EAF - GrafTech

[topofeaturellc]

Nah. GrafTech levered up to buy Seadrift at the top of the cycle and then filed in the downturn.  Brookfield bot the whole thing in ch11.

 

The only thing that really matters here is the needle coke economics. The actual electrode business is a commodity conversion business that doesn't grow so any excess capacity impacts the market for years.  Needle coke used to be the same so no one wanted to spend capital to make it. I guess that's changed.

 

 

[topofeaturellc]

I believe Seadrift has been in bankruptcy twice in the last 20 years.

[bjakes00]

"that doesn't grow" - hasn't that changed now too with the steel capacity mix shift to EAF? Even if the overall industry capacity is stagnant, the shift to EAF will result in an increased requirement for UHP-GE?

[topofeaturellc]

Total EAF growth ex China is basis points at this point. The shift is mostly complete.  And electrode utilization improves overtime

[johnny]

Is Seadrift a union shop? I have to imagine any half-wit running the union should perceive a much stronger position now that GrafTech is contractually locked into essentially full output for the next three years. If quality needle coke is so damn hard to make that nobody in China can figure it out, I think that probably cuts both ways and the facility is practically scab-proof.

[valueinvestor]

https://finance.yahoo.com/news/vertical-groups-johnson-contrary-view-214700975.html

 

There's a podcast where he starts touching upon Graftech on 42:20.

 

I still do not understand Johnson or investment analysts in general. Correct me if I am wrong, but this still does not mean that prices are going down by more than 33%, which will decrease the cash flow they are currently generating.

 

Even if there's an oversupply, they still make bank.

[heth247]

Any comments on the earnings today?  I think it is pretty strong but looks like market is not excited about it. My feeling is that it still has to do with the outlook for the graphite electrode pricing. On the CC, they gave me the impression that they were essentially saying they don't know where the pricing is going. The answer to the extra India supply question also does not make me feel satisfied. Maybe that is also what makes the market uncomfortable?  But with 70% production contracted over the next several years, how bad can it turn?

[valueinvestor]

Any comments on the earnings today?  I think it is pretty strong but looks like market is not excited about it. My feeling is that it still has to do with the outlook for the graphite electrode pricing. On the CC, they gave me the impression that they were essentially saying they don't know where the pricing is going. The answer to the extra India supply question also does not make me feel satisfied. Maybe that is also what makes the market uncomfortable?  But with 70% production contracted over the next several years, how bad can it turn?

 

I haven’t listened to conference call, but I typically don’t listen to any conference calls due to lack of time. However I liken this investment like Posco, where they lump these companies in a basket and the market does not understand the prices have to go down by 50% for graftech not to make a net income. Almost like last years pharmaceutical index massacre, where most stocks went down because of Valeant (well... almost similar). As for CEO answer to price movements, I think he genuinely doesn’t know, and anyone who claims to know probably doesn’t. Investing in Graftech is understanding the stock price may go against you for awhile, but if they keep on throwing special dividends and buyback stock, one will do well.

[bjakes00]

Agreed except it’s only dividends until the stock gets back above $20. Brookfield have a clear view of the intrinsic value of this one (unless that has changed on their side with a different view of the GE / Needle Coke price outlook)

[valueinvestor]

Agreed except it’s only dividends until the stock gets back above $20. Brookfield have a clear view of the intrinsic value of this one (unless that has changed on their side with a different view of the GE / Needle Coke price outlook)

 

Really? I missed that, when did they change their mind? or do you mean that they did buybacks, but Brookfield did not want to tender their shares?

[bjakes00]

They haven’t officially changed their minds, it was the price they seemed willing to transact at post the IPO. There won’t be any buybacks until the share price can get back there again.

In any case they’ve committed $100m now to paying down debt which seems prudent.

 

[heth247]

Nobody bothered by the S-1 filing today that Brookfield want to sell at $14.36?  I guess the buyer would be the company itself again?

[bjakes00]

Not sure the buyer would be the company itself again - they desperately need to get more liquidity in the market. Also would be happy if the company bought some of it but hopefully a large chunk goes to the market.

Interesting that they are willing to transact at this price but it might be BAM recognising that the stock is held back by liquidity. I saw something similar happen with OEC IPO in 2014 and the follow ons - i.e., as soon as they got enough liquidity going the stock was able to start moving more "freely".

 

[bargainhunter]

Big hit after that Citi downgrade. The sellside is typically a great reverse indicator. Does anybody have any insight into the graphic electrode pricing issues/capacity expansion in China they reference (don't have access to the full report)?

[peterHK]

Have to admit, with contracted volume and prices, BAM not selling at this price (given the cancelled secondary), and electrode prices still hanging in there, I'm a little confused as to why EAF trades where it does today.

 

Either I'm horrendously wrong, or the market is.

[valueinvestor]

Have to admit, with contracted volume and prices, BAM not selling at this price (given the cancelled secondary), and electrode prices still hanging in there, I'm a little confused as to why EAF trades where it does today.

 

Either I'm horrendously wrong, or the market is.

 

You're not wrong, I think my fears lie with the uncontracted cash flows because the current contracted price of $10K may not be enough to support a decrease of 50% in the graphite electrode. Therefore reducing net income by 20%, however I still get a Owner's Earnings/Enterprise Value of less than 8.

 

I sold when they announced the special dividend, however hoping to take a bit at this again.

[heth247]

Have to admit, with contracted volume and prices, BAM not selling at this price (given the cancelled secondary), and electrode prices still hanging in there, I'm a little confused as to why EAF trades where it does today.

 

Either I'm horrendously wrong, or the market is.

 

EAF is down probably because of what BBU is trying to do with TOO -- squeeze out minority share holders by taking it under.

[chrispy]

Agree with heath

[tripleoptician]

Agree with heath

Main reason I am not adding, but not selling either

Liquidity very low so hard to see their exit strategy without a takeover or having sufficient float for them to sell which isn’t happening soon

 

 

[racemize]

Have to admit, with contracted volume and prices, BAM not selling at this price (given the cancelled secondary), and electrode prices still hanging in there, I'm a little confused as to why EAF trades where it does today.

 

Either I'm horrendously wrong, or the market is.

 

EAF is down probably because of what BBU is trying to do with TOO -- squeeze out minority share holders by taking it under.

 

I don't think this makes sense.  BBU is monetizing this investment--they already took it private and are trying to get the money out, not take it back.

[Spekulatius]

Have to admit, with contracted volume and prices, BAM not selling at this price (given the cancelled secondary), and electrode prices still hanging in there, I'm a little confused as to why EAF trades where it does today.

 

Either I'm horrendously wrong, or the market is.

 

EAF is down probably because of what BBU is trying to do with TOO -- squeeze out minority share holders by taking it under.

 

I don't think this makes sense.  BBU is monetizing this investment--they already took it private and are trying to get the money out, not take it back.

 

It all depends on price and valuation. If it makes sense to BAM, I actually think they will do it.

[BG2008]

Have to admit, with contracted volume and prices, BAM not selling at this price (given the cancelled secondary), and electrode prices still hanging in there, I'm a little confused as to why EAF trades where it does today.

 

Either I'm horrendously wrong, or the market is.

 

EAF is down probably because of what BBU is trying to do with TOO -- squeeze out minority share holders by taking it under.

 

I don't think this makes sense.  BBU is monetizing this investment--they already took it private and are trying to get the money out, not take it back.

 

It all depends on price and valuation. If it makes sense to BAM, I actually think they will do it.

 

I think it is never beyond Brookfield to NOT take private something that is cheap.  I think there is a situation where Brookfield won't take private a company and that is when they can potentially use the public vehicle as a form of equity financing. For example, they have largely steer clear of trying to take TerraForm Power private.  I suspect that Brookfield want to use TERP to roll up the renewable space and want to drive the yield down where they can issue equity and make acquisitions.  It's taken much longer than I expected.  In one-off situations like a TOO and EAF, there is not industry to roll up. So at a certain price, they are buyers and at certain prices they are sellers. 

 

My respect for Brookfield has certainly gone down in the last couple of years.  Sure, it sounds salty.  I think many of these distress guys got too much of sharp elbows in their DNA that they don't appreciate the art of playing nice.  I have seen this being exemplified with Brookfield, Oaktree, Fairfax, and Leucadia.  As companies scale up, I think it has a tendency to bite back at them.  The general perception is that Berkshire and Markel focuses on quality and will pay a higher multiple.  Brookfield, Oaktree, Leucadian, and Baupost has the "we're the liquidity provider" and "we will extract a pound of flesh."  I think where Brookfield could potentially screw up in the TOO and GGP case is that they are trying to get the last dollar and is pissing off a lot of people along the way.  This is a very different philosophy than someone like a Malone in Charter Communication or a Ed Breen at DowDupont.  I have come to appreciate paying up 8-12x fully taxed and fully depreciated FCF for higher quality companies with sharebuybacks.  Sure, it may not look cheap at first.  But 2% dividend and 6-10% sharebuyback coupled with 4% FCF/Share growth (w/o accretion due to buyback) goes a really long way to create shareholder value in a 3-5 years holding period.  In the long run, Brookfield may find that no one wants to buy their publicly traded vehicles because people simply will not trust that Brookfield won't pull the rug from underneath them when the stock is the cheapest.  Sure, it doesn't matter in the short run.  In the long run, it will hurt them. 

 

I am motivated to create a "shit list project" that compile all the wrongs of Oaktrees, Brookfields and any other bad operators that one can easily locate and search.  The purpose is to shame the governance offenders and create a database of bad actors. 

 

In New York State, you can legally not pay your rent for six month and mooch off your landlord.  Simply because it is legal doesn't mean it is ethical and/or best practice.  The same shit is happening to TOO. 

[Jurgis]

I am motivated to create a "shit list project" that compile all the wrongs of Oaktrees, Brookfields and any other bad operators that one can easily locate and search.  The purpose is to shame the governance offenders and create a database of bad actors.

 

OT?

 

The goal might be laudable but IMO naive. Who is a "good actor" in financing/takeovers? Malone? Did you miss all the complaints about Malone CWC shenanigans? Berkshire? Did you miss the complaints and lawsuits against Berkshire's Clayton takeover? BTW, these are not one-off exceptions. Both Malone and Buffett have quite a few questionable deals in the past. Are these "good guys" because you personally were not among shareholders who got taken advantage of (or believed that they were taken advantage of)?

 

Most takeovers (or takeunders) by a good investor are not fair to selling shareholders by definition. If the buying (value) investor is good, they are only buying companies by underpaying. Investors selling to good value investors usually get a good deal only when the buying investor inadvertently overpays.

 

BAM and Elliott might be bigger scoundrels than Buffett and Markel, but I think your view is quite skewed by recency bias and the fact that you are personally affected. Nobody on this board wrote letters and complained when BAM were buying companies or pieces of companies that CoBF members were not invested in.

 

In general, moral outrage does not really work in investing world. Trust me, I am and have been morally outraged at a number of companies.  ::)

 

Anyway, good luck though.  8)

[writser]

I think many of these distress guys got too much of sharp elbows in their DNA that they don't appreciate the art of playing nice.  I have seen this being exemplified with Brookfield, Oaktree, Fairfax, and Leucadia.

 

They are all just competing to make money for their investors. Frankly I'd say they fail their fiduciary duty if they pay too much for TOO just to 'play nice'. It's a competitive market, not a hippy community farm. Up to the players to decide if they are fine with the reputational damage (if any). If you own a distressed cable company John Malone isn't going to pay you 12x FCF just because he wants to be nice either, he'll screw you over just the same if he thinks he can get away with it. Maybe he has a better PR strategy.

 

Suck it up, learn from it, stay rational.

[petec]

I agree with Writser and Jurgis here - two excellent posts. Was considering writing something similar on the TOO thread but didn't want to cause offence. Everyone went into this with their minds open; no-one was forced to buy.

 

Strikes me BAM's main error with GrafTech was not listing enough to create a liquid stock.