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The share price of silicone and specialty metal producer Ferroglobe PLC (NASDAQ:GSM) has decreased by 24.42% (Y/Y). The company’s Q3 2022 results were impacted by slow headwinds in demand and volatility in energy prices. Aluminum producers in Europe curtailed production until 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 manufacturers and electric vehicle (EV) manufacturers across the value chain. In addition, Ferroglobe announced a restart of its Polokwane facility in South Africa, a move that will boost silicon production while keeping its working capital at 21% (YoY) to sales.
Overview
GSM was founded in 2015 and is headquartered 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 and other casting metals.
Falling metal prices in the quarter caused the company to report relatively weak financial results. As noted, Q3 2022 revenue fell 29.5% (QoQ) to $593.2 million, while adjusted EBITDA fell 38.9% (QoQ) to $185.3 million. GSM’s net profit also fell 46.6% (QoQ) to $98.8 million from $185.1 million with EPS falling 46.9% (QoQ) to $0.52. Total cash also fell by 22.7% (QoQ) to $236.8 million, while it maintained its net debt of $194 million.
It was a challenging quarter, as high costs for raw materials negatively affected the company’s margins, including revenue from the dominant silicon segment. Total revenues fell 26% (QoQ) to $264 million, with volume down 20% (QoQ) to 50,545 MT. As an investor, I am excited about GSM’s board approval of a new medium to long-term development strategy. The company intends to increase the industrial production of silicon metal at the Puertollano mine in Spain. This development will also extend to the planned restart of the Polokwane mine in South Africa. It will see the company increase its silicon metal capacity by a further 50,000 tonnes.
New strategy
In its Q3 2022 earnings call, GSM 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 only looking at consumption of working capital, but a strategy to balance production and demand. I consider the decision to restart the Polokwane facility crucial as it will help add low-cost capacity. Furthermore, South Africa is strategically positioned as a technology hub in Africa with the ability to serve customers in Europe, the Middle East and Asia. With 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 given its impact on the semiconductor industry. Research shows 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 advances in automotive, data storage and wireless communications, which primarily depend on metals.
Stronger balance
GSM enters 2023 with a strengthened liquidity mindset. The company stabilized its quarterly net debt of $194 million, with total current assets of $1.2 billion (including cash) and total assets of $1.86 billion. This largely offsets total liabilities of $1.16 billion. In its Q3 2022 earnings call, GSM indicated that it had redeemed 9% of its super senior notes (due 2025) that had previously closed in July 2022. This deleveraging lowered its adjusted gross debt by up to $60 million. Earlier in Q2 2022, GSM had announced the purchase of $19 million of its senior notes in the open market, bringing the total number of senior notes 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 receivable also decreased by $84.9 million, partially offsetting growth in inventories.
We also have to understand that while revenue was down 29.4% (QoQ), it was up 38.2% (YoY). GSM’s working capital to total revenue has increased by 30.2% (QoQ) compared to 20.4% in Q2 2022. The company managed to stabilize its costs with operating income growing more than 1230% (YoY) despite a decrease of 41.8% (QoQ) . Additionally, GSM’s adjusted EBITDA of $185 million was the third-highest on record since 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 leverage its US asset base to supply its silicon metal to RNWEF to help establish a traceable solar-based supply with a low carbon footprint. The goal of this relationship is for both companies to benefit from the solar energy supply chain that uses silicon metal (including polysilicon) and fully assembled solar modules.
Back in August 2022, the US Senate passed Senator John Ossoff’s legislation to increase the production of solar energy, a move that allows related companies incentives for clean energy.
Later in Q3 2022, Ferroglobe stepped up and announced another MOU with Trinseo PLC (TSE) to jointly develop high-silicon anode solutions for electric vehicle (EV) batteries. At the same time, General Motors (GM) and OneD Battery Sciences as well 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 from lithium) by GM. Silicon as understood can increase the energy density in lithium-ion batteries, thereby reducing both costs and recharge duration.
Thus, using silicon would help battery developers scale their production volume. It has also been studied that silicon has “twice the energy density found in graphite, which is mostly used in lithium-ion batteries.” With all the aforementioned deals, it is clear 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 only in batteries but also in solar energy
Risks
GSM recorded that its average selling price, particularly for silicon-based alloys, fell 10.8% (QoQ). The volume of the metal also fell by 15.1% (QoQ), with demand for ferrosilicon falling due to the slowdown in the sector.
Ferro globe
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 fell 47% (QoQ), representing a decline of $53.6 million from $151.2 million recorded in Q1 2022. The company is still reeling under high energy costs in China, which may challenge production in 2023.
Bottom line
Ferroglobe’s financial position remains strong with $237 million in total cash, giving the company flexibility in business management. Despite increasing costs of raw materials and production costs, it was able to report a healthy EBITDA into 2023. I expect to see an increase in production volume especially for silicon after the restart of the Polokwane plant as well as joint agreements that will increase production. Although the company faces macroeconomic headwinds relative to metal prices, I still feel the stock offers a buying opportunity. It is trading 27% above the 52-week price of $3.64, indicating that it is in the bottom range.
Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Be aware of the risks associated with these stocks.
