GSM - Ferroglobe: Strong Quarter In Soft Market

2023-11-08 13:41:45 ET

Summary

• Solid numbers despite soft macro environment.
• Balance sheet in great shape even with late year inventory build.
• Potential for return of capital once bonds are refinanced/retired.

Ferroglobe Q3 Update:

Ferroglobe ( GSM ) reported a strong quarter yesterday. Revenue came in at $416.8 million, down 9% from Q2 but beating the $390mm estimate. EBITDA was $104.5 million, down 1% compared to Q2, but better than the $78 million estimate. EPS came in at $0.27 vs $0.30 in Q2, but better than the $0.18 estimate. Estimates are to be taken with a grain of salt as there aren't many people publishing on this name.

EBITDA strength was driven by Silicon Metal (80% of EBITDA) and Manganese Alloy. Silicon metal EBITDA came from higher volumes despite lower pricing. Manganese was due to better power pricing in France which offset bad volumes and pricing.

The company reiterated EBITDA guidance of $270-$300 million. Messaging isn't great with this company, a complaint I've had about them before. I think this is less than great guidance is largely due to muted silicon metal demand.

Cash flow was negative mostly due to an increase in inventory that will continue through Q4 in anticipation of a shutdown of the French manganese facility during Q1. The shutdown is part of the power price management the company engages in. These working capital issues will reverse in Q1 and Q2.

Cash is still very firm at $166 million and debt is only $233 million. I imagine a decent Q4 and Q1 plus a working capital release would finally allow the company to get rid of the bonds that have restricted payment covenants.

The company also announced a purchase of a quartz mine in South Carolina last week. That deal will give it feedstock for high quality silicon metal to be used in photovoltaic solar and EV battery applications. The solar market is pretty soft right now as I've discussed in my short write ups for SunPower ( SPWR ) and Maxeon ( MAXN ). The company believes the market will recover. My guess is that will have to come from the EV battery side as I think solar could take some time, and maybe never in the residential market. Utility scale solar is a different story, though. I don't know what the mix of silicon metal comes from utility scale solar versus residential. Fortunately, EV battery demand is firmly growing.

Valuation:

Even with a soft macro environment, valuation remains ridiculously cheap on all metrics, EV/EBITDA, FCF yield and P/E.

Risks:

The main risks to the company are pricing and volume on the revenue and power prices on the cost side. Pricing and volume can remain soft due to the solar industry's headwinds (mainly interest rates), at least until EV battery volume grows enough to offset solar. Power costs are less of an issue thanks to power purchase agreements in Spain and France. Balance sheet deleveraging significantly derisks the business in my opinion.

Conclusion:

The company generates steady cash flows even in a soft operating environment. The balance sheet is in good shape with around $100 million tied up in excess working capital. The restrictive payments covenant will go away once the 9.375% bonds are finally retired, enabling return of capital to shareholders, although the company runs its balance sheet VERY conservatively so capital returns to shareholders might not come until the bonds are retired AND significant net cash has built. I like the name and continue to own it although catalysts to drive it materially higher might not come until capital returns are clear.

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