Ferroglobe Stock: Unearthing Profits In The Silicon Sphere (NASDAQ:GSM)

Jul 23, 2023

RHJ

This article provides an in-depth analysis of Ferroglobe PLC (NASDAQ:GSM), a global producer of silicon metal and alloys. Despite market volatility and a decrease in Q1 2023 sales, the company's strategic initiatives and strong financial health, marked by significant debt reduction and robust gross margins, make it an attractive investment. While currently trading at $5.00 per share, we believe it is undervalued and presents a buying opportunity with a target share price of $6.50 (30% gain).

Ferroglobe PLC is a leading producer of silicon metal, silicon-based alloys, and manganese-based alloys, which are key inputs in a variety of applications and industries including solar, automotive, consumer products, construction, and energy. The company operates out of various countries across the globe, including the USA, South Africa, France, Canada, and others

Typical applications of these metals and alloys:

Silicon Metal: Silicon metal is a key ingredient in many industrial and consumer products. It is used in the production of aluminum alloys, which are used in the automotive and aerospace industries due to their light weight and high strength. Silicon metal is also used in the production of silicones, which are used in a wide range of applications including sealants, adhesives, lubricants, medical applications, and in the production of cosmetics and personal care products. Additionally, high-purity silicon metal is used in the production of semiconductors and solar cells.

Silicon-Based Alloys: Silicon-based alloys, such as ferrosilicon, are primarily used in the steel industry to deoxidize steel and improve its strength and durability. These alloys are also used in the production of cast iron for improved resistance to wear and oxidation. Silicon-based alloys are also used in the production of silicon steel, which is used in transformers and electric motors due to its superior magnetic properties.

Manganese-Based Alloys: Manganese-based alloys, such as ferromanganese and silicomanganese, are primarily used in the steel industry. Manganese is an essential component in steel production, where it is used as a deoxidizer and desulfurizer. Manganese-based alloys help to improve the strength, toughness, stiffness, hardness, wear resistance, and hardenability of steel. These alloys are also used in the production of aluminum alloys, where they improve the resistance to corrosion.

Ferroglobe's Q1 2023 sales were reported at $401 million, a decrease from Q4 2022's $448 million. The sales were distributed across various product categories: Silicon Metal ($161 million), Silicon Alloys ($137 million), Manganese Alloys ($62 million), and Other Business ($41 million).

The company's Silicon Metal sales were down due to a shutdown in France as a result of their French energy agreement. However, they expect volumes to increase significantly as France resumes operations and new incremental sales to Asia and the Middle East are realized.

Silicon Alloys volumes increased by 23.2% quarter-over-quarter due to steel manufacturers restarting capacity and growth in electrical steel. However, the average realized selling prices declined by 13.4% due to a change in the product mix and the lag in the index price, primarily in the US.

The Manganese Alloys segment was impacted by lower energy and CO2 compensation, and the company expressed caution due to weak fundamentals in construction.

While production is ramping back up under more definitive energy agreements, Ferroglobe is still in a challenging market, with Silicon and Manganese Alloys' prices slow to rise in the current economic conditions.

Ferroglobe, in its Q1 2023 earnings presentation, highlighted a significant reduction in its gross debt, driven by strong operating and free cash flow. The company continued its debt reduction strategy with an additional $26 million buyback of its 9 3/8% Senior Notes and a partial repayment of $17 million of a Spanish Government loan. This in addition to their strong free cash flow led to a net debt reduction of $72 million, resulting from the cash generated in the quarter. The company stated that they are aiming for a positive net cash position in the next couple of quarters.

In line with this, Ferroglobe recently announced the redemption of $150 million of its 9.375% senior secured notes due 2025. While this doesn't impact their net debt, it does save them significantly in finance expenses, with $3.5 Million in interest savings per quarter. This move brings net debt to less than $250 million, which is only 2X 1Q23 Free cash flow. The company's financial strategy and recent actions demonstrate a strong commitment to reducing its debt and improving its financial health, positioning it well for future growth and investor return.

In addition to this, rising geopolitical tensions between China and the rest of the world are rewarding GSM because of their ability to provide high purity silicon metals outside of China. In addition to this, Silicon metal is beginning to replace graphite in electric vehicle batteries, and this trend is expected to continue.

While the company's earnings declined from $448 Million last quarter to $401 Million in 1Q23 their net income rose to $25 million for the quarter.

Ferroglobe

With debt dropping dramatically due to the $150 Million note-buyback we expect Q3 23 to have a much higher net cash flow than Q2 23 due to the timing of the buybacks. This increase in net cash flow and in turn free cash flow will allow GSM's management the ability to start returning cash to investors. While the overall commodity market is on shakey ground due to economic uncertainties. GSM's balance sheet positioning and Free Cash Flow should allow them to weather the storm and the increase in production from France and Spain should also allow more top line growth

Ferroglobe PLC has several potential risks. These include operational challenges such as integrating acquired properties, managing foreign operations, and dealing with changes in technology. Regulatory changes, fluctuations in credit markets, and currency exchange rates due to international operations also pose risks.

The company is also exposed to market volatility, as evidenced by a 4.5% decrease in average selling prices and a 5.8% decrease in volume across core products in Q1 2023. These risks, ranging from operational to market and regulatory, could impact Ferroglobe's future operations and financial stability. Effective management of these risks is crucial for the company's continued growth.

Finbox

The steady Gross Margins of Ferroglobe PLC underscore the company's adeptness in managing its operations amidst the volatility of the market. Despite a 10% quarter-over-quarter decrease in revenue, GSM has demonstrated its ability to effectively control costs and maintain high gross margins. This is a testament to their operational efficiency and cost management strategies.

Finbox

Moreover, it's noteworthy that while revenues have seen a significant decline of over 50% since June 2022, the company has been successful in improving its Operating Cash Flow Margin. This indicates that GSM is generating more cash from its operations than it is spending, a positive sign of financial health and operational efficiency.

In terms of valuation, GSM is currently priced at an Enterprise Value (EV) to Sales ratio of 0.46 and a Price to Earnings (P/E) ratio of 2.21. These metrics suggest that the stock is undervalued. Even when considering the uncertainty surrounding commodity prices, the stock appears to offer significant upside potential. This could make it an attractive investment opportunity for those willing to navigate the risks associated with the commodity market.

In my view, the current market apprehension surrounding the fluctuation in Silicon Metal prices has led to an overestimation of risk in Ferroglobe's stock valuation. This perspective overlooks the fact that Ferroglobe is a profitable mining company with minimal debt, operating in a sector that is riding the wave of sustainable and green technologies.

Ferroglobe's financial performance history is marked by consistently high gross margins, a testament to their operational efficiency and cost management strategies. Recently, the company has also demonstrated an improvement in its operating cash flow, a key indicator of a business's health and its ability to generate more cash than it spends on operations. This is a clear sign of Ferroglobe's maturity as a business.

Moreover, Ferroglobe's recent efforts to reduce its debt load are noteworthy. By decreasing its financial obligations, the company is poised to unlock even more free cash flow. This financial maneuvering not only strengthens the company's balance sheet but also provides it with more resources to invest in growth opportunities or return to shareholders.

The combination of limited debt, robust gross profit, and seasoned management makes Ferroglobe an attractive investment. In my assessment, the stock is a buy at any price below $6.50. While I anticipate some degree of volatility in the short to medium term due to market dynamics, I am confident in Ferroglobe's ability to navigate these challenges effectively.

In conclusion, despite the current market uncertainty, Ferroglobe's strong financials and strategic positioning in the green sector present a compelling investment case. It's a reminder that sometimes, market volatility can create buying opportunities for discerning investors.

This article was written by

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GSM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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