Ferroglobe (GSM): Dec 11, 2020
Recommendation: Buy 9.375% senior notes due Mar-22 at 76 cents (35% YTM) and stock at $1.63 / share
Catalyst:
GSM is currently in the process of raising ~$70-$100m of new secured financing to (1) repay some bank debt and (2)
provide extra liquidity to allow management to execute its 3-year strategic plan.
Once this secured financing is done and GSM continues to post solid EBITDA improvement, the company will likely
refinance the 9.375% senior notes before they go current in Mar-21.
The 3-year strategic plan would (1) grow revenues by $175m, (2) increase EBITDA by $150m and (3) streamline working
capital to extract $70m cash – mostly by improved inventory efficiency.
This new secured money would likely be provided by existing senior noteholders and be secured by US PP&E and
European accounts receivable and inventory, which are unencumbered.
Existing secured leverage is relatively low at ~1.5x, so an additional $70-$100m of secured financing would only increase
secured leverage to ~2.5x. GSM’s historical equity multiple is 8.0x.
Large senior noteholders are working with Moelis to negotiate this potential financing.
Company description:
Ferroglobe (GSM), based in Spain, is a global leader in silicon metal and ferro-alloy mining and manufacturing, with 64%
market share in the US and 26% globally (ex-China).
GSM is one of the world’s largest producers of silicon metal, silicon-based alloys and manganese-based alloys.
Moreover, GSM has quartz mining activities in Spain, the US, Canada and South Africa, low-ash metallurgical quality coal
mining activities in the US.
GSM sells to a diversified customer base in over 30 countries, across various end-markets: steel (35%), aluminum (23%),
silicones (15%), photovoltaic (13%), and other (14%). Key customers include: Acerinox, Alcoa, Cleveland-Cliffs (AK Steel),
Arcelor Mittal, Dow, Dupont, GM, John Deere, Momentive, Nippon Steel, Rio Tinto, etc…
Silicon metal is used by aluminum producers to produce alumin alloys; silicon metal reduces shrinkage and the hot
cracking tendencies of cast aluminum, improves castability, hardness, corrosion resistance and weldability.
Aluminum producers use silicon metals for auto components, engine pistons, housings, cast aluminum wheels & trim,
aircraft parts, beverage containers, etc…
Importantly, silicon metal is used to make polysilicon for photovoltaic / solar cells, which enjoys strong secular growth as
the global economy transitions to renewable energy.
Chemical producers use silicon metal for personal care items, health care products and electronics.
Manganese-based alloys are used in steel production to improve hardenability, while silicon-based alloys are used in
stainless steel to improve strength and wear resistance.
As mining is a power-intensive sector, GSM enjoys low-cost energy with several hydro and solar power sources in the US
and Canada (Niagara Falls, West Virginia), Spain and France.
Ferroglobe PLC is the result of the Dec-15 merger between Spanish company Grupo Ferroatlantica and the US company
Globe Specialty Metals.
Merits:
• Global leader in silicon metal & ferroalloys mining and manufacturing - vertically integrated• Strong working capital position: at Sep-20, GSM’s net working capital position was $354m, providing a good
source of future liquidity support.
• On Oct 1, 2020 GSM signed a new A/R factoring agreement that unlocked $20m of restricted cash.
• Low secured leverage ~1.5x
• Good cost cutting has resulted in positive EBITDA, and working capital efficiencies have enhanced free cash flow
• Silicon metal & manganese pricing has firmed up
• US auto market remains strong
• French and Spanish governments have provided loan support
• GSM equity is 54% owned by the Spanish fund Grupo Villar Mir, headed by billionaire Juan-Miguel Villar Mir
Risks:
• Highly levered: GSM is levered 5.3x (‘20E Adj EBITDA $72m) thru the 9.375% Sr Notes due Mar-22. On a market-
adjusted basis with the sr notes at 76 cents, you’re creating the company at 5.3x. Using LQA Adj EBITDA $88m,
you’re creating the company at 4.4x.
• Spanish and French manufacturing footprint – it’s difficult to cut costs in those jurisdictions. Due to weak silicon
prices and rigid cost structure in Spain and France, GSM posted negative EBTIDA in 2019. But GSM has recently
turned the corner, posting two solid EBITDA quarters, even during a global pandemic.
• Weak silicon prices: US and European silicon pricing has fallen since 2018 from ~$3,100 / mt to ~$2,300 / mt
today, but they’ve found a bottom and have stabilized around $2,300 since Dec-19. On Bloomberg, see
S6USYEGHT Index for $/lb.
• High customer concentration: GSM’s top 10 customers account for ~40% of sales, so GSM may lack some pricing
leverage.
