Description

(Note that in the valuation we include both the publicly traded and privately held shares)

Ciner Resources LP (“CINR”, “Ciner”, or the “Company”) is a low cost producer of natural soda ash, a raw material used to manufacture flat glass, container glass, detergents, chemicals, paper, and other consumer and industrial products. The Company has over 113 million tons of proven production reserves in its Green River, Wyoming location.

The stock has been written up multiple times on VIC, including the most recent write-up by Siren81 in August of 2020. The business overview has been given multiple times, so this write-up is going to focus on multiple catalysts that make CINR a timely investment for those that can manage the illiquidity.

Can start with the first and most interesting: There are rumors of Ciner Group weighing the sale of the soda ash unit. https://www.bloomberg.com/news/articles/2021-08-09/ciner-said-to-weigh-sale-of-stake-in-5-billion-soda-ash-unit

Per the article, “The Turkish conglomerate is working with Goldman Sachs Group Inc. as it explores options for its soda ash business, the people said, who asked not to be identified discussing confidential information. We Soda could be valued at about $5 billion in any deal, the people said.” The article came out on August 9th when the stock was at ~$13. In the coming days, the stock proceeded to decline into the low $12 range.

Typically, an article like this would move the stock, yet it seems that either nobody gives it credit or nobody cares. Both are reasonable to assume. But let’s say that the rumors are real, and Ciner Group is looking to sell the soda ash unit. The article states a $5 billion value for the 7 million tons of annual production. CINR currently has capacity of 2.75 million tons, but due to deca depletion this will decline 200k tons in a few years so let’s assume 2.5 million tons or 36% of the 7 million tons. Based on 36% of $5 billion, CINR would be valued at $1.8 billion or a corresponding equity value of nearly $42 per share….220%+ above todays prices. This seems far too generous, so assume that since the Turkey capacity is lower cost and has better access to the ports that it’s a higher proportion of the value. Haircut the CINR value by 30% and you get a stock price around $29 per share, or 120%+ from today’s prices.

This valuation seems very reasonable for this asset given the historical cash flow generation. Pre-COVID, the historical average of EBITDA per ton was ~$50. At 2.5 million tons of annual production, this implies a mid-cycle EBITDA of $125 million. Assuming $20 million of maintenance CapEx and $5 million of cash interest, you get $100 million of distributable cash flow. $100 million of DCF on a $1.14B market cap is an 8.8% yield. For reference, CINR has historically traded at an average yield of 8.9%. Recall, CINR traded in the high $20’s as recently as fall of 2018. It also implies a 10.0x EBITDA valuation. Though this is high, it is not outrageous given the low cost position, limited ability for new natural soda ash supply to come online, strong cash flow generation, and secular tailwinds about to take place in the industry.

There have also been some interesting developments from CINR including no longer hosting quarterly earnings calls, higher frequency of investor presentations, and continued lack of clarity on the expansion project and dividend distribution. It also would be a price that would likely incentivize both NRP and publicly held float to approve. These again are speculations but could imply the business is for sale.

Though a sale would be the ideal scenario here, an investment in CINR is also timely from a financial perspective as well. Soda ash prices have increased drastically in recent months.

It is important to note that China soda ash pricing generally doesn’t impact the rest of the soda ash market as it is the highest cost production, and most is consumed internally. Yet, the direction of these charts is a good proxy of where things are headed and matches commentary from both synthetic and natural producers. Some relevant quotes:

“Indicators point to continued demand growth, as global consumption has nearly normalized to pre-COVID levels and soda ash demand continues to track broader economic growth going forward.” – CINR CEO Oguz Erkan, in August 2nd, 2021 Financial Results

“Despite these increased costs, the overall macro story in soda ash remains intact with, by our estimation, all natural producers being sold out and higher cost synthetic production needing to come online to support rapidly increasing demand….In response to the supply and demand dynamic further tightening and lower export volumes of synthetic soda ash from China, ANSAC announced another price increase for soda ash in early June for the third quarter on all of their non-contract sales of soda ash and on contracted sales when contracts allow….However, there is no question in our minds that this increasingly tight supply and demand dynamic will continue to support prices rising through the remainder of the year…Accordingly, we expect soda ash prices to be sequentially higher in 2022, but our weighted average price will likely not return to pre-pandemic levels next year, primarily due to our longer term domestic contracts containing caps and collars…However, we continue to believe the market dynamic exists where our weighted average price should move increasingly closer to pre-pandemic levels as we enter 2023, or we would suppose 2024 at the latest. – Genesis Energy CEO Grant Sims on August 4th, 2021 Earnings Call.

The inflation we are seeing in many commodities is no different in soda ash. The difference here, however, is that most contracts are done later in the year so the impact of the move in prices has yet to show up in the financials. This factor, along with elevated costs such as shipping, has limited the improvement in CINR financials. As these prices flow into the contracts, we expect EBITDA levels to drastically improve in 2022 with further upside in 2023 and beyond.

Prior to COVID, the market was expected to continue to tighten due to limited supply coming online and demand trending up. From our research, COVID made the supply tighten even further as expansion projects got delayed and demand levels are expected to already reach 2019 levels this year! Industry experts had expected approximately 2.3 million tons from Genesis (Granger), Solvay (soda ash business for sale), an Indonesian company, and Ciner within the next 3 years. It is reasonable to assume that these happen just on a delayed schedule. The other rumored project was a 2.5 million ton expansion by Ciner Groups Turkey subsidiary WE Soda. This was unlikely before 2025, but for conservatism can include that. This means that 4.8 million tons of capacity could come online within the next 3-5 years.

In that same time period, the industry believes demand will grow 6-8 million tons driven by GDP, and secular growth stories such as lithium batteries and energy efficient glass. This means that the supply deficit will continue to grow with margins not favorable enough at current prices for high cost synthetic producers to build capacity.

Because of the above dynamics, we believe the soda ash is about to enter an up-cycle in pricing where low cost natural producers such as CINR will be the main beneficiaries. With capacity additions taking multiple years, this could lead to years of above trend margins and cash flow generation.

All of the above is a long winded way of saying this: if the business isn’t sold, the distribution is coming back. The number of investors willing/able to hold an MLP is minimal, and per our conversations with management they recognize that with no distribution it further reduces the investor base. Per the recent presentation, they expect to refinance the credit facility in the 2H of this year which will help reduce limitations on distributions and growth capital expenditures. As the above factors take place, we believe that something similar to the $1.36 pre-COVID is likely. This was a number chosen by management that would allow them to fund the expansion and pay out cash. This represents a 10% yield at current prices, a reasonable return to get paid as the expansion gets built and a catalyst for the stock.

Just to touch on the expansion project, we think it is a good use of capital. The dynamics for the industry remain strong and adding this capacity would lower the overall cost of production and increase annual volumes. Per management, it should take about $400 million of capital over three years (back half weighted which again helps support a distribution near-term with full margin reversion coming more towards 2023). Since it will be lower cost capacity, we assume 10% better margins so $55 of EBITDA per ton on 1 million tons. This adds $55 million of EBITDA with little incremental maintenance CapEx going forward which is a reasonable return on investment. Overall, production will increase by 800K tons net (200K deca decline) so $45 million net impact to EBITDA. This puts the earnings power around $170 million of EBITDA in 2025. 

Catalyst

- sale of business

- improvement in financials as contracts re-set

- distribution reinstated