Ferroglobe PLC: Market Tailwind Offers Buying Opportunity (NASDAQ:GSM)

Ferroglobe PLC stock price for silicon and specialty metals manufacturer (Nasdaq:GSM) by 24.42% (YoY). The company’s results for the third quarter of 2022 were impacted by slow demand headwinds and volatility in energy prices. European aluminum producers have cut production through 2023 due to unsustainable energy prices while specialty grades of silicon continued its positive contribution in the quarter.

thesis

Despite a 29% decline in revenue (QoQ), Ferroglobe expects operating EBITDA to reach $225 million by 2024 through its turnaround plan. The company is set to enter into joint development agreements with major silicon and carbon composites producers and electric vehicle (EV) manufacturers across the value chain. In addition, Ferroglobe announced the restart of its Polokwane facility in South Africa, a move that will increase silicon production while keeping its working capital at 21% (annual) to sales.

summary

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

The decline in metals prices in the first quarter resulted in the company reporting relatively weak financial results. As noted, Q3 2022 revenue decreased 29.5% (QoQ) to $593.2M, while adjusted EBITDA decreased 38.9% (QoQ) to $185.3M. GSM net profit also fell 46.6% (QoQ) to $98.8m down from $185.1m with EPS down 46.9% (QoQ) to $0.52m. The total cash balance also decreased by 22.7% (QoQ) to $236.8 million while maintaining its net debt at $194 million.

It was a challenging quarter as higher raw material costs negatively impacted the company’s margins, including revenue from its dominant silicon segment. Total revenue decreased 26% (QoQ) to $264 million, with volumes down 20% (QoQ) to 50,545 metric tons. As an investor, I am excited that the GSM Board of Directors has approved a new medium-to-long-term development strategy. The company intends to increase 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. The company will see its silicon metallurgical capacity increase by an additional 50,000 tons.

New strategy

About 35,000 tons of South Africa’s 50,000 tons will be produced in 2023, GSM CEO Javier Madrid said on our Q3 2022 earnings call. We’re 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 as it will help add capacity at a lower cost. Furthermore, South Africa is strategically positioned as a technology hub in Africa with the ability to serve clients in Europe, the Middle East and Asia. With initial production set at 1,150 metric tons, GSM plans to accelerate it to a minimum monthly production of 3,750 metric tons by the second quarter of 2023.

Overall, GSM has an opportunity to improve and build an efficient asset footprint keeping in mind that it affects the semiconductor industry. Research indicates that semiconductors Market It will become a trillion dollar industry by 2030 with a compound annual growth rate of 7%. Most of this growth will be attributed to the advancement of automobiles, data storage and wireless communications that rely primarily on metals.

Stronger balance sheet

GSM enters 2023 with an enhanced liquidity mindset. The company settled net debt for the quarter at $194 million, with total current assets at $1.2 billion (including cash) and total assets at $1.86 billion. This greatly exceeds the total liabilities, which amount to $1.16 billion. In its Q3 2022 earnings call, GSM indicated that it had redeemed 9% of its senior notes (due in 2025) that were completed earlier in July 2022. This downgrade reduced its total adjusted debt by as much as 60%. Million dollars. Earlier in the second quarter of 2022, GSM announced the purchase of $19 million of its principal notes on the open market, bringing the total notes purchased to $79 million.

The debt reduction increased working capital by $30 million, or 4.4% (QoQ), to $717.3 million. GSM attributed the increase in working capital to inventory growth of $108.6 million. Receivables also decreased by $84.9 million, which partially offset inventory growth.

We should also appreciate that while revenue was down 29.4% (QoQ), it was up 38.2% (YoY). GSM network working capital relative to total revenue increased by 30.2% (QoQ) compared to 20.4% in Q2 2022. The company managed to stabilize its costs with operating income growing over 1230% (YoY) despite declining by 41.8% % (Quarterly) . In addition, GSM’s adjusted EBITDA of $185 million was the third-largest record since its inception in 2015 although it was down 39% (QoQ). This result demonstrates the significant impact of the strategic plan implemented since 2020.

Strategic partnerships

GSM announce Memorandum of Understanding with REC Silicon (OTCPK: RNWEF) in the second quarter of 2022. Under this agreement, GSM has committed to leverage its asset base in the United States to supply silicon metal to RNWEF to help create a solar-based supply that is traceable and has a low carbon footprint. The goal of this relationship is for both companies to benefit from a solar energy supply chain that uses silicon metal (including polysilicon) and fully assembled solar modules.

Back in August 2022, the US Senate passed Senator Jon Ossoff’s legislation to increase solar energy production, a move that allows clean energy incentives for related companies.

Later in the third quarter of 2022, Ferroglobe stepped up and announced another MOU with Trinseo PLC (TSE) for co-development of high-silicon anode solutions for electric vehicle (EVs) batteries. At the same time, General Motors (GM) and OneD Battery Sciences, too announce Their collaboration in October 2022 to develop low-cost batteries. These batteries will use OneD’s silicon nanotechnology inside Ultium (made of lithium) battery cells by GM. Silicon can understandably increase the energy density of lithium-ion batteries and thus reduce cost and recharge time.

Thus the use of silicon will help battery developers to increase their production volume. It has also been studied that silicon has “twice the energy density of graphite, which is often used in lithium-ion batteries.” With all of the above conventions, it’s clear that companies are ramping up their marketing of silicon anodes in electric vehicle batteries. The expectation here is that silicon will form a key component in the green energy transition, not only in batteries but also in solar energy.

Risks

GSM reported that the average selling price, particularly for silicon ingots, decreased by 10.8% (QoQ). Metal volumes were also down 15.1% (QoQ) as demand for Ferrosilicon declined due to a slowdown in the sector.

Demand is likely to remain subdued in the first half of 2022 due to weak market conditions and Russia’s ongoing invasion of Ukraine. However, the global market for ferrosilicon was projected From $11.6 billion in 2021 to $13.66 billion in 2027, showing a compound annual growth rate of 2.56%.

GSM recorded the lowest net income since the beginning of 2022. Net income decreased by 47% (QoQ) which is a decrease of $53.6M from the $151.2M reported in Q1 2022. The company continues to suffer an uptick Energy costs in China that may challenge production in China. 2023.

minimum

Ferroglobe’s financial position remains strong with cash totaling $237 million, which gives the company flexibility in running the business. Despite higher raw material costs and production expenses, I was able to report healthy EBITDA by 2023. I expect to see increased production volume especially for silicon after the restart of the Polokwane facility as well as joint agreements that will increase production. While the company faces macroeconomic headwinds in terms of metals prices, I still feel the stock is a buying opportunity. It is trading 27% above the 52-week price of $3.64 indicating that it is in the lower band.

Editor’s note: This article discusses one or more securities that are not traded on a major US stock exchange. Please be aware of the risks associated with these stocks.