EAF - GrafTech

[Anglozurich]

Brookfield sell down of 7m shares.

 

https://d18rn0p25nwr6d.cloudfront.net/CIK-0000931148/7aa6b2e5-0ebd-4a9c-8e4d-66dc2f6158c3.pdf

[valuebet]

So, after the completion of the sale of 20 mln shares, Brookfield will have less than 50% of EAF.

 

Brookfield had 147 million shares left after last transaction on 12/14/2020 (https://www.sec.gov/Archives/edgar/data/931148/000114036120028655/xslF345X01/form4.xml)

Now, after deal with Morgan Stanley (https://finance.yahoo.com/news/graftech-announces-secondary-offering-common-214300953.html) is completed, they will have 127 million left, which will be less than half (there are 267 million shares in total), approximately 47,5% of the total number of shares.

 

I think this is a great news!

[hasilp89]

thanks for sharing. Anyone hearing seeing anything on electrode pricing?

 

Steel co's and steel prices appear to be rebounding, assume that will have positive impact for EAF at least on demand for electrodes / smaller mills not going out of business (maybe not pricing)

[amphi2008]

I agree that this 20 mln shares sale is a favorable event. For those interested I recommend to read the prospectus in the link below, as it also contains the 2020 preliminary financial statements:

 

https://d18rn0p25nwr6d.cloudfront.net/CIK-0000931148/c4f9728f-95ef-493a-a773-f0ed2f57fd25.pdf

 

One part also interesting is on p.13 of the pdf:

"Upon completion of this offering, we anticipate that the Brookfield Affiliates will no longer control more than 50% of the total voting power of our Common Stock with respect to the election of our directors. As a result, we will no longer be a “controlled company” within the meaning of the NYSE listing standards and, therefore, will no longer be exempt from certain

NYSE corporate governance requirements, subject to applicable phase-in periods."

 

This in my view is an important milestone, and it should open up to more institutional investors participation, as some of them might have been constrained to not invest in controlled companies

 

Also interesting if you check the LT debt, now it's on the 1.4bln level, it seems that this quarter they reduced the principal by about 160mln$, which is good and consistent with previous quarter.

 

Spot prices have been lower than Q3 (4900 vs 5700), as announced by management in the last earning call.

The positive thing is that it seems the bottom has been reached and now they expect spot price to increase (assuming steel demand won't fall again), check still the prospectus:

 

"During the fourth quarter of 2020, our average realized price from LTA business was approximately $9,600 per MT, and the average price for nonLTA business was approximately $4,900 per MT. The current market for graphite electrodes continues to be competitive, as our industry lags behind the improving fundamentals in the steel industry. If the strength in the steel industry continues, we would expect market improvement for our products later in 2021."

[hasilp89]

nice find - good to see them de-levering and increasing the float - price has been hit today but agree that it is positive long term.

 

Based on the estimates they are trading at around 6x EV/EBITDA (2020E TTM) and 4x on 2019A. With some rough estimates for capex and D&A for 2020 its trading at a ~20% CF yield.

 

Ran some quick math on what things might look like once LTA's are run out in 2023. Assumptions: they continue to de-lever at similar rate to 2020 ($600-800M of debt reduction), LTA volumes of 35M tons + spot ($5k/ton) at ~140m tons (equivalent to 2019 total production). They'd trade around a 5% yield.

[hasilp89]

Q4 earnings out the other day. Ended the year at $650M of EBITDA down about $400m from 2019. Volume was down 25% and spot prices were $4.9k/mt.

 

With LTA's they have in place for 21/22 ($900m of revenue/year) and spot volume at 2020 levels I have them producing about $800M of cash over the next two years.

 

Mgmt. indicated they'll continue to delever (paid down $400m of debt in 2020 and refinances $500m at sub 5% bonds due 2028).

 

Downside case I have for '23 is ~$300m of EBITDA and ~$200m of FCF assuming they do similar total volumes to 2020 with any non contracted volume at $4.9k MT, also assuming lower EBITDA margins (40%) and $65m in capex.

 

What i'm getting at is it still appears a heads you win tails you don't loose investment. While prices may not get back up to $10k/mt - i certainly think volume can bounce back to 170MT level vs. 135MT in 2020. (eg Nucor announced Q1 Net Income to be almost double what the street has estimated ($900m vs. ~$500m source: tikr).

 

welcome any thoughts.

[Longnose]

Been holding since Pabrai bought and still holding. I don't care Pabrai abandoned his thesis and sold. Even at 40% down last year I still felt good that the company could pay its debts and that the MOS for this cash cow was high. The biggest risk to this company is the vampire BAM and BAM is slowly getting out.

 

Additionally, with the increase in building and things potentially looking better for the steel market prices could increase.

 

Then you have the secondary benefit of the growing EV market that could put upward pressure on the prices of pet coke. if that happens we will be sitting pretty. I plan on holding for a few more years and re evaluate along the way.

 

Heads I win tails I don't lose much is the right way to look at it. Even with the pandemic down swing its back above Pabrai's purchase price therefore for those who held. Still haven't lost anything.

[balaparavi]

Been holding since Pabrai bought and still holding. I don't care Pabrai abandoned his thesis and sold. Even at 40% down last year I still felt good that the company could pay its debts and that the MOS for this cash cow was high. The biggest risk to this company is the vampire BAM and BAM is slowly getting out.

 

Additionally, with the increase in building and things potentially looking better for the steel market prices could increase.

 

Then you have the secondary benefit of the growing EV market that could put upward pressure on the prices of pet coke. if that happens we will be sitting pretty. I plan on holding for a few more years and re evaluate along the way.

 

Heads I win tails I don't lose much is the right way to look at it. Even with the pandemic down swing its back above Pabrai's purchase price therefore for those who held. Still haven't lost anything.

 

Hi Longnoose, could you kindly explain why BAM is/was a vampire in Graftech? Thank you.

[valueinvestor]

I think the person is referring to the perceived image that Brookfield constantly undermining minority shareholders. They sometimes sell out of stakes and buy it back at cheaper than NAV or the replacement value.

 

 

 

 

[valueinvestor]

Been holding since Pabrai bought and still holding. I don't care Pabrai abandoned his thesis and sold. Even at 40% down last year I still felt good that the company could pay its debts and that the MOS for this cash cow was high. The biggest risk to this company is the vampire BAM and BAM is slowly getting out.

 

Additionally, with the increase in building and things potentially looking better for the steel market prices could increase.

 

Then you have the secondary benefit of the growing EV market that could put upward pressure on the prices of pet coke. if that happens we will be sitting pretty. I plan on holding for a few more years and re evaluate along the way.

 

Heads I win tails I don't lose much is the right way to look at it. Even with the pandemic down swing its back above Pabrai's purchase price therefore for those who held. Still haven't lost anything.

 

Please note Graphite may not be required for EV, another suitable anode is Silicon. Although that's more optionality than a core thesis.

 

Steel is still going to be in production for the foreseeable future and the supply of graphite is low and they're the only vertically integrated North American supplier.

[Saluki]

I still have this but haven't sold.  As far as the potential demand in lithium batteries, I feel like that's a "but wait...there's more!"  part of the presentation.

 

The way I see it is that there is no substitute for needle coke. It's long and when it heats up, it expands up and down, not sideways, so you can make big rods that can withstand high temps.  If they expanded sideways, you couldn't make thick graphite rods because the expansion would make them blow apart.

 

Petroleum needle coke is in limited supply because it's a buy product of petroleum refining and now that some refiners are not operating at 100% capacity because of the pandemic, the fact that EAF is vertically integrated puts it in a great position.

 

I don't understand the exact difference between PET needle coke and the needle coke that you get from coal, but (according to the description in their annual report) it takes a lot more time to make a graphite rod from coal, so unless the price difference is substantial, it's an inferior substitute. 

 

I like this for the same reason that people like ADP or Transdigm, they provide a necessary element to businesses that are a small part of the total cost of the finished product, and they are in an oligopoly industry.  Even if you don't win the lottery, it's a company where there are good economics and good management and it's hard to lose money under those circumstances.

[Krapdivad]

https://www.ft.com/content/46d4727c-761d-43ee-8084-ee46edba491a

 

FT had an article today about increasing pressure on reducing CO2 emissions from steel making.

They featured a new technology that uses hydrogen to create steel, and will require the intermediate "sponge iron" to be heated up with an electric arc furnace.

 

I see it as a tailwind for EAF which produces much less CO2 than traditional methods, and it looks like it will be compatible with future advances in steelmaking.

[Longnose]

Hi Longnoose, could you kindly explain why BAM is/was a vampire in Graftech? Thank you.

 

I think the person is referring to the perceived image that Brookfield constantly undermining minority shareholders. They sometimes sell out of stakes and buy it back at cheaper than NAV or the replacement value.

 

@balaparavi, BAM has already made more than a 6X on EAF before it re-IPO'd. The majority of EAF's debt is owed to BAM and with BAM being the majority shareholder they continue to suction off nearly all FCF. @valueinvestor is correct BAM is perceived as regularly undermining minority shareholders. BAM did this with TOO several years back too. Although the situations are quite different. But it turned out bad for minority shareholders.

 

Overall I still believe that EAF is a great heads I win tails I don't lose much situation. When I see BAM selling out shares and price dropping because of it I only see it as a good thing that BAM reduces its stake in EAF.

 

I still have this but haven't sold.  As far as the potential demand in lithium batteries, I feel like that's a "but wait...there's more!"  part of the presentation.

 

The way I see it is that there is no substitute for needle coke. It's long and when it heats up, it expands up and down, not sideways, so you can make big rods that can withstand high temps.  If they expanded sideways, you couldn't make thick graphite rods because the expansion would make them blow apart.

 

Petroleum needle coke is in limited supply because it's a buy product of petroleum refining and now that some refiners are not operating at 100% capacity because of the pandemic, the fact that EAF is vertically integrated puts it in a great position.

 

I don't understand the exact difference between PET needle coke and the needle coke that you get from coal, but (according to the description in their annual report) it takes a lot more time to make a graphite rod from coal, so unless the price difference is substantial, it's an inferior substitute. 

 

I like this for the same reason that people like ADP or Transdigm, they provide a necessary element to businesses that are a small part of the total cost of the finished product, and they are in an oligopoly industry.  Even if you don't win the lottery, it's a company where there are good economics and good management and it's hard to lose money under those circumstances.

 

I agree, the EV battery thing is not part of my thesis for EAF at all. But if we get some sort of weird price squeeze out of it I wouldn't mind.

 

As far is what I understand about pet coke vs needle coke is that pet coke is a more refined. The bear case for EAF is that china can make graphite electrodes cheaper using low quality pet coke.  which would reduce the need for these EAF's Ultra High Performance (UHP) electrodes.

The argument for competitive advantage beyond the vertical integration of needle coke is that you can only make UHP electrodes using the more refined needle coke which is in limited supply. The lower quality Chinese electrodes don't perform as well (not as hot) or last as long as the UHP electrodes that EAF makes because of the use of lower quality pet coke.

 

 

 

 

[hasilp89]

brookfield selling down another 30m shares. think it would put them down to ~36% ownership.

[Anglozurich]

I notice this sell down, or industrial-scale dumping by BAM, has been spun as positive in earlier posts. I honestly can not see how its a positive. They will have the inside track on spot prices, supply and demand curves for electrodes. 'Brookfield selling into a supposed super-cycle'....i just find this hard to believe, regardless of their need to move funds around / lock in the money multiple on their overall trade. Way more likely they optimized margins and dumped at the top of the cycle.

 

Management also own nothing, and i mean squat, in terms of inside ownership.

 

Not saying it collapses from here but new LTA's being struck at much lower spot prices could mean this treads water for years.

[valueinvestor]

With steel prices on the roar - won’t EAF go up with it? 

[hasilp89]

Really more tied to steel volumes versus steel prices I would think. Also they need needle coke market to tighten up. Given they are vertically integrated it’s what will boost market pricing for EAFs. I was a holder here and still generally like the story. However next two years it’s a deleveraging story IMO. I switched over to STLC.TO earlier this year. Worth reviewing if you hadn’t already. CEO is very confident it will double / he can buy back half the shares. Trades at 1.5x ‘21 EBITDA (albeit that is on peak steel pricing). Only debt is small revolver facility and capped pension that should get wiped out this year. Did I mention CEO said it should double from here / he has no problem buying back half the shares!!!!

[valueinvestor]

Thanks! I’ve reviewed it before, passed because of the major shareholder and a PE at that. Typically it was always prone to take under but I may take a small position though!