future outlook, we do see and continue to see high barriers to entry to the pellet market and good long-term growth drivers.
So that does conclude now my section. I'd like to thank you for listening and take the opportunity to now hand over to Kostyantin Zhevago, the CEO, who will report on the market, operations review and strategy. Thank you.
Chris, thank you very much. Everybody, good morning, and thank you for participating in our annual result telephone call.
So I'd like to draw your attention to the Slide #13, which is showing that the strong demand environment for pellets is right now in place and it was mentioned by both Steve and Chris. So it's all like in driven, first of all, with the high crude steel capacity utilization. You see on the Slide #13 on the like in left chart showing that China is right now still increasing production of crude or liquid steel and crude steel and utilizing their capacities at 91%. So like in where -- ex China, our utilization rate is 83%, which is still high like in into the historical terms. How long it will last? No one knows. But nevertheless, like in with this kind of utilization rates, demand for high-quality products, including pellets, is usually high.
If you look into the chart or like in left chart in the bottom, you see the Atlantic long-term contract pellet premiums where we see right now the highest ever from 2007. And you remember that in 2008, these pellet premiums didn't sustain like in post the global financial crisis, it doesn't. So pellet premiums started to soften then in August, even before the global financial crisis starting to unwind in the end of September and beginning of October. So like in right now, we have historical high pellet premiums, which is more like in keeping ourselves very much cautious. But at the same time, as it was mentioned by Chris already, so it was caused with the supply disruptions. And like in our expectation, this can allot for some time so -- and we see that this one is going to stay for a while in the market.
If you look into the burden mix within the liquid steel production like in of the hot metal production globally, you'll find out that pellets are 36% of the average feed in Europe, only 12% in Japan, 89% in Middle East and North -- Africa simply because of the grassroot of direct reduction, like in road there to produce steel.
And China is 10% lowest of like in all other markets globally, which is showing the further potential more like in ore pellet producers to effectively to increase production, if required, and still find out the market for pellets in hot steel production simply because China is rationing right now steel manufacturing, steel production. And also, with the environmental pressures and impact, so everybody is expecting that pellet consumption in China is going to grow at least to the levels of somewhere in the middle of European Union, Japan and South Korea.
So pellet use varies by mill and region. Europe account for 33% of imports. Northern Eastern Asia, 17%. Largest importers of pellet are China, Japan, Germany, Saudi Arabia and Turkey.
Chinese mill requirements for high-grade converging with the developed country requirements: high blast furnace productivity, supply-side reforms are in place right now in China, and that is what is also effectively making the pellet market very much tight. So reduction of emissions environmental protection is a top priority for the government not only in China, but all over the world, and that is also very much positive for pellet producers and high-grade iron ore producers globally.
Improvement of the final product quality is what is going on right now in China and like in effectively with the downstream production sophistication, high-quality ore is in demand and is going to be in demand for the foreseeable future. And it's just like historical curve, and so we are strongly in believe that like in that is going to just like in keep growing.
If we'll go to the Slide #14, you'll find out the information regarding the pellet market and you'll find out also that incumbent pellet producers enjoy high barriers to entry. And people see into the chart on the left side of the slide, with the export of pellets like in statistics, we'll find out that pellet exports has peaked in 2010 at around 150 million tonnes.
And if you look at all other mix, blast furnace mix, companies and compounds like in statistics, you will find out that pellets and export of pellets is the only product like in which decreased in terms of supply to the global market from 2010 to 2018. The rest of the iron units, including like in pellet feed, lump, fines, everything and all these products have increased in terms of their supply to the market. And we see that the percentages are in between like in high 40s and up to hundreds of percent increase in terms of the pellet feed and just center ore. And in this respect, so pellets are showing quite tight supply and good fundamentals like in for the pellet producers.
So if we just look into the CRU breakeven pellet cost curve in China -- cost to China, we'll find out that Ferrexpo is placed within the lowest quartile of the cost producers like in on the cost of production of pellets like in to be supplied to China and like in if we are deducting the freight and rebase these to other markets, it is fair to say so that Ferrexpo is very much competitive.
And specifically, when we have right now Brazil, Brazilian production like in going off-line and some of the production like in has been shut. So we see that the competitiveness of like in existing pellet producers and specifically low-cost ones is really very much like in stable and like in making this like in position within the cost curve very much sustainable for the foreseeable future.
If we look into the producers of pellets globally and specifically including Canada, Bahrain and new supply coming out of India and Iran, mostly for the capacity production, so like in the figures are not that high and reflected in the first chart. So within the last 8, 9 years, production not even -- not increased, but like in decreased for 14%, like in keeping the market very much tight.
Pellets breakeven cost drop is moving to the left as supply exits the market, and that is we see right now, specifically for this 2019. How long it will last, we do not know. But like in for next 2 to 3 years, as plenty of analysis globally is showing, this is going to be sustainable like in situation, and we do not expect any additional pellet production to hit the market or to join the market within the next 2 to 3 years.
So -- but some of the restarts in Brazil can be possible, but with the very complicated regulatory environment there and plus like in necessity of getting substantial amount of new permissions for the Brazilian suppliers, so like in no one really in the market like in now can tell when the Brazilian production could be restarted -- or will be restarted.
Ferrexpo is the third-biggest pellet exporter in 2019. You see that we are behind Vale with their production in Brazil and Oman, behind a state-run company, LKAB, in Sweden. And with our current production being on the third place, and so hopefully with all the realized project during this year, next year, like in we are going to sustain and strengthen our position being one of the leaders of pellet exports in the world.
If we go to the Slide #15, you will see that the capital investment continue to increase quality and pellet output, while we are maintaining the strong balance sheet, as it has been reported by Chris. If you'll see from 2007 and up to now, we have invested in excess of $2.3 billion and with a plan, 2019, to refurbish a final pellet line, new concentrate storage area, complete engineering studies for the pellet expansion of the fill stage to 20 million tonne plus.
So in 2020, for next year, we are finalizing our pellet feed concentrate Section #9. And we are going to complete also like in medium fine crushing Complex #2. All in all, it will add output of pellet feed and, eventually, pellets of somewhere in between 1 million to 1.5 million tonnes.
So we want to hit and it is now our plan to hit annualized production capacity at 12 million tonnes sometime in the second half of next year. So with 2021 production of 12 million tonne, so targeted through all these improvements and through all these capital investments like in that we are right now doing in 2019 and planning to do in 2020.
So further on, we are also continuing to assess and make like in detailed engineering for increase of our pellet production in increments to 20 million tonnes. So after refurbishing and debottlenecking of every single machine, which we have 4 of them, like in -- and the first one is planned to be put into the enhanced and advanced refurbishment mode some time post-2021, we believe 2022.
So since 2007, the group has increased our output of 65% pellet by 168%. Since 2007, the group has increased total production volumes by 17%. By 2021, production volumes to increase a further 15% to 12 million tonnes and investment opportunity to increase production volumes to 20 million tonnes is being intensively researched and like in assessed. And as we mentioned like in substantial amount of money, time and capital has been spent to make basic engineering right now, like in we are more into the detailed engineering stage.
If you look into the Slide #16, you will find out that what we are trying to achieve right now and achieved already in 2018 like in a balanced capital allocation, where in 2016 CapEx was significantly lower like in, in terms of the composition of all the capital spent. So all capital has been dedicated and devoted to debt repayment, debt repayment in 2016, not dividends during this year and 2016. But at the same time, gross debt went down from $734 million in '16, as you see on the left-bottom chart, up to $402 million in 2018.
At the same time, in 2017, our capital has been spent on CapEx, and we returned back to the some growth projects. So debt repayment was still important part of the capital allocation, at the same time we started to pay dividends. In 2018, so everything has been balanced. And that is what we want to achieve further on in 2019 and '20, up to the market to stay where it is and now plus/minus 10%, 15%, 20%. So we can more or less, we consider that within the normal market as we call it, so we will be in the position to allocate capital fairly in between CapEx and growth prospects, debt repayment, deleveraging and dividends.
So you see on this chart, Page #16, that dividend payout went up 21%, 25%, 41% subsequently, 2016/'17/'18. And capital investments also increased from $48 million in 2016 to $103 million in '17 and $135 million in 2018.
If you look into the Slide #17 with the outlook, we can just state that steel margins to recover from lows seen in Q4 2018 but not to 2018 highs, so, like in, which is not that, like in, bad for ourselves as the iron ore and specifically pellet producers. We want steel margins to be reasonably sustainable, with the steel mills not to suffer. At the same time, like in, we are very much cautious all the time on the incredibly high steel price inflation that as history has shown us many, many times, so it's not sustainable, it was not sustainable and that is where we are quite concerned and cautious if, like in, steel prices are overshooting.
Pellet premiums strongly correlated to steel margins. So what we have achieved in terms of the pellet premiums for this year being booked, so maybe I don't know if that correlate into Q4 '18 steel margins. But as they are recovering right now, on average, we consider that, so it is very much, like in, reasonable distribution of margins in between the pellet producers and steel manufacturers.
Steel -- seaborne supply of pellets to remain tight following major supply disruption in Brazil. We touched on that couple of times, and plenty of information in the market and for all your researches. So we consider this to be the case. We believe that this will stay in 2019 and, like in, most likely the whole '20 hopefully, so even beginning of 2021 because we have assessed all the pellet production and, like in, pellet demand within the major steel manufacturer in the regions and, like in, we consider that '19 and '20, unless heavy recession to happen. So going to be good years for pellet suppliers to the global market.
So we expect higher received prices in 2019, which we're not only expecting, but facing right now about the first quarter of this year and right now to the second quarter of this year, and that is, like in, what is not only expected, but right now, materialized and effectively booked within our balance sheet and within our bank account.
So we continue to repair and maintain our facilities, like in, within the program that we have adopted, including the 75 days pellet plant shutdown in the second half of 2019. That is the last line which is requiring shutdown for this enhancement. And we're very much proud that, like in, 75% of our capacities in pelletizing have been in the shutdown and enhancement procedure already. And that's the last one to finish, like in, where from 2020, we will target, as I mentioned earlier, to hit annualized 12 million tonne capacity in pellet production within the second half or fourth quarter of 2020.
So production volumes in 2019 are expected to be in line with 2018, and that is only with slightly better composition inside of the pellet production with high-quality pellets and we believe higher quality properties to be supplied to our customers.
So costs subject to production volumes, commodity input prices, local currency exchange rate and local inflation, that is also reflecting the higher repairs and maintenance expenditure, which we're doing. We consider that during good years, we need to just, like in, invest a little bit more to keep our facilities bulletproof of, like in, any kind of volatility potentially to happen both technically and into the market into the future.
So subject to achieved pellet pricing and additional cash flow generation, CapEx will increase in 2019 to include spend on future growth projects. That is what I mentioned, medium fine crushing Section #9, so basic engineering and procurement of the specific equipment for enhancement of the pelletizers, press filter project which is also very much important. It is currently expected to be in the range of $220 million, maybe up to $300 million depending what kind of figures we will achieve specifically post first half of this year.
So that is it on my Slide #17, and thank you very much. You have slides in the Appendix, including also the information regarding our tailing dam. And, like in, further on, if you have any questions, please address. Thank you.
[Operator Instructions] First question today is from the line of Krishan Agarwal from Citigroup.
I mean given the significant increase in the CapEx to $220 million to $300 million. Hello, can you hear me?
Yes.
Yes. Given the significant increase in the CapEx to $220 million to $300 million, can you talk about a little bit on the potential sequencing of the growth as in the 1 million to 1.5 million tonne is coming from 2020? And afterwards, what sort of volumes you're going to see? And what is the potential trajectory of those volumes? And secondly, beyond 2019, what kind of CapEx estimates we should start to factor in, in our models?
I will answer this question with this kind of information. So, like in, our base capital expenditure of $150 million is staying intact. We, during the good years, are just adding additional funds, like in, additional capital of $70 million or maybe even $150 million depending, like in, what is going to be our cash generation simply to speed up and effectively enhance, like in, all our projects in the pipeline. And as you mentioned already and as I tried to explain, that next year we will add somewhere in between 1 million and 1.5 million tonnes to come to the 12 million capacity rate in the second half of the year. Plus, we will have some spare concentrate, which is pellet feed of 67.5%, 68%. And that is going to be destined for export as well as we need to prepare all the upstream facilities, like in, in terms of the pellet feed generation to meet the pelletizing request, like in, within the enhancement of the pelletizers in increments that I was talking about. So it does mean, once we will add 2 million more pelletizing capacity from 12 million to 14 million, we will need to have pellet feed. And that's why this pellet feed will be available for a short period of time into the market, after the moment we'll enhance. Idea is that our first pelletizer to be enhanced for another 2 million tonnes, like in, will come onstream somewhere in the second half in current plan, second half of '23. Means, like in, we will finish '20. We will just run '21 at 12 million plus some concentrate. We will run '22 with some -- with 12 million capacity, maybe some bigger one 12.2 million, 12.3 million. And the rest is going to be fines to meet our '23 -- 2023 fourth increment of 2 million tonnes in the second half of that year. So, like in, to reflect all this in figures, like in, we consider that we will stay -- still stay in $150 million a year. If more cash will be generated and will become available, we will definitely try to speed up all these processes and move them, like in, a little bit earlier, a little bit more into advance.
Okay. Secondly, on the cost increase, you mentioned costs are going up in 2019. Can you also discuss the potential magnitude of the cost increase and the main areas from where the cost is coming up in this year?
Chris, maybe you will answer this one, and I will add if there's going to be something to add.
Yes. Thank you for the question. I touched on it briefly when we were looking at Slide 8, if you can refer back to it. We saw a reasonable cost increase in 2018 compared to 2017, and the components in there are broken out for you. The cost increase that we expect in this year will be around about $5 assuming that we have a stable local currency and assuming that we have oil slightly below current levels. And that will be split. So it would be roughly half of what you've seen in this year. So commodity price increases around half.
Local inflation is moderating. That was principally salaries, around half again. Repairs and maintenance, there'll be a smaller increase because we're going from a higher base of repairs and maintenance. And the stripping would be around about half of that level. So that more or less would be at the sort of general bridge that you'd expect. The caveat is always in there. I can't predict what the local currency is going to do and I cannot predict what oil is going to do. And you've noticed on the chart that 60% of our costs are commodity related.
What I will note is that we don't have -- just wait for these positives and negatives to flow past us. There's a lot of very good work going on which you've seen in the -- particularly in the mine but also in other areas in order to cut costs. So there is a lot of efficiency gains being made in terms of mining, and these are standard production indicators. So this is truck utilization and shovel dig rates and mining rates. We're also making improvements in the processing as we're investing capital as well. So we are seeing slightly above the expected 2% improvements in KPIs in production as well, which will go the other way. But with the cost structure being 60% commodity related, those are the biggest influences of the overall level of C1.
Our next question comes from the line of Liam Fitzpatrick.
Two questions from me. Just firstly on the balance sheet. You said pretty clearly you're moving to a more balanced capital allocation plan from here. But can you just clarify, are you still targeting further net debt reductions from here? And if you are, can you give us sort of ballpark number on what level you'd like to get to? And if you aren't targeting further debt reduction, should we assume the excess is all coming back via dividends?
And then secondly, I think it was largely answered in the questions before, but can you just clarify CapEx beyond 2019? So if we're looking into 2020, 2021 and assume conditions remain relatively good, will you still be spending similar to the $220 million to $300 million per annum?
Thank you for questions. I can tell you that your question on the net debt reduction, so, like in, our plan is further on to reduce debt during this year and, like in, depending on how much of EBITDA will be generated. So we are targeting somewhere in between $50 million to $100 million of net debt reduction. Means that, like in, we will be somewhere in the area of -- we hope so, like in, to be in the area of $200 million to $250 million of net debt, so by the end of this year. And that is, like in, easy for you to calculate, like in, in terms of the net debt-to-EBITDA ratio, expecting more like in what kind of EBITDA we will generate if everything will go the way it is going on right now, I mean, like in, no major, like in, recession will hit the global market.
So in regards of the capital to be spent during the next year and beyond, like in, if all conditions will stay the same, like in, we will target to spend somewhere in between, like in, USD 200 million and USD 300 million to just bring projects earlier if engineering will allow us to do so and if, like in, execution -- understanding and execution of viability will show that, like in, these projects can be delivered earlier.
We know that we are pretty much comfortable to just produce more of the pellet feed, like in, to backup pelletizers, but even without pelletizers, pellet feed is generating definitely less margin or smaller margin in comparison to pellets but still good product to be sold into the market, seemed like Minas-Rio or any other pellet feed producers in the world generating and selling as the final product. So, like in, our product is going to be the same 68% or close to that, 67.7%, 67.5%. And definitely, we do not want to sell it into the market. We want to sell pellets. But if pelletizing capacity will not be ready yet, so we are reasonably happy to sell 1 million or 2 million or 3 million tonnes of pellet feed once these pellet feed will become available. We are pretty comfortable with the engineering and execution there because it's, like in, repeat exercise for ourselves, like in we have been doing that for so many years, and definitely, these projects to just deliver are time consuming and capital consuming but not that very much complicated in comparison to pelletizers. So that's why pellet production and pelletizers are very much complicated and highly capital-intensive. And that's why barriers to enter the pelletizing, like in, business are very high and, like in, relatively restricting for others -- other companies and other competitors to join.
So, like in, if everything will stay the same way in 2020 and 2021 as it is in '19, our answer to your question is that we will spend somewhere in between USD 200 million and USD 300 million depending on how much we will be in the position to, like in, execute in efficient manner. So if markets will go into the, like in, southern direction, means if markets will sour, so we will most likely be on the very much, like in, the plant, as we call it out-of-pilot CapEx figure of something like USD 100 million -- around USD 150 million.
Okay. That's very clear. Could I just ask one follow-up? In terms of the expansion plans to 20 million tonnes, when is the big -- when will you require a bigger step-up in CapEx under your current plans? Are we talking 2023, 2024? And do you have a target in terms of when you would like to hit the 20 million tonnes?
I can tell you, so, like in, it is highly speculative right now because, like in, engineering, detailed engineering is not finished yet. But our ideal scenario would be to just deliver first 2 million in '23, second 2 million in '24, third 2 million in '25 and final 2 million in '26. So -- and we consider that spending USD 300 million per year will deliver all that. So means, like in, on average, once we will spend, so $300 million this year, $300 million next year, $300 million in '21, '22 and up to '26, we will deliver all that. And largely, like in, these pellet additions in terms of the capacity will pay for it. Because, like in, as you can imagine, we are calculating on average $30 EBITDA per tonne of pellet produced. And like in, each 2 million incremental will add $60 million of additional EBITDA, which will not be EBITDA but, like in, profit before tax as all other EBITDA components will be covered and, like in, just absorbed with the existing production. So, like in, I have given to you the dates and figures. So they're, as I mentioned, like in, I'm not certain and highly speculative, but that is what we would love it to be.
The next question comes is from the line of Amos Fletcher from Barclays.
So first question from me is just around on the marketing side actually. I just wanted to ask can you confirm whether your pellet premium contracts are now based on 65% grade fines as your major competitor has done? And then, secondly to ask, it's obviously very early, but do you have any views of the new President elected in Ukraine and whether we're likely to see any major changes that could impact on the business?
I will answer, Amos. Thank you very much, like in, for your questions. Like in, Chris and Steve, if you want to add, please do so. Like in, I believe that Ukrainian story would be told by myself.
So to answer from the second question on the presidential election, so we're expecting only better things to happen, so, like in, if all the common and, like in, relatively same conditions, like in, to be within the Ukrainian politics. So like in, I see that's very much beneficial and good outcome for Ukraine with the new President being elected. The only concern is Russia because, like in, no one knows what is in their minds and people are speculating that, like in, it can be just like a major provocative behavior from Russian Federation to come very soon. Who knows? Like in, it could have happened years ago, months ago, quarters ago, and it can happen any moment, like in, not in relation to Ukraine only but the rest of the hot points, so like in Russia and the rest of the world and civilized world have, like in, on the global map.
So generally, we expect that market conditions will be liberalized further in Ukraine. We expect that this will positively play for our logistics competitiveness. And we expect that, like in, monopoly Ukrainian railroad authority will be more liberalized as it has been signed in between Ukraine and European Union within the association agreement 2 years ago. So we believe that there's going to be acceleration of this drive and, like in, plenty or majority of the monopolies will be just, like in, not changed but enhanced and, like in, improved and liberalized more, like in, just in line with Ukrainian commitments to the European Union signed during this association agreement conclusion.
In regards of your question, the first one, Chris, maybe you will answer this one.
Yes, Amos. Thanks for the question. It's a short answer. Yes, we have moved on to that basis with the vast majority of our customers. And we would expect to be pricing, as in the past, in line with the market leader.
Amos, we have some adjustments in terms of quality, sometimes, like in, premium, sometimes discounts, so, like in, we have some logistics adjustments, like in, in relation to the price. Because sometimes, like in, big vessels, big capesize vessels of 200,000 tonnes of pellets are calling 2 ports not 1 port. Let's say, half of the cape is going to Nippon Steel and another half is going, let's say, to China Steel in Taiwan. And in this respect, we were getting $1 discount with Nippon and $1 premium with China Steel, means, like in, more or less averaging the achieved price. But, like in, as Chris confirmed and I'm confirming as well, so, like in, all our contracts are -- be 65% base.
The next question is from the line of Dominic O'Kane from JPMorgan.
Just 3 questions from me. So 2 financial questions. You mentioned in 2019, you won't be mining lean ore. So just in terms of working capital implications, should we expect a release of working capital in 2019? Or are there offsetting factors that should see negative working capital in 2019?
Second question, you mentioned an ambition to pay $160 million of dividends in the future. I just wondered if you could put some context around that, particularly in light of the step-up in CapEx that is possible. Is that a dividend payout that we could expect within the next 1 to 3 years? And is that going to be referenced off a specific net debt/EBITDA ceiling?
And then third question is related to the accounting investigation. I haven't heard specific comments with respect to some of the conclusion. So I just wondered if you could give us your take on where you're at with the accounting investigation and a likely time line for conclusion of these issues.
Thanks. I'll deal with the first question first and then pass the other 2 to Kostyantin and Chris. There's nothing more we can really say right now because the review is ongoing. Obviously, if anything announceable emerges, we will make the appropriate announcement at the time.
I think it's important to say that this is an investigation into a third-party charity. It is not a current issue. We stopped making payments to that charity nearly a year ago now. It does not concern any investigation or review into the affairs of Ferrexpo. And there's no suggestion of any wrongdoing on the part of anybody in Ferrexpo. So it's a very limited review, limited in scope and on matters that are historic and not current.
Yes. And I'll pick up on the lean ore and dividends, if that's okay, Kostyantin, and you can obviously add.
Please.
Yes, so in terms of working capital, I think it's surrounded working capital. We have modified the mining plan and are not going to be extracting more ore than we are processing. So the line which says lean ore, we would expect to be 0 or a small number in 2019, so you won't see that working capital outflow. The reversal won't happen until we've got additional processing capacity in. At the current time, we are long in mining and are building up the processing capacity. So in 2020, 2021 when additional capacity comes on, then we would have the opportunity to start reversing that particular line on the balance sheet.
Other working capital items will vary principally dependent on price. So one of the reasons for the working capital increase in this year or to the year-end 2018 was higher prices, which affect trade receivables, in particular. That will be very much dependent on price, so that would vary normally with the basic accounting assumptions that you're putting in, if that's okay on that question.
In terms of dividends, we are running always the same strategy. It's been the same for several years where we are balancing the 3 legs of capital allocation. It's between dividends, capital expenditure and deleverage. In the prior years, we prioritized deleverage, so the dividends have been lower because we wanted to reduce the risk -- the financial risk on the balance sheet. We've now achieved that, and we're going into the year 2019 where cash flow should be reasonably healthy. That gives us the opportunity to increase the CapEx depending on the prices, reduce debt and pay dividends, as I've indicated, around about $160 million.
The strategy going forward will be very much the same, so it's really to balance the capital allocation. And when we get to the end of 2019, net debt will be very much at the sorts of levels that will be sustainable in the longer term. We then have the optionality of either reducing the net debt a little, increasing the net debt a little, but the dividends would be effectively protected within that sort of cash flow.
So just for the completed pointed out, $160 million is a reasonable expectation for the dividend in 2019?
It is a reasonable expectation in 2019 dependent on pricing. Obviously, the markets can collapse or they can go higher. But at the current time, it's a reasonable expectation for dividends in 2019 in cash.
The next question is from the line of Conor Rowley from Crédit Suisse.
I've actually had all my answers to the questions.
Then in that case, there are no further questions. I'll hand the conference back to Kostyantin.
Thank you.
Okay. I think then if everyone has asked their questions, we've got no further questions here that have come through. So yes, I thank everybody for dialing in this morning. It's much appreciated. Thank you all very much for the questions that were all very good questions and it's given us the opportunity to expand a little bit on the presentation. So thank you all very much for joining and I will close the call now. Thank you, again. Bye.
Thank you very much. Thank you, and goodbye.
Thank you. That does conclude the conference for today. Thank you for participating, and you may all now disconnect.
