Ferroglobe PLC: main factors affecting its results
Ferroglobe’s profits are closely related to sales prices, which are influenced by several different factors that vary across Ferroglobe’s two segments.
The prices of manganese alloys have shown a direct correlation to the price of manganese ore. Prices remained low in 2016, following the trend that began in 2015. Slower growth in emerging economies has led to a drop in the prices of the main commodities (oil, aluminium, copper, iron ore, etc.) and in production of and demand for them. This situation is affecting the price of all commodities related to steel, stainless steel and aluminium, which has fallen significantly compared to the years prior to 2015, when this price and demand volume recession began.
Market prices for silicon metal have evolved in a similar fashion.
In this regard, under Ferroglobe’s policy, aimed at reducing dependence on spot market prices, the prices applied to its term contracts are a function of (i) a base price representing a mark-up over actual costs, which are calculated once a year and (ii) the spot market price, which is typically set by reference to CRU spot prices for each particular product, to which a premium or discount can be applied using a case by case analysis. Ferroglobe sells certain high quality products, the price of which is not directly linked to spot market prices.
Cost of raw materials
The key raw materials sourced by Grupo Ferroglobe are manganese ore, coal, quartz, wood and charcoal. Manganese ore was purchased from suppliers in South Africa (59.6% of total purchases) and Gabon (36% of total purchases). Coal meeting certain standards for ash content and other physical properties is used as a major reductant in silicon-based alloy production. Wood is an important element for the production of silicon alloys and is used to produce charcoal, which acts as a reductant at Grupo Ferroglobe’s Chinese and South African plants.
Grupo Ferroglobe has sourced 61.7 % of its quartz needs from its own mines in Spain and South Africa.
Power constitutes the largest expense for most of Ferroglobe’s products other than manganese-based alloys. Ferroglobe focuses on minimising energy prices and unit consumption in all its operations by concentrating production of silicon and manganese-based alloys during periods when energy prices are lowest. Ferroglobe’s power contracts are different in each country. In Spain, South Africa and China, energy prices are mostly daily or spot prices with significant seasonal fluctuations, whereas in France and Venezuela, Ferroglobe has power contracts in place that provide for flat or almost flat rates during most of the year.
In Spain, Ferroglobe receives a rebate on part of its energy costs in exchange for an agreement under which it must interrupt production and, thus, power usage, upon request. Ferroglobe uses derivative financial instruments to partially hedge the risks related to energy price volatility in Spain. In France, until 2015, FerroPem had access to relatively low energy prices through a discount on Electricité de France’s green tariffs. These green tariffs expired at the end of 2015 and the government established new regulations for highly intensive energy consumers. Under these new regulations, energy prices in France will be partially subject to wholesale energy markets, but will enjoy favourable terms in regulated parts of the power rates and rebates for services offered to the system.
Furthermore, the new system avoids the need to shut down its factories in January and February, when energy prices have always been at their highest.
In Venezuela, Ferroglobe has access to low and stable power prices in US dollars through a long-term contract with the local supplier, as its factories are located near five hydroelectric power plants. In South Africa, the National Energy Regulator (“NERSA”) sets energy prices and price increases are publicly announced in advance. In China, Ferroglobe purchases energy from the grid at a fixed rate. During the dry season, which lasts from January to May, Ferroatlántica shuts down operations in China due to the high cost of energy.
Foreing currency fluctuations
Ferroglobe’s production costs are mostly dependent on local factors, with the exception of the cost of manganese ore and coal, whereas its product prices rely more on global factors. The relative strength of the functional currencies of Ferroglobe’s subsidiaries affects its competitiveness in the international market, most notably in the case of its plants in Venezuela and South Africa, which export a majority of their production to the United States and the European Union.
In South Africa, since 2012, the rand has lost value against the US dollar and the euro at a faster pace than its inflation differential with both the United States and the Eurozone, thus increasing the competitiveness of its factories during this period. In Venezuela, the devaluation of the Venezuelan bolivar in February 2013 (from VEF 4.3 to 6.3 per US dollar) was insufficient to compensate for the inflation differential between Venezuela and the United States since 2012, resulting in a loss of USD 23.1 million at our operations in Venezuela in 2013. This trend was reversed in February 2014 when the Venezuelan government approved a new exchange rate for export companies, of VEF 49.99 per US dollar. In January 2016, the exchange rate for export companies was set at VEF 199 per US dollar.
The current loss of value of the euro versus the US dollar has resulted in a significant price gap between US dollar and euro denominated spot market prices for silicon metal in particular, which enhances the competitiveness of our European production units in the international markets.
Business Combination between Grupo FerroAtlántica and Globe Specialty Metals
On Dec. 23, 2015 Grupo FerroAtlántica and Globe Specialty Metals, Inc. announced its combination, finalizing the creation of the new company Ferroglobe PLC. The business combination, which was first announced on February 23, 2015 was completed following receipt of all required regulatory clearances and approvals.
Ferroglobe will be among the world’s leading suppliers of silicon metal, silicon-based specialty alloys, and ferroalloys serving a customer base across the globe in dynamic and fast-growing endmarkets such as solar, automotive, consumer products, construction, and energy.
The new company will have a broader production base and increased access to new markets and products, allowing us to accelerate our growth strategies. The company intends to manage its business to maximize free cash flow generation and return on investment. this, along with a uniquely conservative balance sheet, should position Ferroglobe to continue to deliver on exceptional growth opportunities for its shareholders. The company will be well-positioned to better serve its business in existing markets as well as develop into new, attractive downstream markets such as solar energy. In addition, it intends to continue to reduce its cost base and execute on synergies, allowing to unlock significant future value for the shareholders. Ferroglobe will be listed on NASDAQ under the symbol “GSM.” The newly combined business will be headquartered in London.
Creating an international leader in the production of silicon and specialty metals
Grupo FerroAtlántica and Globe Specialty Metals, producer of silicon metal and silicon alloys based in the United States, reached an agreement to merge their businesses on 23th February 2015.
The new company will be the world leader producer of silicon metal, silicon alloys and ferroalloys and will be in an excellent strategic position to take advantage of the growing demand for the solar, automotive and consumer (silicones) industries, construction and energy products.
The new company will have an enterprise value of approximately 3.1 billion dollars, with aggregate revenues of around 2.3 billion dollars a year and EBITDA of approximately 325 million dollars before exploiting possible synergies, and it will benefit from an expanded range of products and a diversified production base. Furthermore, it will enjoy a wider geographical coverage due to the presence of Globe Specialty Metals in North America and Grupo FerroAtlántica’s leadership in Europe.
The merger is expected to generate substantial synergies in three key areas: production costs (65 million dollars annually); reducing borrowing costs by refinancing the current debt (30 million); and generating an additional cash flow of about 100 million dollars in the three years as a result of a more efficient management.
Strategically attractive merger
Grupo FerroAtlántica and Globe Specialty Metals operations are highly complementary, something that should allow delivering a better service to its customer base worldwide. Globe currently has eleven production centres and three mines in six countries, and nearly 90% of its revenues come from the North American market; while Grupo FerroAtlántica has twenty production centres (fifteen plants and six mines) in five countries and hydro-electrical assets in Spain and France, and most of its revenue comes from Europe. The new company will employ about four thousand seven hundred people worldwide, and this merger should result in improved employment opportunities, both for Grupo FerroAtlántica and Globe Specialty Metals employees.
Structure and corporate governance
At the closing of the transaction, the two companies will be integrated under a newly created holding company incorporated in the United Kingdom and headquartered in London, one of the global centres of the mining and metals industries. London offers the new company and its managers a central location with easy access to their plants, customers and international suppliers as well as to financial markets.
The new company will trade on the NASDAQ. At the closing of the transaction, Grupo Villar Mir will have a 57% shareholding in the new company, and Globe’s existing shareholders will control the remaining 43%.
The transaction is subject to customary conditions precedent, including its approval by the Globe’s shareholders and by regulatory authorities in the United States and other jurisdictions. The parties anticipate closing the transaction in the fourth quarter of 2015.
A merger of 3,100 million USD will create a new international leader in the silicon and specialty metals industry
An attractive value proposal for Globe Specialty Metals (gsm) shareholders
Geographical complementarity will create a global leader in silicon metal and alloys, operating in the five continents