TSE - Ferroglobe PLC: Market Tailwinds Present Buying Opportunity

Summary

• Ferroglobe's total revenues fell 26% (QoQ) to $264 million, with volumes down 20% (QoQ) to 50,545 MT.
• GSM has the chance to optimize and build an efficient asset footprint, considering that it is impacting the semiconductor industry.
• GSM recorded the lowest net income since the beginning of 2022 as it dropped 47% (QoQ).

The share price of silicone and specialty metal producer, Ferroglobe PLC ( GSM ) has declined by 24.42% (YoY). The company's Q3 2022 results were impacted by slow demand headwinds and volatility in energy prices. Aluminum producers in Europe curtailed production into 2023 due to unsustainable energy prices while silicone specialty grades continued their positive contribution in the quarter.

Thesis

Despite a 29% (QoQ) decline in revenue, Ferroglobe expects its EBITDA run rate to reach $225 million by 2024 through its transformation plan. The company is set to enter into joint development agreements with leading silicon-carbon composite producers and electric vehicle (EV) manufacturers across the value chain. Additionally, Ferroglobe announced a restart of its Polokwane Facility in South Africa, a move that will ramp up silicon production while maintaining its working capital at 21% (YoY) against sales.

Overview

GSM was founded in 2015 and has its headquarters in London. It operates mines in the US, Spain, Canada, and South Africa. Specialty metals offered by the company include silicon, manganese alloys, ferrosilicon, electrodes, solar grade, and other foundry metals.

Declining metal prices in the quarter saw the company report relatively weak financial results. As noted, Q3 2022 revenue was down 29.5% (QoQ) at $593.2 million, while adjusted EBITDA fell 38.9% (QoQ) to $185.3 million. GSM's net profit also declined 46.6% (QoQ) to $98.8 million down from $185.1 million with EPS dropping 46.9% (QoQ) to $0.52. The total cash balance also fell 22.7% (QoQ) to $236.8 million while maintaining its net debt at $194 million.

It was a challenging quarter as high costs of raw materials adversely affected the company's margins, including revenue from the dominant silicon segment. Total revenues fell 26% (QoQ) to $264 million, with volumes down 20% (QoQ) to 50,545 MT. As an investor, I am enthusiastic about GSM's board approval of a new medium to long-term development strategy. The company intends to ramp up industrial production of silicon metal at its Puertollano mine in Spain. This development will also be extended to the planned restart of the Polokwane mine in South Africa. It will see the company increase its silicon metal capacity with an additional 50,000 tons.

New Strategy

In its Q3 2022 earnings call, GSM's Executive Chairman, Javier Madrid stated that about 35,000 tons of the intended 50,000 tons from South Africa will be produced in 2023. We are not just looking at working capital consumption, but a strategy to balance production and demand. I find the decision to restart the Polokwane facility vital since it will help in adding low-cost capacity. Further, South Africa is strategically located as a technological hub in Africa with the capability of serving customers in Europe, the Middle East, and Asia. With the initial production set at 1,150 MT, GSM plans to accelerate it to a monthly production of at least 3,750 MT by Q2 2023.

Overall, GSM has the chance to optimize and build an efficient asset footprint considering that it is impacting the semiconductor industry. Research indicates that the semiconductor market will become a trillion-dollar industry by 2030 growing at a CAGR of 7%. Most of this growth will be attributed to the advancement of automotive, data storage, and wireless communication which primarily depend on metals.

Stronger Balance Sheet

GSM is getting into 2023 with a bolstered liquidity mindset. The company stabilized its net quarterly debt at $194 million, with total current assets at $1.2 billion (including cash) and total assets at $1.86 billion. This largely outweighs total liabilities, which stand at $1.16 billion. In its Q3 2022 earnings call, GSM indicated that it had redeemed 9% of its super senior notes (due in 2025) that were earlier finished in July 2022. This deleveraging lowered its adjusted gross debt by up to $60 million. Earlier in Q2 2022, GSM had announced a purchase of $19 million of its senior notes in the open market, bringing the total of senior notes purchased to $79 million.

This debt reduction increased working capital by $30 million or 4.4% (QoQ) to $717.3 million. GSM attributed this increase in working capital to the $108.6 million growth in inventories. Accounts receivables also decreased by $84.9 million partially offsetting the growth in inventories.

We must also appreciate that while revenue was down 29.4% (QoQ) it was up 38.2% (YoY). GSM's working capital relative to the total revenue has increased by 30.2% (QoQ) as compared to 20.4% in Q2 2022. The company managed to stabilize its costs with operating income growing more than 1230% (YoY) despite falling 41.8% (QoQ). Additionally, GSM's adjusted EBITDA of $185 million was the third-largest record since its inception in 2015 despite its 39% (QoQ) decline. This score shows the significant impact of the strategic plan implemented since 2020.

Strategic Partnerships

GSM announced a memorandum of understanding ('MoU') with REC Silicon ( OTCPK:RNWEF ) in Q2 2022. Under this agreement, GSM committed to leveraging its U.S. asset base to supply its silicon metal to RNWEF to help establish a traceable solar-based supply with a low carbon footprint. The aim of this relationship is for both companies to take advantage of the solar supply chain that uses silicon metal (including polysilicon) and fully-assembled solar modules.

Back in August 2022, the U.S. Senate passed Senator John Ossoff's legislation to increase the production of solar energy, a move allowing related companies clean energy incentives.

Later in Q3 2022, Ferroglobe stepped up and announced another MOU with Trinseo PLC ( TSE ) to jointly develop high-silicon anode solutions for batteries of electric vehicles (EVs). At the same time, General Motors ( GM ) and OneD Battery Sciences also announced their collaboration in October 2022 to develop low-cost batteries. These batteries would use the silicon nanotechnology from OneD within Ultium battery cells (made of Lithium) by GM. Silicon as understood can increase energy density in Lithium-ion batteries thereby reducing both cost and recharge durations.

Using silicon would thus help battery developers scale their production volume. It has also been studied that silicon has "twice the energy density found in graphite that is mostly used in lithium-ion batteries." With all the aforementioned agreements, it is apparent that companies are working to increase their commercialization of silicon anodes in EV batteries. The expectation here is that silicon will form a key component in the transition to green energy, not just in batteries but also in solar power

Risks

GSM recorded that its average selling price, especially for silicon-based alloys dropped 10.8% (QoQ). Volumes of the metal also declined 15.1% (QoQ) with the demand for Ferrosilicon decreasing due to the slowdown in the sector.

The demand is likely to remain low in H1 2022 due to weak market conditions and the ongoing Russian invasion of Ukraine. However, the global ferrosilicon market has been projected to grow from $11.6 billion in 2021 to $13.66 billion in 2027, showing a CAGR of 2.56%.

GSM recorded the lowest net income since the beginning of 2022. Net income dropped 47% (QoQ) which represented a $53.6 million decline from $151.2 million recorded in Q1 2022. The company is still reeling from high energy costs in China that may challenge production in 2023.

Bottom Line

Ferroglobe's financial condition is still strong with $237 million in total cash, giving the company flexibility in business management. Despite rising costs of raw materials and production expenses, it was able to report a healthy EBITDA into 2023. I am expecting to see an increase in production volume especially for silicon after the restarting of the Polokwane facility as well as joint agreements that will ramp up production. While the company faces, macroeconomic headwinds in relation to metal prices, I still feel that the stock presents a buying opportunity. It is trading 27% above the 52-week price of $3.64 indicating it is in the bottom range.

For further details see: