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FERROGLOBE PLC GSM
December 02, 2021 - 9:39am EST by
zzz007
2021 2022
Price: 5.95 EPS NM 1.10
Shares Out. (in M): 187 P/E NM 5
Market Cap (in $M): 1,110 P/FCF NM 5
Net Debt (in $M): 400 EBIT 50 250
TEV (in $M): 1,510 TEV/EBIT 30 6

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Description

Overview

  • Ferroglobe PLC (“Ferroglobe” or “GSM”) is a specialty materials company with a very favorable supply/demand outlook. The company has completed a recapitalization which takes liquidity concerns off the table. It is in early stages of turnaround with a new CEO who has a strong reputation. Trades at  just 3x 2023/24 EBITDA.

Introduction

  • Woodrow wrote up GSM in May of this year and I would refer you back to his writeup for some excellent context; I believe that it is time to revisit the stock

  • Shares have done well subsequent to the writeup on an absolute basis, rising from his writeup price of $4.15 to ~$6/shr; however, this obscures what was an even more impressive interim run to $9.50/shr

  • Since the May writeup, there have been a number of favorable developments

    • The company has completed its balance sheet restructuring; liquidity risk is off the table

    • Cost takeouts have proceeded either in-line with or ahead of management’s original expectations

    • Pricing for the company’s products has remained incredibly strong

      • Over the past 13 mos (since the company released its projections in conjunction with the proposed financial restructuring), pricing for the company’s products is up anywhere from 80% to 270%, with an average increase of 180%

      • Since Woodrow’s May writeup, pricing for the company’s products is up anywhere from 10% to 140%, with an average increase of 85%

      • Note that this pricing is based on Bloomberg index pricing, which (per the company) generally understates actual realized market pricing for suppliers

  • Despite these developments shares have taken their lumps recently; the primary culprit is market concern over the company’s ability to manage increased input costs, primarily energy, and drive acceptable operating leverage

  • I believe that we remain in the early stages of the company’s recovery; management is moving aggressively to leverage its global footprint to address cost inflation and the supply-demand outlook appears favorable over a multi-year period

    • Smaller local competitors are highly disadvantaged vs Ferroglobe, with limited/no ability to leverage geographic diversity to minimize cost inflation (i.e. energy) headwinds

    • Spain is the company’s most troubled geographic locale w/respect to rising energy prices, as (I believe) it is the only locale where it is 100% exposed to spot energy pricing from external suppliers

    • Spanish energy costs have risen ahead of all expectations, from €45/MWh (1Q 2021) to an intra-quarter peak of €189/MWh (3Q 20210)

    • Ferroglobe has begun a multi-faceted effort to ameliorate the situation in Spain

      • Several furnaces in Spain have been idled, with additional production cutbacks at non-idled furnaces

      • Contract negotiations for 2022 are underway, with provisions for pass-thru of energy costs to customers of the Spanish facilities

      • Longer-term power supply agreements in Spain are being discussed, to provide a higher degree of predictability and limit exposure to spot energy pricing

      • Results in Spain have begun to turn, moving from a loss position in 3Q to (modest) profitability in the early part of 4Q

  • Management plans to host an analyst day in 1Q 2022, at which point I expect it to (at a minimum) affirm the existing operating/financial plan or (ideally) increase existing medium-term guidance

  • Contract negotiations for 2022 are currently underway, and reflect the company’s advantaged position vis-à-vis customers that are looking to lock in needed supply

 Business

  • GSM was formed through the 2015 merger of Spain-based FerroAtlántica, S.A.U. (“FerroAtlántica”) and US-based Globe Specialty Metals, Inc.

  • Segments

    • Silicon metal (31% TTM volume, 37% TTM revs)

      • 242k metric tons capacity (2019); 70% N America mkt shr, 20% global market shr ex-China

      • End markets: aluminum (45% 2019), chemicals (43% 2019) serving diversified end markets (personal care, construction, health care, electronics), solar (10% 2019); segment is primary driver of consolidated profitability; required for production of aluminum alloys, reduces shrinkage and cracking

    • Silicon-based alloys (31% TTM volume, 28% TTM revs)

      • Primary end market is steel (accts for 88% of sales); deoxidizing + alloying agent

      • 34% market share in Europe; among top 3 ex-China

    • Manganese-based alloys (38% TTM volume, 25% TTM revs)

      • 309k metric tons silicomanganese capacity (2019) + 346k metric tons ferromanganese capacity (2019)

      • 15% European market share

      • Primary end market is steel (accts for 90% of sales); deoxidizing agent

  • Overall end markets (per company 2018 presentation): steel (35%), aluminum (23%), silicones (15%), photovoltaic (13%), other (14%)

  • Control some raw material assets: metallurgical coal (US), quartz (US, Spain, Canada, S Africa), charcoal (S Africa)