2023-03-10 10:30:00 ET
Summary
- Eramet is a French company producing manganese and nickel, while constructing a lithium project.
- 2022 was a great year, 2023 will definitely be worse.
- Based on the company's own EBITDA guidance, the EPS should come in around 19 EUR, which means Eramet is trading at just over 5x earnings.
- At an even lower EBITDA of 1B EUR, the EPS should still exceed 15 EUR for an earnings multiple below 7.
- The new lithium project should start producing in 2024. At a LCE price of $20,000/t this project will add $180M to the annual EBITDA and over 100M EUR to the free cash flow.
Introduction
Eramet ( ERMAF ) ( ERMAY ) is a French company focusing on mining and commodities. The company currently focuses on the production of manganese ore and nickel ore as well as mineral sands. As 2022 was a good year for commodities, Eramet performed very well, but the market should expect a substantial double-digit EBITDA decrease this year as the commodity prices are cooling down. But I am turning bullish on the company as it is in full construction mode on a lithium project in Argentina where a Chinese partner is funding the majority of the capex.
Eramet’s primary listing is in Paris where the stock is trading with ERA as ticker symbol . The average daily volume exceeds 70,000 shares per day. The market capitalization of Eramet is approximately 2.95B EUR based on the current share price of just over 100 EUR per share and the current share count of approximately 28.8M shares.
2022 was great but 2023 will be much weaker
I will be relatively brief when I discuss the company’s mining projects as Eramet is doing an excellent job in providing plenty of information on its website. Its FY 2022 results presentation for instance contains 79 slides and I strongly recommend reading through that presentation. I will focus on Eramet’s performance in 2022 and what this means for 2023.
The company reported a total revenue of just over 5B EUR, which resulted in an EBITDA of 1.55B EUR. The adjusted EBITDA was actually 1.9B EUR as Eramet is working towards selling two loss-making divisions which weighed on the result. You can also very clearly see that in the income statement below: the net income from continuing operations was 930M EUR but the discontinued operations generated a loss of 156M EUR resulting in a net income of ‘just’ 774M EUR of which 740M EUR was attributable to the shareholders of Eramet. This worked out to 25.81 EUR per share which indeed means the company is trading at less than 4 times the 2022 earnings.
It's also very important to keep an eye on the cash flow as mining and commodities are a capital intensive business. The cash flow statement below starts with the reported EBITDA of 1.55B EUR resulting in an operating cash flow of 1.23B EUR before changes in the working capital position. After deducting the 26M EUR in lease payments, the operating cash flow was approximately 1.2B EUR.
We also clearly see the capex was ‘just’ 530M EUR (including growth investments). This means the underlying free cash flow was approximately 670M EUR of which approximately 650M EUR was attributable to Eramet. A brilliant result, but this was still somewhat hidden by the 236M EUR cash outflow related to the discontinued activities.
As both the A&D and Erasteel divisions will be sold, we need to have a look at the expectations for 2023 and fortunately Eramet has provided a pretty clear guidance. It expects the adjusted EBITDA to shrink from 1.9B EUR to 1.2B EUR (2022 really was a banner year for the company)
This now allows you to calculate the expected profit for this year. We know the EBITDA will be around 1.2B EUR (of course subject to changing commodity prices, but for simplicity sake let’s now just use the company’s official guidance) and the current depreciation expenses are approximately 271M EUR. If I would use 300M EUR for depreciation and subsequently 100M EUR for interest expenses, the pre-tax income will be approximately 800M EUR and the net income will be approximately 550M EUR after taking the non-controlling interests into account. Divided over 28.8M shares this still represents an EPS of approximately 19 EUR per share. The reported free cash flow will obviously be lower given the 600M EUR capex budget, but keep in mind the sustaining capex is almost equal to the depreciation and amortization expenses.
It will also be interesting to see if/how Eramet starts to refinance its existing debt. It is one of the few companies that actually has a shot at decreasing its cost of debt as the existing bonds are trading above par. The 4.196% 2024 bond trades just over 100% while the 5.875% bond maturing in 2024 trades at in excess of 102% for a YTM of less than 5%. And considering the balance sheet now contains almost 1.7B EUR in cash and financial assets I would expect Eramet to start repaying its debt when it is due rather than issuing new debt to refinance the existing bonds. But this will only kick in from 2024 on and will not impact the 2023 interest expenses yet. The sole potential benefit would be to see Eramet generating an interest income on its cash pile.
The development of the Centenario lithium project is ongoing
So while Eramet appears to be relatively attractively priced, there is one reason why Eramet has jumped higher on my priority list. The company started the construction phase of its 50.1% owned lithium project . Long-term partner Tshingshan with whom Eramet already has an active joint venture on a nickel asset, owns 49.9% of the asset.
The financing structure of the deal is favorable to Eramet. The projected capex was $550M and Tshingshan will fund approximately $450M of this, which means Eramet is really only investing $100M for its 50% stake which should result in an annual lithium production of 12,000 tonnes per year (the total project will produce 24,000 tonnes per year ). At the current lithium price of approximately $60,000/tonne and rounding up the anticipated production cost from $3,500/t to $5,000/t these 12,000 tonnes of lithium carbonate could bring in $660M in annual EBITDA. Not bad for a $100M investment. That being said, I do expect the total capex to come in higher than the $550M budgeted at the start of the construction so I’m not holding my breath Eramet will only have to invest $100M. The final number will likely be closer to $150-175M.
But of course it would be plain wrong to use the current spot price after a massive bull run. But even using the long-term consensus price of $17,800/t, the attributable EBITDA would be around $150M per year. And in an even more conservative case using an opex of $5,000/t and a sales price of $15,000/t, the EBITDA contribution would still be around $120M per year. And given the demand for lithium both partners are already designing a plan to triple the production. There are no economics available just yet but I would estimate an expansion to triple the output will probably cost $800M, and that’s fine. Eramet’s pro rata share would be $400M and assuming an operating margin of $10,000/t, the incremental EBITDA would be in excess of $200M per year. Meanwhile, Eramet can clearly self-fund that capex.
It’s not the only growth investment that’s in the works as Eramet is also partnering with BASF ( BASFY ) ( BFFAF ) to explore some options for the nickel and cobalt potential by processing ore from the Indonesian Weda Bay project.
Investment thesis
Eramet is in an interesting spot. Let’s forget about the spectacular results in 2022 as 2023 likely won’t get anywhere close to the profit and free cash flow generated last year. But if this year’s EBITDA indeed comes in around 1.2B EUR, I would expect the net income to come in pretty close to 20 EUR per share. Meanwhile the lithium project, which will contribute about $180M to the EBITDA (and likely north of $100M to the free cash flow) at a price of $20,000/t provides additional diversification and could put Eramet on the map as a dedicated battery metals company as it will produce nickel, lithium, manganese and perhaps also cobalt later this decade.
The downside is that Eramet’s properties are in Tier-2 and Tier-3 mining jurisdictions (Gabon, Senegal, Indonesia) so the stock will likely always trade at a discount but even if you’d require a 13% free cash flow yield to compensate for the risk, the stock should still be trading close to 150 EUR per share for an upside potential of 40-45%.
For further details see:
Eramet: A One-Stop Shop For Lithium And Battery Metals Exposure