Yet Another Value Podcast - Grizzly Rock Capital's Kyle Mowery + Mike Holt on secular tailwinds for silicon metal producer $GSM

Episode Date: October 2, 2023

Kyle Mowery and Mike Holt, CFA, Managing Partner / Portfolio Manager and Senior Analyst, respectively, at Grizzly Rock Capital joins the podcast today to discuss their thesis on Ferroglobe PLC (NASDAQ: GSM), a leading producer globally of silicon metal, silicon-based and manganese-based specialty alloys. For more information about Grizzly Rock Capital, please visit: https://www.grizzlyrockcapital.com/ Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:47] Who is Ferroglobe PLC (NASDAQ: GSM) and why are they interesting? [3:39] $GSM valuation [7:52] What Grizzly Rock Capital thinks the market is misunderstanding about $GSM [10:51] Global supply / demand curve for silicon metal in China + IRA demand [17:51] How much of $GSM earnings come from solar currently [20:01] Evaluating $GSM on an asset valuation basis [23:53] Management evaluation and semi-controlling shareholder / long term vision [29:40] Capital allocation strategy [32:52] Inflation Reduction Act (IRA) and solar demand [35:49] Plants coming online in North America and how that affects $GSM [38:38] Outlook on European assets [40:56] Licensing off EV patents and maintenance capex [44:57] How Grizzly Rock Capital looking at 2024 earnings [47:15] Bridging the gap of Grizzly Rock Capital's 2024 expectations vs. $GSM historical performance [53:14] $GSM final thoughts Today's episode is sponsored by: Alphasense This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the #1 rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities, like Smart Synonyms and Sentiment Analysis, provide even deeper industry and company analysis. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As a Yet Another Value Podcast listener, visit https://www.alpha-sense.com/solutions/financial-services/ today to beat FOMO and move faster than the market.

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Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. Hello, and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, would mean a lot if you could rate, subscribe review wherever you're watching or listening to it with me today i'm happy to have on the team from grizzly rock and covese capital kyle maury and mike halt guys how's it going great thanks for having us back yeah thanks for having us hey thanks for coming on happy to have you

guys on for the second time i think the first time was with jake not mike though right so we've got the the same old guy here but a new uh secondary but experienced and or experienced that's right that's it. But before we dive in, let me just remind everyone, nothing on this podcast is investing advice. You know, please go consult a financial advisor. We're going to talk about, you know, a recent price stock, but it is, it files 20 apps. There's all, it's pretty cyclical. So people should just remember, it's not investing advice. Please do your own work and consult a financial advisor. Got out the way, Kyle Mike, the company you want to talk about is Barrow Globe. The ticker is GSM. It is super interesting because the story has changed a lot since, you know, kind of things got

weird in 2019. Things got weirder in 2020. The story's been changing a lot. Maybe the market hasn't picked up on some of the the inflection points here, but I'm rambling. I'll turn it over to you. Kyle, Mike, what is Farraglob and what makes them so interesting? Yeah, so Farrow Globe is a billion dollar market cap business with sort of a sorted history of financial leverage. It was a busted merger, although the merger strategically made sense. The business was over levered. But all those issues, in our opinion, are behind us, and now there are secular tailwinds. So before we dive in too far, they are a producer of silicon metal, which is pretty early on in the supply chain into aluminum, steel, and most importantly, solar panels. You cannot make solar panels without photovoltaic cells, and you need silicon metal to make those.

So it is largely a solar play with a de levered balance sheet. So I know a lot of folks are probably groaning. This one bit a lot of guys. But it's actionable in our opinion. And we just wanted to unpack it here a little bit today. Mike, did you want to add anything on there? Yeah, I mean, I think, you know, what Kyle said is right. And, you know, you think there's a lot of structural changes that have been made to the business that aren't, you know, being recognized.

in the value of the stock at all. And it's kind of a smaller industry that maybe doesn't get a lot of headlines, but has some real interesting demand dynamics going on over the next decade plus. So we're pretty excited about this opportunity. So I guess the first thing, there's so many different places we can go. The company did an analyst day back in May 2022, where they kind of went through the history and some of the exciting stuff. But I guess maybe let's start with people are going to hear.

hey, this is a commodity producer. They're connected to solar. I think we'll talk about China exports and China dumping in a second. But I guess the first thing people are going to ask is, how do you value this company? You know, EBITDA two or three years ago is basically nothing. They're guiding to 270 to 300 million in EBITA. How do you value this company? Where are we in the cycle?

Is this top? Is this bottom? Is this mid cycle? Like, how are you looking at that? Yeah. So we value it on free cash flow on street numbers. the stock with zero financial leverage is trading at about a 23 to 24% free cashful yield on next year's numbers. Next year, we Grizzly Rock are in around 375 on EBAA. We think that's largely

mid-cycle. We think, you know, bottom of the cycle is probably in the 200-ish range. The reason is they've done 200 million of cost cuts here. And then in 21, they had over 8,000. hundred million of EBITDA. So yes, highly cyclical, which is why the business should not have financial leverage, which it does not. But yeah, that mid-cycle number, which, you know, our number is 375, but we actually think that number goes far higher with the solar growth based on the inflation reduction act. So we can get into that in a little bit. And Mike, I'll just also see you that Kyle mentioned on levered. And I think the two things there are, A, if you look at the balance sheet, they do have debt on the balance sheet. So people might

look at that and say, what do you mean unlevered? And then the second thing that kind of struck me is if you go back to 2019 and 2020, like this was a business, not that it was wildly over levered. I think it might have been on the heels of the merger in 2015. It wasn't wildly over the levered, but it definitely had leverage. And one of the things that struck me is they, you know, not to spoil the plot, but they brought down leverage a lot. So maybe we can talk about unlevered balance sheet, how they got their leverage down. And maybe later in the conversation, we'll talk about capital allocation going forward. Yeah. So when you look at this business, you know, in 2019, it was near bankruptcy. I mean, the results were pretty horrible and that largely stemmed from, you know, not properly executing the merger. There was so much low-hanging fruit on these combined businesses. And so when you look at these businesses, you know, scale makes a ton of sense. Having a global asset footprint makes a ton of sense. But, you know, they didn't have things like simplistically, you know, centralized buying. They didn't share best practice.

you know, across their facilities, you know, you had kind of a culture clash with the U.S.-based assets, historically globe specialty metals and the private European assets for Atlantica. So there was a lot of culture clash and issues that weren't addressed. The new management team, CEO Marco Levy, came in in January of 2020, brought in Bain to do a big look at their cost structure, brought a lot of his guys in from his past at Dow, guys that have a lot of experience in and operations. and businesses like this, and they were able to identify a massive amount of cost cuts. You know, since then, they've executed on those cost cuts,

and it also coincided with a period of rising silicon metal pricing. And so you can kind of see, you know, from 2020 to 2021 to 2022, as these contracts reset, as these cost cuts flowed through, they were able to generate an incredible amount of free cash flow to effectively deliver the balance sheet. So when you look at the balance sheet now, you know, we think they flip to net cash this quarter. They're working on kind of the optimal capital structure. They've historically called out a $200 million of gross debt.

You know, that may come lower just given the current rate environment and the financing markets for metals and mining's businesses. But effectively, they're going to run from now forward as a completely unlevered company, net cash positive. And we think with that becomes a lot of capital returns to shareholders. And just to defend myself, I said they weren't widely over levered. Like at the end of 2019, they had $400 million in net debt, which I think Kyle kind of said, hey, maybe Trow EBITA approaches $200 million. Like, yes, there's real capbacks here and stuff. But that's not a wild amount of leverage.

The issue was at the end of 2019, like the business results were awful. And when you have awful business results with a cyclical business in any debt, it's always a problem. So, Kyle, before we dive into a couple of different things, I just want to ask you, you mentioned, you know, sell sides got them at like 20% plus free cash flow next year. You know, the IRA story, it's not like the company shy about telling people, hey, we're going to be a big beneficiary over the IRA. Everybody kind of knows that solar is probably a thing. We'll talk China in a second. But what do you guys, when you look at this business and, you know, people can see what people think the price targets are.

I think you guys have a deck that people can maybe email you or figure out a way to get. We can talk about that later. But when you guys look at the business, what are you? you've seen that you think kind of the street, the market, everyone is misunderstanding that's kind of presenting an alpha opportunity here. Sure. So the first is they absolutely operate in commodity markets. However, they're the number one producer in the U.S. and the number one producer in Europe. And based on the climate related bills, the IRA and the net zero bill in Europe mandates supply chain be domestic, including all the way back to the source of materials.

And so when you have a secular tailwind for solar, it's going to benefit the number one player from a volume perspective. So what we are underwriting is massive increases in the volume for this company, right, because of solar. It's not a play on the price going higher, although we do think the price does go higher as all these solar plays come on. It's really about volume and where are they going to get the volume. It's Faroe Globe. So you're taking it as historically perceived as a commodity business, you know, you've got to steady aluminum and steel, and these are cyclical in markets,

and you're transforming the business to having a secular tail driver of massive, massive volume that has to come from onshore. So where is it going to come from? It's necessarily Farrow Globe. And so the confluence of those events de-emphasizes the commodity aspects of the business of the end markets. Plus, you have the cost cuts, which have been proven out. And you have the capital return and zero financial leverage allows you to have, you know, the operating leverage to the commodity as a positive, right? Does that make sense? It makes total sense.

Let's just, let me dive into that a little clear. So you mentioned a commodity business. Like anyone who's done anything in these companies in anything commodity knows, it's all about supply demand, right? And boom times when demand is higher than supply, prices go up and these guys make money. And bus times when demand is lower than supply, prices go basically to marginal costs. It's awful for everyone. Things get shut. I mean, I guess the two things, the three things I want to ask is, number one, just globally, what does the supply demand curve look like?

Because I do think a lot of capacity came out during COVID. There might be China over capacity. I think China's building a lot. So maybe we can talk about all that. Number two, you mentioned the play on the IRA. So if I'm right in understanding what you're saying, it's, hey, even if we went into a scenario where globally we're oversupplied and the U.S. We're kind of going to be undersupplied because there'll be all this IRA demand and it can only come domestically. And who's that going to benefit?

It's going to benefit anyone in the U.S., they have this advantage position. So you've kind of got that boom cycle there. There was a third point I was going to make, but I actually just threw a ton at you. So let's comment on those. I can refresh you on anything and I'll try to think of my third point. Mike, why don't you hit supply demand in China? Yeah, so the way to think about this market is kind of in two separate segments. So when you think about the non-Chinese consumption and supply, those countries run at a deficit.

So they are importers from China. China is the swing ton historically. What's been interesting, though, is two pieces. you have one, as Kyle mentioned, kind of the onshoreing elements, the criticality of supply chain. So you've seen both the U.S. and Europe apply the critical raw material to silicon metal. So they want to be more focused on domestic production and not importing. So when you look at the U.S., Faroe Glob produces 80% of the production in the U.S. There's a couple other small players that produce the 20% and then the rest is imported from Brazil.

In Europe, Faroe Globe has about 40% of production. Another 30-ish percent comes from a publicly traded company called Elkem, and then it's a bunch of small producers. So when you look at the global supply picture, it's very fragmented outside of China, outside of Farraglob. They are by far the largest player, and they also have the ability to bring on capacity. From a China perspective, China has been focused on less exports of energy. intensive commodities like silicon metal. So what you've seen in recent years is they've been shutting down a lot of production in the inner part of China because it's largely coal-powered.

There's environmental issues. It takes some extra cost to ship it out to the coast and then ship it. And then they're also focusing on their own supply chain, so solar supply chain. So what you've seen is the domestic consumption in China of silicon metal is growing rapidly. And between the capacity that they shut off, they are bringing on some new one, but it's largely offsetting what they're shutting off. The supply picture there is largely staying flat, but their consumption is growing. So you're seeing those tons coming out of China shrink. They've already shrunk by over 200,000 tons over the past three or four years. And it's expected

to decline, you know, 35% over the coming years. So that leaves the rest of the world at a structural shortage of silicon metal, especially when looking at these demand drivers like solar and like battery that could easily double the consumption of silicon metal in the next 10 years. That was perfect. That's perfect. Kyle, I don't know if you want to take it or Mike if you want to take it, but just domestically thinking about the IRA, like, does domestic supply go into structural shortage regardless of what's happening international just because of the IRA?

It depends on what's going on in, say, the automotive market, right? Right now we've got a UAW strike and industrials around and around you go, right? There's always going to be some problems somewhere in the world. So I think the way I think about it from 30,000 feet is the solar growth takes up a ton of demand. We actually have the company and these are our numbers spending a little bit of money to convert some production. from Farrow Silicon, which is iron, iron, you know, general industrial products into solar silicon metal productions. Silicon metal 60% of the EBITDA for the business last year. We think that grows over time a lot higher. You know, we also think they are going to expand capacity

in North America to meet this growing demand. But yes, in the end, the macro does matter here, which quite frankly is one of the reasons why the stock is where it is, even though we're telling you all of these wonderful things, you know, go forward. Why would someone not buy the stock right now? Well, macro, right? If we get a big recession, you know, maybe demand falls a bit regardless of the solar growth, because the solar growth's really going to start picking up into next year, 24 and then 25 and beyond. So while it's absolutely real, the macro does still matter. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete?

According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all.

Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. You know, on macro, the nice thing here is you see this in a lot of places, right?

Like, I think there are a lot of places, I always think back to Bob Robody coming on the podcast and be like, hey, the old economy, like, you know, if you make something, if you've got a chemical plant that, you know, it costs a billion dollars to make over the past seven years, they probably haven't made any more. You're just in structural shortage. And yeah, if we have a recession, things are going lower in the near term. But the nice thing about GSM and a lot of these industrial and commodity players is they've, they've had this boom pricing for the past couple of years. They've paid off all their debt. So yeah, the stock's not going to double in a day. if we go into a big recession, but you know what? It's also not going to go bankrupt. And two years ago, you couldn't say, hey, could this company, and I say this company, not just GSM, a lot of these commodity companies, you couldn't say they could survive a recession. Now you've got, their balance sheets are so strong. Unless we go into a 10-year Great Depression,

they're going to survive, and you'll still get that structural shortage. It'll just be a year, two years, 236 months from now. And with solar, our numbers for 25 are about 30% higher on EBAAs. simply from that. So for the, for the, you know, for the down cycle to take that completely away would be very rare. How much of their earnings is coming from solar currently? So last year is about 14% was going into this market. Our numbers that are in 2026, that number is going to be something

like 50. Okay. So it's going to go up in order of magnitude. It's essentially going to triple. And when it does, that will also lead to an increased perception of the business. So we're not using lofty multiples on this business. I think in our base case, we're using a five, maybe six in the upside case, EVDiba type multiple, free cash flow, you know, it's going to be in the double digits for sure on our intrinsic value. But as the numbers step higher, you don't need multiple expansion to get the stock from, you know, the low fives to, you know, say 15,

in and around a triple is basically coming from free cash flow generation, capital return to shareholders, and, you know, really just getting in gear with what the IRA has asked, you know, the U.S. industrial economy to do. And I'd just add to that, too, you know, when you think about that mix shift, the other important pieces, these contracts are now going to be long term. You know, the solar production and some of these other high value markets require a high-quality courts to meet the product specifications. FaroGlobe is 70% backwards integrated into courts.

They announced they just bought another or working on buying another quartz mine, so that number is going to go up. So when you look at some of these players, they need a specific quality of silicon metal. Faroe Globe is one of the only ones that can meet that at scale. So not only are they going to have a mix shift to solar customers, but these are going to be on long-term contracts. And they talked about this a lot when they brought up their South

Africa plant, you know, those volumes, they only brought it up on a two to three year volume commitments from customers. So, you know, this isn't a company that has any plans to bring on speculative supply. You know, you're going to have to commit to it long term in order for them to increase production. Let me switch to. So look, you've got EBITOM multiples and earnings multiples here, which is great. Ultimately, that's how a business is going to be judged, especially if you've got a structural shortage here. But I just want to ask asset valuation. And the reason I ask this is because at their 2020 Investor Day, they had some really interesting quotes. Like I've got one right here. Our industry has high barriers to entry. It's capital

intensive, technical knowha, blah, blah, blah. Most recent green fields have failed because they have some of these capital intensive elements. You have to survive through the cycle. They couldn't survive. They weren't well placed for logistics. They didn't have access to all to quartz or power that you've talked about. We can talk about European power issues in a second. I just want to ask you know, when I look at GSM and right now, if I've got my model up, I think you're paying about, and it's got an EV of literally roughly a billion dollars. Like it almost perfectly comes out to a billion. So that's nice easy math.

Like, how would you just kind of look at this on an asset valuation basis? If I was like, hey, Kyle, Mike, we're going to go raise a ton of money and we're going to go build out the Faroe Globe, like global footprint. What would that cost to replace? Yeah, I can take this one, Kyle. So when you look at a green field facility, it costs around $350 million to make a 60,000 tonne silicon metal furnace. So Farrell Globe roughly has around just to keep the math, simple, 300,000 tons of production. So just on a replacement cost alone, that gets you to, you know, $1.7, $1.8 billion EV, just on the silicon metal, not including, you know, there are other segments. The other piece that, if you mentioned, you know, a lot of these facilities has failed is silicon metal isn't something that you just go mine, you know.

It takes six tons of raw material to make one ton of silicon metal. So, you know, it's coal, it's electrodes, it's quartz, it's wood chips. So there's not many areas where you can build a plant that are going to be able to source these all at a cost-competitive manner. And then on top of that, Farragold has the vertical integration into the most important raw materials. So, you know, from an asset standpoint, I mean, these are incredibly valuable assets. It takes, you know, three plus years to build and get the permitting for a new plant.

It takes another six to 12 months to get it running at full production. So the supply is very limited from that standpoint. But what's interesting is Farrell Gold has the ability to increase their production by 50% through a couple of ferro-silicon furnace conversions and a few brownfield projects. So when you look at their potential, they could down the road be a 450,000 tonne-silicon metal provider. Again, when you look at that to build a greenfield, 350,000. million for 60,000. That math gets super interesting based on the current EV and giving no credit to their other segments. So I guess if I was just like taking all the numbers, if I said, hey,

replacement value here is probably one and a half billion dollars. And that's not even giving them credit for, you know, a plant that's already built is probably going to be better located than what you and I could source, the permits, the time value of getting everything up. But, you know, ultimately that would all work out. But replacement value is probably $1.5 billion. and you're buying the business for a billion dollars. So even ignoring, you know, the supply demand picture, the IRA, everything, like, you're probably buying it below replacement value. And, you know, when you buy stuff below replacement value, that tends to work out pretty well

unless management, you know, really poops the bed. Yeah, yeah, absolutely. And, you know, they have some really good assets and good cost competitive areas. So that combined with the global footprint. I mean, you can't replicate the global footprint when you're selling to, you know, customers that are global, that really has. helps as well. So, yeah, we think these assets are incredibly value and misunderstood by the market given on the demand that's coming for for Silicon Metal.

Let's talk a little bit. So I'm looking at your deck, weak management, right? A lot of people think of this company and think weak management. They think back to the 2015 merger, poor integration, everything, you know, the company almost goes bankrupt. I think people look at that. The new CEO comes in and I think he's done a pretty nice job. But I do want to talk on management, and particularly there's a controlling shareholder here, right? I think it's Group O VM. They own about 50% of the stock. And, you know, if things have gone really well from 2020 to today, maybe they get credit for that. But if things go really poorly from 2015 to 2019, they probably get credit for that too. So I want to talk about management, particularly the semi-control shareholder because I did get some people who are like, hey, somebody owns 50%? They file a 20F. They bad merger historically. Like, are minority shareholders going to be the ones who actually make money here? Are they going to make money here? Yeah, let me take a step there. So first of all, on management, we are big fans of CEO, Marco Levy. We think from an operating and commercial perspective, he's done an excellent job.

He is definitely not the quote unquote standard U.S. small cap CEO. He prefers to speak softly and let his actions do the talking, which is wonderful, except when it comes to promoting the stock. So that's a separate topic. But in terms of execution, since he's come in, it's been exemplary. And we,

in fact, we thought they were going to cut the guide based on macro on Q2 call. They didn't. They held the guide based on those cost cuts, which was just, again, additional proof that we, even as bulls,

were not giving them credit for because it hadn't been born out yet. And now it is being born out. So we think he's doing an exceptional job With respect to the large shareholder, yes, that's the legacy family that owned the Faro-Atlantica asset. We believe there is alignment there. Now, the negatives in terms of if we needed to, if an activist were to look at this, then they wouldn't be able to do anything. There is, yes, a controlling shareholder.

However, that controlling shareholder has expressed a continued through their chairman. through the executive chairman, expressed a desire for capital return. And capital return aligns us, whether it's share of purchase or dividends. And I think they're going to do both, you know, towards into this year and then picking up as we go forward. I think you're going to do both. So I do think the alignment is there. There's professional management. And I think, you know, this stock was in high teens before and the same shareholder was there.

So we don't see any reason. We don't see any way that capital can sort of go, you know, other than to everyone equitably and radibly. I want to a capital allocation. Go ahead, Mike. Yeah, I was just going to add in, you know, you mentioned, you know, minority shareholders getting screwed and other things. And when we think about, you know, a catalytic path in terms of the stock working,

you know, the company in 2021 had to issue some punitive bonds that they're currently paying off and we'll pay off the rest this fall, those bonds don't allow capital returns to shareholders. So, you know, we think once the company pays those off and lays out a plan, you know, that's going to get a lot of people to take a look at this and realize that they are going to receive a lot of this cash flow. And there's going to be, you know, with the growing demand of Silicon metal, a lot of it to come back to shareholders. We'll talk capital allocation a little more one second, but just one more on Group OBM.

So I think that you send 50%. And then this year's 20F showed that they owned kind of like 43%. So it looks like they sold a decent bit over the past year or so. I'm not sure if I was misreading it or if there was something else going on or something. But just longer term. They're obviously in favor of capital returns. I heard some people say, hey, maybe these guys like need more than capital returns. Do you like, what do you think their plans are longer terms?

They've been in here for almost 10 years at this point, if I'm thinking about it correctly. Are they going to hold this for 30 years? Is this, do they want to sell their stake? Do they want to, because they want to sell their stake? Do they sell the whole company? Do we see a big secondary where the company buys back a lot of stock? Like, how do you think about those dynamics? So it's a really, it's a good question, but it's not a question that we're in a great position to answer, right?

As minority shareholders, we've effectively asked that, especially around the sell down, we kind of said, guys, why are you selling down? And they said, well, we need, we, the family need some money. And this was, you know, most of their other businesses are. private and so this was one area that had liquidity also just math mathematically if they start buying back stock next year their ownership percentage of the business actually would then you know kind of revert back up so in a way it's it's just a timing thing on capital allocation like Mike said they the dividends were not available the working cap on you know flowing through the

bonds are going to get paid off now capital return begins etc so you know longer term Yeah, really don't know. I don't necessarily see this company as a strategically valuable to a large player, right? I mean, they serve a lot of the big global chem guys, like, say, a Dow, right? They're a global supplier to Dow. I don't know that they need to be owned by Dow. So I think my guess is this operates as an independent asset. And, you know, with the global growth in solar and we haven't even gotten to battery yet,

there's there's a battery anode play as well. So there's a lot of growth for this company in the public markets in our view. Yeah. No, that makes total sense. I guess just, you know, A, the pod boys run the world now and when they see a 43% shareholder who's selling down a little bit, I think the first question, a lot of people with a Bloomberg is going to pull out is, hey, am I stepping in front of a secondary or also, hey, it's a 50% owner. They've got the executive chairman. They sold over 10% of their stake in a year. Do they know something that Kyle and Mike don't because Kyle Mike are pointing a rosy picture and the largest shareholder is selling it. I think everything you guys said makes sense. I haven't really dug into

the needs at Group OVM, but I certain, you guys heard it too. It seems like they did want some cash. Capital allocation, I think we've mainly discussed it. You guys talked about the restrictive bonds that they raised in 2021. I think they did an equity rights offering back then, too, if I'm remembering correctly. Is that right? Yeah, they did. Yeah. So 2021, obviously, heals of COVID. Whole globe shut down. They do that. to survive once they pay them off, which is later this year, they've, they're not even hitting. Go read the Q2 call. Go read the 2022 investor day. They've said, we know we need to get capital back. So do you guys think, I think a lot of people think it's going to be small

dividend plus a share repurchase program? Is that kind of what you think? Or how do you all think about that? Yeah. That's, that's what the board or the management has said the board is leaning towards, but they haven't stated that. I do think that a dividend would be wonderful in terms of opening up the shareholder base to other players. I mean, this is, this company is widely underowned, especially in the long only community, especially in the ESG community, because you're the, I mean, I talk to tons of people. You're the first people who, it is commodity lever controlled. So maybe it's not surprising.

You're the first people who've ever mentioned it to me. Yeah. Well, I think, and we actually have a pretty reasonable history in terms of investing in businesses that are transforming into environmentally friendly, you know, at Invest for Kids in 2019 here in Chicago, we presented Darling. Darling now is known to be a renewable diesel player, giant renewable diesel player through their Valero partnership, Diamond Green Diesel. But it, you know, previously it was valued as a has been low margin cyclical renderer. And this is a very similar setup with respect to the business is not the business in the mirror is different than the

business through the windshield because of solar and battery and onshore mandates by politicians and by the way these are fully bipartisan right everyone is behind this the IRA is is is secular you know blue gets decarbonization red gets jobs everyone wins right so largely this is something that's that's that's baked in And it's just not recognized by especially the long, only environmentally sort of focused investors. We think that changes. The company still, on Bloomberg, doesn't even screen as unlevered, even though today it is unlevered, right? And they are going to have capital return, even though today there are some of those bonds that are outstanding that preclude capital return.

So what we're looking at is the next six to nine months, this company is going to screen vastly different than it does today. Let me, there's one thing there you said that I just want to poke on real quick. You mentioned, hey, the IRA by season. And I don't, I don't really disagree with you. You know, obviously there was a fight over getting it passed, but as soon as it passed, as Biden likes to point out, hey, the Republicans love to go to their community and say, look at all these jobs I brought to you, even though they fought tooth and nail, like they voted it down and now they're saying, look at all these jobs.

I don't disagree with you. But I could see, especially this is plugged into solar, right? And I could see if you had a change of administration, like IRA is the law. It'd be tough to overturn, especially with all the jobs and everything. But could you see the, I don't think it breaks the thesis anyway, but could you see the IRA getting changed to the point where, hey, maybe they don't have this kind of U.S. stranglehold that we're kind of hoping for that really gives you the, you know, when you're investing in a condo player, you want a super normal profit cycle where the cash flow is just rolling in and you kind of get 60% of your EV in two years or something. Yeah, well, it's both and maybe I'll start and have my kind of finish. I mean, first of all, by the time we get to 2025, we think the numbers are going to be way higher. By the time a new administration has even sworn in, the numbers have already inflected in the pull through.

You know, the Koreans are building a giant plant down in Georgia. There's another plant going in in the state of Colorado. I mean, these are massive plants. And just physically speaking, these products are measured in tons. They are hard to transport around the globe. And then, as Mike mentioned, the Chinese are largely using their own domestically. So it's a bit of both and. Yes, we think the solar growth is there per the IRA.

We do think it's bipartisan. And it's also hard to feed these factories with foreign source product, even in that sort of environment. Mike, did you know, if the solar demand doesn't pull through in the U.S., you know, when you look at the current market, markets, they're very structurally favored to domestic producers. So the U.S. is at a massive production gap between what they consume and what is supplied domestically. And it's massively tariff protected as well. When you look at tariffs on China, it's over 100%. So I think you can look back in history and look at globe specialty metals when it traded on its own, which was these assets. You know, that was a very highly valued business in the public markets. The average

EBITDA multiple was above eight times because of its consistent through cash generation. So you're looking at a market that even if solar demand doesn't meet our expectations, is that a structural deficit. And you do have some growing drivers as well. When you think about, you know, lightweighting of vehicles, when you think about aerospace and defense, when you think about aluminum beverage cans, you know, a lot of these end markets are still growing. So, you know, we think that market, even without a massive solar inflection, is still

reasonably attractive and the margin of safety is plenty to make this investment. I'm just laughing because I know you guys spend most of your time in industrials. When you say, you know, when it was standalone, it got a pretty great multiple. It was trading for eight times Evida standalone. And, you know, if you and I were looking at anything else, we'd be like, it's a great multiple eight times next year's sales, you know, if we were looking at a tech company or something. Just on supply. So you mentioned the two huge plants coming in in North America.

And look, I've just started researching this. I'm really interested in it, but I've just served research just for my own notification. Like, you've got these two new plants coming in. And Kyle mentioned, hey, this is a business on tons. It's expensive to transport. And that just kind of changed my, what I was thinking when I read the investor day. You know, they talk about Chinese dumping. That doesn't really fit with, hey, these are really expensive to transport.

And the new plants coming online didn't fit with the, hey, most green fields fail because it's really difficult. Can you just kind of help me bridge the gap between those two? Yeah. So I think, you know, in Europe, there isn't the plans coming online. And so that's where a lot of the Chinese tons go. There's no Chinese tons that go into the U.S. And so when you think about the European market, you know, they've made a big emphasis on protecting the domestic silcon metal producers. You've kind of seen it with their French asset and their Spain assets, these long-term favorable energy contracts,

you know, talking about as a critical raw material. And, you know, the rumblings are that they are going to increase tariffs on that to first. protect the pricing. So when we think about the plans coming online, you know, that's a U.S., base plans that are coming online. So those aren't receiving any domestic tons. But when you look at these investments, you know, I think people are looking at the demand that is potentially coming and these projects in the U.S. that are looking to secure their supply chain in advance. You know, you can't build a solar panel without silicon metal. So somebody's going to make an investment. They want to have that silicon metal consumes. So I think, you know,

these aren't speculative tons. It's based on an incredible amount of demand that's being communicated by customers. So, you know, we would love if no supply is coming online, but when you think about the U.S. markets, we still think they'll be at a structural deficit, even if these plants are built, built on time, and are able to compete from a cost standpoint and raw material standpoint. Kyle, did you want to add anything there? Nope, Mike's got it. Quickly, Mike, you mentioned Europe a little bit.

I do just want to mention, you know, everybody remembers since 2022. It seemed like the most important chart in the world was how much European natural gas prices we're trading for. And, you know, if you're going to do anything industrial or commodity, it takes a lot of power, right? And these guys have talked about, hey, one of our advantages, Mike, you mentioned earlier, they have 70% of quartz internal. They also said, hey, I think like 35% of their coal is internally sourced, which is it huge, but it is a decent bit. But one of the issues, they've got Spanish and French assets, electricity prices, power prices go through the roof. These things become, you know, the less than marginal producer. I think Spain gave them like 35 million of really low cost funding to help.

But I just want to ask on the European side, like what's kind of the outlook for the European assets there? Yeah, sure. So from the Spanish assets, you know, those really haven't been running at all. The company has been working to secure a long-term power contract that makes them cost competitive, not only in Europe, but globally. They mentioned on the last call that they have one power agreement that's going to start January 1 of 2024, and they expected the final one for those Spanish assets in the coming months, so I wouldn't be surprised if that's finalized when we're hearing the third quarter earnings calls. The French assets, they are on a three-year agreement that incentivizes them to shut production in one queue during those winter months, and then they get more cost-competitive energy throughout the year.

So they have been doing that. That goes for two more years. They can run the assets if they want, but it's just a question of where pricing is versus the power contracts. So we obviously don't have visibility into what those power prices are, but from what management has said, and we have no reason to not believe them, those put them in a really cost-competitive energy standpoint globally. And I think what they've done and what wasn't done historically is, you know, in periods of weak and market demand, they are shifting production to their lowest cost assets. So, you know, with the Spanish assets offline, they're shifting it to their South African plant,

which is very cost-competitive globally and their U.S. assets. So we think they've done a great job kind of managing that. And I think, you know, when looking at last year's performance and this year's EBIT guide, even with a very tough macro environment in Europe, it kind of shows that they're doing the right things. And numbers have a really good chance to go up as things continue to normalize. Well, two last questions for me. And then I'll give you guys any final thoughts or anything. So on the, I think it was the Q2 call, but, you know, I read a decent bit. Maybe I'm mistaken. They mentioned that they were going to license their EV patents off. And that just was kind of interesting to me because you guys talked about, hey, we don't build in.

they get an ESG like real, obviously built in something for the IRA, but you haven't factored in. They get a real ESG multiple. That's the type of thing that could get really sexy. I don't know how to frame what they make, but what are they going to do with licensing off their EV patents? I guess this would also take us to the battery play if that ever played out as well. Yeah, let me frame it out and then have Mike give you a more detailed answer. So silicon in terms of being a material in the battery, it silicon. If the anode of a lithium ion battery was allowed to use all silicon from a physics, now we're talking physics, it would charge 10 times as fast and take 10 times as much power.

But the problem is silicon metal expands and it cracks. And so these batteries crack and they wear out, they don't work, right? So right now, there are many, many companies all around the world from the biggest names to startups all working on how to get more silicon metal. in the batteries and if and when that does happen that's a boon for the entire industry including uh including ferro globe as a producer but mike do you want to answer the more expand on that and then answer the more specific question on the patents yeah sure so when you look at batteries today you know silicon metal replaces typically three to 10 percent of of graphite um and that technology works and so when you just think of

batteries as a demand driver, you know, the more batteries we create, you know, that's going to be more silicon metal demand. Like I'll mention, you know, all these battery producers, when you think about batteries, the two of the biggest issues are, you know, reducing the charge time and increasing the capability of holding the power, you know, silicon metal cells both of those. So, you know, battery producers throughout the world are making big investments to increase that silicon metal content replacing graphite um you know we we aren't making a big bet on this it's you know above our pay grade in terms of technology but you know we wouldn't be surprised to continue to see that percentage increased over time and the other key point of this is uh this is one of the products

that requires a very specific quality courts to meet uh what what these battery producers need so Faraglobe being vertically integrated into that high-quality courts is one of the few players that can meet these tons. So they're partnering with a lot of battery producers. They are shipping some volumes into these projects today. When you think about that markets, you know, they've kind of outlined, you know, 200,000-ish tons, you know, in the coming years of silicon metal demand that could come from that. And then more over time as that percentage of graphite is replaced by silicon metals. So it's another super interesting, you know, in our opinion call option that that's not being priced in whatsoever to the stock. And we'll see how it plays out. But they're pretty

excited about it as well. What do you think maintenance CAPEX this year? Around 75 million, we think would be plenty to sustain the asset base. And, you know, in terms of growth CAPEX, we think they could expand silicon metal capacity by 50%, you know, with only $80 to $100-ish million. So when you think about the cash generation, you know, they can grow and return a lot of capital with no issues there. But if I just take your $75 million of maintenance capax, like the low end of EBITDA guide is $275 for this, it's $270, but let's call it $275 for this year. That's $200 million in unlevered cash flow. Obviously there's some interest expense, there's some tax expense. But again, it's a billion-dollar company.

So you're talking about a 20% unlevered free cash flow number. And that takes us nicely. And we haven't given credit for any of the growth option or anything. But that does take us nicely into, I just want to end by talking about the 2024 outlook, right? Because it struck me on the Q2 call. Here's two quotes. Markets extremely challenging at the moment. We expect to see better conditions next year.

Optimism for 2024. Excess inventory is depleted. Supply demand balance for our products are improving. Obviously, the full. IRA won't have flown through there, but just if people are, you know, pod shop through all the world, 2004 is going to be what's on most people's minds when they look at this. And if we don't go into a huge recession, if we, you know, the plane doesn't crash, how are you guys thinking about 2024 earnings when people are kind of thinking about a 12 or

18 month outlook? Mike, do you want to start or maybe? Yeah, I can go. So, you know, when we think about the step up, part of the step up to our 24 number is just these Spanish assets coming online. and these power contracts coming through. And so just based on that, which we kind of consider a mid-cycle earnings number, we think the company can do $375 million of EBITDA.

You know, over time, we think that goes up. But, you know, barring any material recession, we think that's a very doable number based on the cost reductions and kind of what they've shown this year, you know, even if the economy gets far worse, we still think they're going to be a cash generator, obviously not to the level of what we're currently expecting. But yeah, I mean, we're, you've seen kind of the Chinese silicon metal prices, bottom out and start to uptick, you know, Europe kind of tracks typically those Chinese prices. So we, there you are seeing some kind of normalization and in demand and end markets. And, you know, if, if the economy holds in, we, we think there will be a nice step up.

Did you want anything to that, Kyle? No, look. I mean, so we're bracketed. There's two, there's two sell side shops, Frily and Seaport. The Seaport analyst used to be at Jeffries. We're bracketed. We're right in the middle of their 24 numbers. We think it's just that the street is not paying attention to this company yet. And then on 25, our numbers go far higher as you really get that solar pull through. and so that pre-cash flow just goes along with it. So it's a very, very interesting and catalytic six to nine months here. Actually, I have one last question, if that's okay. And what Mike said and what Kyle, you just said, actually goes really well into it.

I had in my notes on their 2000, I can't remember it was their 22 call, if it was their 22 Investor Day or if it was on their last call. But they said, hey, we think the new floor EBITDA number for our business is higher than historical averages. Right. And this is a common thing that I've had. I mentioned the Bob Robody thing earlier. When a lot of supply has come offline, the new floor is just higher because, you know, think about your supply, your economic supply demand curve. Supplies come offline. New floor pricing is higher. Mike, you mentioned 375 million EBITDA for 2024. And I think you were kind of saying, hey, that's around a mid cycle number when things aren't too hot or two cold three and five. I think the pushback would be, I'm looking at their 2022 investor deck right now, right? The highest. EBDA they'd earned since the merger was 2018, where they did 230 million in EBITDA. They will break that this year. But, you know, cool. They broke for the first time in almost 10 years.

They did 275. And Mike's out here telling me 375 is kind of the new normal mid-cycle. So how do you bridge those two gaps? Yeah, let me take a crack and just be really blunt. There was $200 million of some of the worst managed cost we'd ever seen. seen part of Marco Levy joining, right? They had no centralized procurement. They were focusing on volume at the facility level.

They were sending stuff all over the globe rather than producing in the right geographies, producing locally and delivering those products. I mean, when we went through and did our deep dive, you know, channel checks, like some of the comments were like, it's like, wow, you know, you'd write a business school case study about what Marco and his team have come in and cleaned up. And that was just a culture clash. It was European, American merger, right? This is just, you know, you can write another

business school case study about that too, right? And a lot of that, it's just very simple. It's just cleaned up. And quite frankly, Andrew, we didn't really believe the magnitude of it until this last this Q2 call, right? Where the price of silicon metal is, given the China weakness, European weakness here, we thought they were going to cut numbers and they didn't. And so that was just another proof point that we weren't fully ready to underwrite in terms of, in terms of how real those costs cuts were. So you take, you take that, you know, 150 and you add 200 and, and you're pretty darn close to, you know, that 375. So there was, I'm going to butcher it. I was trying to find it, but there was this really interesting line in the, again, the 2020 analyst day where they were like, look,

one of the things we had to do was we had to go out and teach our salespeople to be business people and, like, understand how, what they did impacted the P&L and everything. And you could just tell the underlying thing behind it was like, hey, we had salespeople and they were just like, go make sales. Doesn't matter. It doesn't matter if we're selling negative margin business. Doesn't matter if you ship something from, you know, Cleveland, Ohio to South Africa when we've got a South Africa plant. You could just tell there were things. And as you said, to bring it back to the real world instead of me misremembering an anecdote, like go look at the cost they've taken out. I love what you said of, hey, the Q2 thing kind of bored out because people are going

to look and say, oh, it's up a little bit in a few months. hey, you know, when you start getting these proof points, those are huge inflection points. I don't know. Mike, do you want to add anything to kind of what I said or what Kyle said? Yeah, I mean, you know, I think, you know, last year and this year are real proof points about, you know, the earnings power of this business going forward, you know, that the CEO, Marco has said repeatedly throughout this year that they believe their guide this year is a trough number. You know, we thought trough would be far lower. And, you know, if it certainly plays out that that's a huge advantage.

But when you think about, you know, the macro environment, you know, 50% roughly of their silicon metal production is in Europe. And when you think about what's happened in the Europe industrial economy, you know, a lot of their customers shut down and still haven't come back or are still running at, you know, utilization rates far below normal. So when you think about, you know, a recession, you know, a lot of their customers are already in a recession and they're still going to be generating a lot of cash flow this year. So, yeah, we were really excited about, you know, maintaining that guide.

And we think it's a real proof point of how the structural profitability of these assets is as far above what it was historically. You know, just one other thing on that, one thing that they've highlighted is, hey, this business was running 30% working capital to sales. And they brought it down to about 20%. And I think that might inflate a little bit in the short term. But, you know, well managed working capital is one of those interesting things. You don't really think about it. Like I can't tell you how many times it's very small on the podcast. So many times to talk about it.

But well-run companies, guess what? They run with lower working capital. And I'm not saying you need to go hugely negative, but 30 to 20 percent, they had 100 million of cash flow release this year from better working capital management. And that's just another sign like the business was, it was just mismanaged before. And that's good management in there and it improves. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete?

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and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. Guys, we've almost gone an hour. We had a lot to talk about.

I'm looking through all of my notes and stuff. I think we hit everything I had, but when I turned it over to you, anything you guys have done a lot more work on this than me, Anything we didn't talk about that we should be thinking about or people should hit it harder? Mike? Yeah, I mean, I think people should just, you know, spend a lot of time kind of looking at the supply demand picture and getting comfortable with that. And, you know, once you really see the outcomes here, you know, McKinsey just came out with a study this year about an estimate for silicon metal demand to grow 21% kegger through 2032.

You know, those are very real numbers. and when you look how difficult it is to bring on supply, you can really see the opportunity they have in front of them. You know, I think take the time to talk to the company and get to know management and really understand the changes they've made. And I think, you know, we think you'll come away really impressed and give a lot more credit to the transformation that they've done over the past few years and even in a difficult macro environment.

And I will tag CoVest Select on the Twitter, so people who are interested in getting in touch with you guys. I know one of the reasons you come on is you want smart people to come on and buy the stock and see what you guys see. I'll tag CoVest Select so people can hit you up there. People can go listen to the first podcast to hear a little bit more about Covese Select, but yeah, I don't know, Kyle, did you want to end with anything on Coves Select or anything? So people that were fairly well known in the small crap community, at least in industrials and materials for sure. We've got 150-page deck. I'm happy to, you know, communicate with folks. If folks are digging in, doing

real work, hit us up, Mike or me, email or on the Twitter machine and we can get in touch. Yeah, Kovest, we run a small cap platform that's designed to help smaller managers get their names in front of institutional investors. It's going well. We have paid managers cash and continue to look for ideas that, you know, we're trying to help guys grow their businesses, guys and gals, grow their business. So yeah, I've appreciated talking to a lot of folks on that front too. Again, you know how I know you guys are covering industrials too much?

You said you paid managers cash. You've got to pay them that non-cash stock comp so you can get the free ad bags. Who cares about it? Cool. Well, Kyle, Mike, this has been absolutely great. This is a fascinating idea. I mean, I just, I love buying, kind of talked all the time, but I love buying assets at a discount or replacement value. And here you've got the great thing.

You've got a good management team coming in improving the business and like you've got the tailwinds coming in for replacement value where I think a lot of the things Kyle and I talk about are things where maybe the management team, you might have the tailwinds, but you might not have as good of management teams kind of stewarding it and getting ready to return to the cash flow. So people can go check out co-vessel act, including link in the show notes, and we'll go from there. Thanks, guys. Thanks, Andrew. Thanks, Andrew. A quick disclaimer, nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast.

Please do your own work and consult a financial advisor. Thanks. Thank you.