Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: peterHK on November 12, 2018, 08:15:56 AM

Title: EAF - GrafTech
Post by: peterHK on November 12, 2018, 08:15:56 AM
Very good write up on VIC (https://www.valueinvestorsclub.com/idea/GRAFTECH_INTERNATIONAL_LTD/5782887411) on this, so I won't rehash everything here. The comments are VERY worth reading.

Basically, only vertically integrated supplier of a key input into steelmaking: graphite electrodes. They are about 2% of the cost to make steel, but you can't run an electric arc furnace without them. The key input into graphite electrode is petroleum needle coke, a byproduct of refining that is in short supply globally.

The industry went bankrupt in 2016, lots of supply not just shuttered but demolished globally, then the steel industry took off. Graftech went BK, Brookfield bought them, restructured them, and took them public in an awful IPO that way underpriced the company.

They have ~25% FCF yield, with 60% of the business locked up under long term contracts at ~10k/ton vs. spot of ~15k/ton. There are lots of reasons why the spot market will be in short supply for years to come, one of which is that sourcing needle coke (which is also used in EV batteries) is very hard, so high needle coke prices guarantees high electrode pricing. Because needle coke is a byproduct, basically nobody is incentivized to build new supply and even if they were, it's very hard to do.

The company is 80% owned by BAM (BBU specifically), and has a low float, which is part of why its puking today. They said on their recent conference call that they wouldn't restart one of their facilities yet, but IMO they will at some point and even if they don't, the company is going to generate $1bn of FCF this year vs. a $4.6bn market cap. Because of the contracted business, it's fairly stable, I think deserves a higher multiple to peers, and they've said they're going to buy back shares with all their FCF.

Other thing worth noting is maintenance capex is very light: on $1bn of FCF, they'll need about $60mn of MCX.
Title: Re: EAF - GrafTech
Post by: bjakes00 on November 12, 2018, 03:11:39 PM
Massive pullback today on the back of a Vertical Research report downgrade. Anyone have access to Vertical Research for more colour?

Here is another good write up that values the contracted cash flows at $19:
https://static1.squarespace.com/static/55cbe47de4b0a1e3b9b911fe/t/5b56268ef950b7be70cad9d7/1532372622855/GrafTech+%28EAF%29+Massif+Capital+22JUL2018.pdf
 (https://static1.squarespace.com/static/55cbe47de4b0a1e3b9b911fe/t/5b56268ef950b7be70cad9d7/1532372622855/GrafTech+%28EAF%29+Massif+Capital+22JUL2018.pdf)
Title: Re: EAF - GrafTech
Post by: Spekulatius on November 12, 2018, 03:20:53 PM
These type of pricing aberrations for what is a commodity product are not sustainable. I believe the Chinese will bring on sufficient capacity to normalize the margins at much lower level. BAM really got the entry and exit (via IPO) of this business right. Gnerally speaking, you donít want to buy what smart investors like BAM are selling or at least tread very carefully.
Title: Re: EAF - GrafTech
Post by: peterHK on November 12, 2018, 03:24:54 PM
They're all downgrading EAF because EAF said they'd wait to restart St.Mary's. I peg the value of that restart at ~$3/share.
Title: Re: EAF - GrafTech
Post by: bjakes00 on November 12, 2018, 03:47:55 PM
Spekulatius, BAM still own 78%?
PeterHK, I understand the Vertical report from today was more a sectorwide downgrade that sparked the sell-off. Appreciate the St Mary point which led to some confusion on the investor call but the price made a come back post that.
In any case, there are 5 years of take or pay contracts in place here with integrated production - what am I missing? Are those contracts looser than I think or relatively enforceable?
Title: Re: EAF - GrafTech
Post by: peterHK on November 12, 2018, 03:59:07 PM
These type of pricing aberrations for what is a commodity product are not sustainable. I believe the Chinese will bring on sufficient capacity to normalize the margins at much lower level. BAM really got the entry and exit (via IPO) of this business right. Gnerally speaking, you donít want to buy what smart investors like BAM are selling or at least tread very carefully.

Obviously they aren't sustainable. go read the VIC article, I think there are a lot of reasons that China can't add supply as quicky as people think and EAF at a 25% current FCF yield pays for the market cap in 4 years where we have a lot of visibility into their pricing, and then there's stub value left over after that.

BAM got the timing more right than those buying at the IPO, but I don't think those buying today are wrong to see 100% upside. I arrive at $21/share assuming that electrode prices drop to their historic spread of 3000 over needle coke prices, and needle coke prices stay where they are.
Title: Re: EAF - GrafTech
Post by: valueinvestor on November 12, 2018, 04:01:31 PM
Spekulatius, BAM still own 78%?
PeterHK, I understand the Vertical report from today was more a sectorwide downgrade that sparked the sell-off. Appreciate the St Mary point which led to some confusion on the investor call but the price made a come back post that.
In any case, there are 5 years of take or pay contracts in place here with integrated production - what am I missing? Are those contracts looser than I think or relatively enforceable?

With my perspective the whole thesis is how systemic is this business? If Graftech disappeared today would the steel industry care? If they are the only vertically-integrated producer of high-quality electrodes, as well as a low-cost operator - their customers wants Graftech to survive. With questions to the contract, it becomes unenforceable when the customer does not have any ability to pay. Since the electrodes are 3-5% of the total cost of steel production, for them not to pay for electrodes that are crucial to steel production, it would mean a shut down of a lot of steel factories. I typically do not invest in commodity businesses, but seeing how uniquely positioned they are, I pulled the trigger. The only reason why I would sell is if the thesis above how systemic and important they are in the industry is wrong. As most companies deal with graftech, not being they are the cheapest in price, but the largest in value, as they can rely on the electrode to last when going through the steel production process. Please note, Iím basing this on annual reports and havenít look through the source material. So please feel free to poke holes in my thesis. As this is a relatively large position.
Title: Re: EAF - GrafTech
Post by: peterHK on November 12, 2018, 04:53:42 PM
Spekulatius, BAM still own 78%?
PeterHK, I understand the Vertical report from today was more a sectorwide downgrade that sparked the sell-off. Appreciate the St Mary point which led to some confusion on the investor call but the price made a come back post that.
In any case, there are 5 years of take or pay contracts in place here with integrated production - what am I missing? Are those contracts looser than I think or relatively enforceable?

With my perspective the whole thesis is how systemic is this business? If Graftech disappeared today would the steel industry care? If they are the only vertically-integrated producer of high-quality electrodes, as well as a low-cost operator - their customers wants Graftech to survive. With questions to the contract, it becomes unenforceable when the customer does not have any ability to pay. Since the electrodes are 3-5% of the total cost of steel production, for them not to pay for electrodes that are crucial to steel production, it would mean a shut down of a lot of steel factories. I typically do not invest in commodity businesses, but seeing how uniquely positioned they are, I pulled the trigger. The only reason why I would sell is if the thesis above how systemic and important they are in the industry is wrong. As most companies deal with graftech, not being they are the cheapest in price, but the largest in value, as they can rely on the electrode to last when going through the steel production process. Please note, Iím basing this on annual reports and havenít look through the source material. So please feel free to poke holes in my thesis. As this is a relatively large position.

It's still a cyclical business, just likely less cyclical than peers because of the contracts. In typical BAM fashion, they're trading pricing for stability, which I think is the right move. Not my largest position, but I added in the 13's today because the price move was just stupid. Small float makes this fun. 

I'd also point out that even at prices half of what they are today, this is a business that can earn 30%+ ROIC's, which shows that actually it's a fairly high quality business. Another point is they have a structurally lower tax rate than peers, so comping them on an EV/EBITDA basis I think misses some things (stability being the other).

I view this as, oddly, a defensive company. If we get the market cap back to us in cash, then the stub value is free upside. I have a fairly high degree of confidence that, assuming $10k, then $8k, the $6k electrode pricing in 2019/2020/2021 vs. $15k today, that they're going to earn the cash I expect they will.
Title: Re: EAF - GrafTech
Post by: valueinvestor on November 13, 2018, 07:48:58 AM
Spekulatius, BAM still own 78%?
PeterHK, I understand the Vertical report from today was more a sectorwide downgrade that sparked the sell-off. Appreciate the St Mary point which led to some confusion on the investor call but the price made a come back post that.
In any case, there are 5 years of take or pay contracts in place here with integrated production - what am I missing? Are those contracts looser than I think or relatively enforceable?

With my perspective the whole thesis is how systemic is this business? If Graftech disappeared today would the steel industry care? If they are the only vertically-integrated producer of high-quality electrodes, as well as a low-cost operator - their customers wants Graftech to survive. With questions to the contract, it becomes unenforceable when the customer does not have any ability to pay. Since the electrodes are 3-5% of the total cost of steel production, for them not to pay for electrodes that are crucial to steel production, it would mean a shut down of a lot of steel factories. I typically do not invest in commodity businesses, but seeing how uniquely positioned they are, I pulled the trigger. The only reason why I would sell is if the thesis above how systemic and important they are in the industry is wrong. As most companies deal with graftech, not being they are the cheapest in price, but the largest in value, as they can rely on the electrode to last when going through the steel production process. Please note, I’m basing this on annual reports and haven’t look through the source material. So please feel free to poke holes in my thesis. As this is a relatively large position.

It's still a cyclical business, just likely less cyclical than peers because of the contracts. In typical BAM fashion, they're trading pricing for stability, which I think is the right move. Not my largest position, but I added in the 13's today because the price move was just stupid. Small float makes this fun. 

I'd also point out that even at prices half of what they are today, this is a business that can earn 30%+ ROIC's, which shows that actually it's a fairly high quality business. Another point is they have a structurally lower tax rate than peers, so comping them on an EV/EBITDA basis I think misses some things (stability being the other).

I view this as, oddly, a defensive company. If we get the market cap back to us in cash, then the stub value is free upside. I have a fairly high degree of confidence that, assuming $10k, then $8k, the $6k electrode pricing in 2019/2020/2021 vs. $15k today, that they're going to earn the cash I expect they will.

That's kind of my point. It is a defensive company where you can be comfortable that prices have to be cut more than 50% or more for Graftech to not earn a net income. This is the first time I invested in a commodity-type business, but I do not have to be an expert in commodities to know this can be a lucrative investment with very little downside.
Title: Re: EAF - GrafTech
Post by: valueinvestor on December 05, 2018, 07:45:30 PM
Not sure why Graftech went down by 8%, possibly because of https://www.recyclingtoday.com/article/sdi-steelmaking-recycling-eaf-southwestern-usa/.

Not sure why this matters, as the mill is only to start construction by 2020 or 2021.

The fact that they are building out new EAF furnaces, where "over 85% of senior management compensation at risk / Over 60% of production employee compensation at risk," where 100% of annual bonus is linked to ROE and long-term incentive plans tied to ROE, Operating Margins, Revenue Growth and Operating Cash Flow per Revenue metrics shows they believe the long term viability of Electric Arc Furnace. However, I typically refrain using that argument, because there have been numerous occasions where shareholders' interest were aligned with the managements, but still turned out to be a bad investment.

I have not bought more, as it is a large position, but tempted.
Title: Re: EAF - GrafTech
Post by: chrispy on December 06, 2018, 05:24:41 AM
Today is the ex dividend date for the 0.7$ dividend. May that be part of it?
Title: Re: EAF - GrafTech
Post by: peterHK on December 06, 2018, 09:35:00 AM
The dividend is some of it. Also remember that this trades with China and steelmaking (very high correlation to Iron Ore and Met Coal, even though those aren't used in EAF steelmaking...), and it has a very low float so it's easily pushed around.

I think it's a bargain here, but it's a large enough position for me so I'm not going to add more just for risk control reasons.
Title: Re: EAF - GrafTech
Post by: bjakes00 on December 06, 2018, 02:05:25 PM
It's so cheap it makes you completely doubt your thesis...on the Massif capital numbers, next 5 year contracted FCF is 62% of current EV? Nevermind any kind of terminal value or the other third of the business (going to 25% once management puts new take-or-pay contracts in place) that is still very healthy but based on spot prices.

Makes you wonder how Brookfield is going to sell down - my best guess is that they have a $20 floor price on any future selldowns they do.

Title: Re: EAF - GrafTech
Post by: valueinvestor on December 06, 2018, 02:57:22 PM
Who knows what's Brookfield's game plan is on this one, but they are motivated to see this trade well.

I've bought some more for the possible bump back, because the only real risk is that their customers cannot pay and there's a liquidity issue with the company because they do have a decent chunk of debt.


Title: Re: EAF - GrafTech
Post by: peterHK on December 06, 2018, 04:08:19 PM
I have the trading down to the float. I think the market is just missing the cash flow story and management sort of shot itself in the foot the last conference call.

As for BAM's strategy, look at the buyback vs. dividend decision. Secondaries above $20, dividends to release cash without BAM selling their stake below $20. I think that outlines what they think intrinsic value is fairly clearly.
Title: Re: EAF - GrafTech
Post by: BG2008 on December 06, 2018, 06:49:09 PM
GrafTech reminds me of Awilco Drilling a lot. Contracts in place.  The difference is that the GrafTech assets likely won't depreciate the way that the semi submersibles will.   
Title: Re: EAF - GrafTech
Post by: BG2008 on December 06, 2018, 06:52:33 PM
The secondary at $20 is very telling of what they think the value is.  Granted, if you own a very large chunk of a company, you manage position size and start selling earlier than if you owned a 2% position or just a smaller % of the entire company. 
Title: Re: EAF - GrafTech
Post by: heth247 on December 06, 2018, 08:33:58 PM
So this is selling below the IPO price now?

In the VIC write up, comments section, somebody mentioned that those take-or-pay contract cannot always be forced and has room to negotiate. Is this true?  (Somehow I can only view part of the comments in VIC, not all).  I think this is  critical because the contracted revenue is basically where the margin of safety is.
Title: Re: EAF - GrafTech
Post by: Spekulatius on December 07, 2018, 04:14:02 AM
So this is selling below the IPO price now?

In the VIC write up, comments section, somebody mentioned that those take-or-pay contract cannot always be forced and has room to negotiate. Is this true?  (Somehow I can only view part of the comments in VIC, not all).  I think this is  critical because the contracted revenue is basically where the margin of safety is.

Based on what I have seen with drilling rigs, contracts ended up sometimes not getting enforced and renegotiation was occurring. I am guessing it depends on the balance of power between the customer and the supplier, the financial health of the customer (if he canít pay, he wonít) and how the contracts are written. For example with Chinese customers, I always would be worried about them just bailing out, if they are unfavorable. Then they have to be sued  in a chinese court - good luck!
Title: Re: EAF - GrafTech
Post by: valueinvestor on December 07, 2018, 08:33:09 AM
So this is selling below the IPO price now?

In the VIC write up, comments section, somebody mentioned that those take-or-pay contract cannot always be forced and has room to negotiate. Is this true?  (Somehow I can only view part of the comments in VIC, not all).  I think this is  critical because the contracted revenue is basically where the margin of safety is.

Based on what I have seen with drilling rigs, contracts ended up sometimes not getting enforced and renegotiation was occurring. I am guessing it depends on the balance of power between the customer and the supplier, the financial health of the customer (if he canít pay, he wonít) and how the contracts are written. For example with Chinese customers, I always would be worried about them just bailing out, if they are unfavorable. Then they have to be sued  in a chinese court - good luck!

Well if the thesis was based on contracted cash-flow without any consideration to quality of the business, then it may not be prudent to invest in such an idea. What I see with Graftech is that it is a business that it is a high-quality and defensive business. The spot price is already 50% above the contract price, and typically, prices go down by 50% during a recession.

In order for Graftech to not make a net income, conservatively, spot price has to be at ~$4500.00. While the contracted price is ~10 000.00 (where they make ~40%+ net profit margin), and current spot prices are around ~$15K. So if a 50% decline does come, then it does not affect Graftech. This does not factor any future growth.

Lastly, Graftech does not supply to China.

However, Spekulatius is right in a way that contract for the most part is enforceable, when there's an ability to fulfil one's obligation, but once the ability is gone, then... it's a different story.

My fear is the debt, where cash-flow required for the liabilities may not be sufficient during a down-turn. Hence, the position-sizing.
Title: Re: EAF - GrafTech
Post by: peterHK on December 07, 2018, 11:35:30 AM
1) Less than 5% of EAF steelmaking costs are electrodes. It is highly unlikely that the costs of these things will force a customer out of business.

2) Keeping plants open is often more profitable than closing them.

3) EAF has said that there are no reopeners on contracts, so there is no renegotiation available until the contracts roll over.
Title: Re: EAF - GrafTech
Post by: valueinvestor on December 07, 2018, 12:38:25 PM
1) Less than 5% of EAF steelmaking costs are electrodes. It is highly unlikely that the costs of these things will force a customer out of business.

2) Keeping plants open is often more profitable than closing them.

3) EAF has said that there are no reopeners on contracts, so there is no renegotiation available until the contracts roll over.

Any chance you looked at how their Accounts Receivable works? I'm not really concerned about steelmakers ability to stay open, but rather their ability to pay on time during a downturn, which can have a domino effect, especially when it comes time to pay bills, and payroll. 

Title: Re: EAF - GrafTech
Post by: valueinvestor on December 08, 2018, 12:02:08 PM
1) Less than 5% of EAF steelmaking costs are electrodes. It is highly unlikely that the costs of these things will force a customer out of business.

2) Keeping plants open is often more profitable than closing them.

3) EAF has said that there are no reopeners on contracts, so there is no renegotiation available until the contracts roll over.

Any chance you looked at how their Accounts Receivable works? I'm not really concerned about steelmakers ability to stay open, but rather their ability to pay on time during a downturn, which can have a domino effect, especially when it comes time to pay bills, and payroll.

Seems AR is net 30 to 120, but what's interesting is that their AR only increased by 76%, when revenues went up 280%.

On a completely different note, not sure why the stock got killed because of the Vertical Group Report last month. Even if 91,000 MT in additional capacity comes in, which increases supply by 14%, I fail to see how it will reduce the value of Graftech by almost half.

Title: Re: EAF - GrafTech
Post by: valueinvestor on December 11, 2018, 10:54:22 AM
The stock is in free-fall, sold out my position when it hit a 10% loss, but have plans to buy back. Not sure what is happening, especially when there's nothing changed to the fundamentals of the stock, maybe it's something outside? Does anyone know what it is?
Title: Re: EAF - GrafTech
Post by: Cardboard on December 11, 2018, 11:14:03 AM
Bear market. People sell everything out of fear. Fundamentals no longer part of the equation.

Listening to many managers on TV, they all try to hide somewhere and almost all expect a bad economy in 2019. It now pays to be negative as they all have had a bad 2018 and their clients are not or will not be happy.

I don't own this stock but, I will be doing some research on it as it looks interesting.

Cardboard
Title: Re: EAF - GrafTech
Post by: Gregmal on December 11, 2018, 11:25:20 AM
Bear market. People sell everything out of fear. Fundamentals no longer part of the equation.

Listening to many managers on TV, they all try to hide somewhere and almost all expect a bad economy in 2019. It now pays to be negative as they all have had a bad 2018 and their clients are not or will not be happy.

I don't own this stock but, I will be doing some research on it as it looks interesting.

Cardboard

Basically this.

All those turds who have been wrong for years, if not longer now get to gloat about being in the consensus but at the end of the day, you can't talk the economy into a recession, and barring one, there's a lot of companies out there that are very enticing right now. Sometimes the market goes stupid. Everyone thinks 2019 will be a lost year. If those predictions bear the same accuracy as one's we've heard from underperformers and analysts for the past decade, 2019 will turn out to be decent...Think with your brain, not your ears.

I'd also add that the Wall St crowd's obsession with the boogey man called "recession" is kinda stupid as well. Maybe companies that are operating at record profitability this year, earn 5% less next year... SO WHAT? What does Wall St say? Give em a 7x multiple.... Sheer stupidity.
Title: Re: EAF - GrafTech
Post by: peterHK on December 11, 2018, 12:27:43 PM
Bear market. People sell everything out of fear. Fundamentals no longer part of the equation.

Listening to many managers on TV, they all try to hide somewhere and almost all expect a bad economy in 2019. It now pays to be negative as they all have had a bad 2018 and their clients are not or will not be happy.

I don't own this stock but, I will be doing some research on it as it looks interesting.

Cardboard

Bringing it back to EAF, 2/3 of their revenue is contracted, and while some roll off this year there will be renewals.

The market thinks this business is WAY more cyclical than it actually is going to be over the next 4 years, and because of the small float, it can get pushed wildly around.

Basically this.

All those turds who have been wrong for years, if not longer now get to gloat about being in the consensus but at the end of the day, you can't talk the economy into a recession, and barring one, there's a lot of companies out there that are very enticing right now. Sometimes the market goes stupid. Everyone thinks 2019 will be a lost year. If those predictions bear the same accuracy as one's we've heard from underperformers and analysts for the past decade, 2019 will turn out to be decent...Think with your brain, not your ears.

I'd also add that the Wall St crowd's obsession with the boogey man called "recession" is kinda stupid as well. Maybe companies that are operating at record profitability this year, earn 5% less next year... SO WHAT? What does Wall St say? Give em a 7x multiple.... Sheer stupidity.
Title: Re: EAF - GrafTech
Post by: valueinvestor on December 11, 2018, 12:28:38 PM
 ???
Bear market. People sell everything out of fear. Fundamentals no longer part of the equation.

Listening to many managers on TV, they all try to hide somewhere and almost all expect a bad economy in 2019. It now pays to be negative as they all have had a bad 2018 and their clients are not or will not be happy.

I don't own this stock but, I will be doing some research on it as it looks interesting.

Cardboard

Basically this.

All those turds who have been wrong for years, if not longer now get to gloat about being in the consensus but at the end of the day, you can't talk the economy into a recession, and barring one, there's a lot of companies out there that are very enticing right now. Sometimes the market goes stupid. Everyone thinks 2019 will be a lost year. If those predictions bear the same accuracy as one's we've heard from underperformers and analysts for the past decade, 2019 will turn out to be decent...Think with your brain, not your ears.

I'd also add that the Wall St crowd's obsession with the boogey man called "recession" is kinda stupid as well. Maybe companies that are operating at record profitability this year, earn 5% less next year... SO WHAT? What does Wall St say? Give em a 7x multiple.... Sheer stupidity.

It's an incredible and lucrative phenomenon. I'm going to slowly rebuild my position, because although I have been in situations where it took two-to-three years of being underwater, before the market became optimistic, I'm not comfortable with the fact that it is a commodity company and the debt.

I still do not understand why it is hard to bring in additional needle coke and graphite electrodes supply, as I am just basing this on the words of Graftech and other reports, and not the source material.

However even with my ignorance, it looks stupid cheap, because even if there was enough demand or supply cuts that brought prices to down by 50%, they still make a 60% FCF margin. I wish Graftech includes in their presentation sometime in the future, how their company will look during a trough cycle, like how Fiat did.

It's trading at 6x net earnings after taxes, and even adding the debt to the market cap, it still trades at 9x net earnings after taxes without factoring growth or price increases as more than 2/3 of their contracts are based on prices that is 50% below the spot price. 

Title: Re: EAF - GrafTech
Post by: peterHK on December 11, 2018, 01:59:31 PM
As per Showa Denko's most recent call:

Q. It is said that spot prices of graphite electrodes
in Chinese market are going down. How are the
prices of graphite electrodes manufactured and
sold by your Sichuan subsidiary?

A. Prices of high power (HP) graphite electrodes for
ladle furnaces in China are stagnant. However, as
for ultra high power graphite electrodes which our
group company in China produces with high quality,
the situation is quite different. Prices of UHP
graphite electrodes with diameter of 24 inch or larger
in Chinese market remain high

From their Q2 call, they said that they think competitors are debottlenecking, but no new supply and IF there were it would take 3 years to build it (even in China).
Title: Re: EAF - GrafTech
Post by: bjakes00 on December 11, 2018, 02:37:39 PM
How do you bring new petroleum needle coke onto the market (the key ingredient for the UHP-GE)? This is a small market with 4 players and Philips 66 has something like half (if not more) of the production. P66 and Graftech have 75% of production.

This stuff is produced in a complex refinery and a project to bring on more supply would be a significant cost and time outlay. I don't see how P66 would be incentivised to bring on more capacity given how profitable their current capacity is without significant off take agreements and a floor price. Otherwise they risk bringing on supply at a time when demand dries up.

There is also a route to produce UHP-GE via coal but I understand its only Showa Denko and maybe Tokai that can process this stuff:
https://www.m-chemical.co.jp/en/products/departments/mcc/coke/product/1201080_7940.html
 (https://www.m-chemical.co.jp/en/products/departments/mcc/coke/product/1201080_7940.html)
EAF have an extremely advantaged position in the UHF-GE market.
Title: Re: EAF - GrafTech
Post by: bjakes00 on December 11, 2018, 02:52:45 PM
Some additional colour from P66 recent results transcript:
1. They talk about needle coke being "a relatively small component in the overall mix for Phillips 66"
2. On plans to expand production:  "The coke business is within the Humber Refinery and the Lake Charles Refinery. So it shows up in the Refining portfolio, our Refining segment. In that segment we highlight the most important capital projects every year [...]. And so, the fact that we haven't highlighted a large capital project, it's probably a reasonable assumption that there's not one."
3.  "We do have industry-leading technology associated with needle coke production It is a different process. And so we are very unique in that regard."
Title: Re: EAF - GrafTech
Post by: kab60 on December 11, 2018, 10:49:26 PM
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?
Title: Re: EAF - GrafTech
Post by: tripleoptician on December 12, 2018, 06:55:51 AM
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bŤ exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes
Title: Re: EAF - GrafTech
Post by: kab60 on December 12, 2018, 07:05:26 AM
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bŤ exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes
Sorry if I was unclear - I know about their own production of Needle Coke, but as you said it only covers 2/3 of their needs according to their recent presentation. I was just wondering whether there's a big risk and Needle Coke prices spike a lot, thus making the 1/3 unprofitably - possibly by a large margin. Seems like it would take some extreme moves, but it wouldn't be the first time a company was screwed by fixed contracts with variable costs.
Title: Re: EAF - GrafTech
Post by: tripleoptician on December 12, 2018, 07:18:14 AM
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bŤ exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes
Sorry if I was unclear - I know about their own production of Needle Coke, but as you said it only covers 2/3 of their needs according to their recent presentation. I was just wondering whether there's a big risk and Needle Coke prices spike a lot, thus making the 1/3 unprofitably - possibly by a large margin. Seems like it would take some extreme moves, but it wouldn't be the first time a company was screwed by fixed contracts with variable costs.

Well the price of needle coke has spiked dramatically but those costs of production have been passed on via increased spot prices in GE productioŮ.

If there is no other producer that internally sources needle coke than higher prices of needle coke from Phillips would increase the cost of production for everyone.

It doesnt appear steel producers using EAF have an option to not have a GE for their production and therefore higher needle coke prices just get passed to the consumer of GE. This cost seems low to the overall cost of steel production.

The known unknowns are what happens with China. All discussion from the company is ex-China as no one can estimate their production abilities or ability to compete in the high quality GE market.
It also looks like China is trending toward increasing the percentage of EAF steel production vs Blast secondary to the environmental factors.

Assuming this continues to occur, perhaps a significant portion of internally sourced needle coke in China needs to be kept in China for GE production.

I read an article for india where their gov't was forcing GE producers to create fixed prices of GE's for the steel companies despite being externally sourced needle coke. Now that can be a recipe for disaster.
Title: Re: EAF - GrafTech
Post by: peterHK on December 12, 2018, 07:23:44 AM
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bŤ exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes
Sorry if I was unclear - I know about their own production of Needle Coke, but as you said it only covers 2/3 of their needs according to their recent presentation. I was just wondering whether there's a big risk and Needle Coke prices spike a lot, thus making the 1/3 unprofitably - possibly by a large margin. Seems like it would take some extreme moves, but it wouldn't be the first time a company was screwed by fixed contracts with variable costs.

No because GE prices are largely based on coke plus a margin (usually), so there is a floor in the market based on coke prices. One of the reasons GE prices are so high is that coke prices are so high, so one has to watch them both to get a sense of the business.
Title: Re: EAF - GrafTech
Post by: valueinvestor on December 12, 2018, 07:54:52 AM
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bŤ exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes
Sorry if I was unclear - I know about their own production of Needle Coke, but as you said it only covers 2/3 of their needs according to their recent presentation. I was just wondering whether there's a big risk and Needle Coke prices spike a lot, thus making the 1/3 unprofitably - possibly by a large margin. Seems like it would take some extreme moves, but it wouldn't be the first time a company was screwed by fixed contracts with variable costs.

No because GE prices are largely based on coke plus a margin (usually), so there is a floor in the market based on coke prices. One of the reasons GE prices are so high is that coke prices are so high, so one has to watch them both to get a sense of the business.

Any chance you can clarify more? For some reason, my interpretation is that the take-or-pay agreements say the price of their graphite electrodes is "coke price + some margin," as opposed to an actual price, therefore factors in any possible extreme movements in needle coke. It's not unheard of but I never saw a client sign a contract where the margin is well in excess of 20%. Unless the price they receive from their Seadrift production is significantly lower than the third-party vendors.
Title: Re: EAF - GrafTech
Post by: bjakes00 on December 12, 2018, 07:57:23 AM
Showa Denko released a medium term plan today reiterating the tightness in the market and saying prices for next half are agreed and above the previous half prices. The BoAML note is informative if you can access.

They again said there is no point in expanding UHP capacity (even though it would take a few years to do so) as no needle coke producers are bringing on any supply - they all realise how cyclical the industry is and are acting rationally (for now).

Expect EAF to report that 75% of volumes are contracted (post sea drift debottlenecking) at a higher than previous average price.
Title: Re: EAF - GrafTech
Post by: peterHK on December 12, 2018, 12:08:54 PM
Have theseguys fully matched their sales of GE with their purchases of Needle Coke? Couldn't see it in recent presentation. If not, is it a risk that some of these seemingly profitable contracts bite them in the butt because Needle Coke prices rise even more and thus they're locked into unprofitable contracts?

They produce their own needle coke via a wholly owned facility.
Thus is what makes them able to create fixed priced take or pay contracts on 2/3rd of their production. NO other GE producer has their own internal supply of needle coke.

Off memory I think they become unprofitable around the $2500 price for their graphite electrode. ThIs occurred in 2016 and led to bankruptcy given the debt load.

The extra 1/3rd of GE production is vunerable to external needle coke supply as it needs to bŤ exterbally sourced. 

Someone correct me if wrong as I read through the weekend but didnt take notes
Sorry if I was unclear - I know about their own production of Needle Coke, but as you said it only covers 2/3 of their needs according to their recent presentation. I was just wondering whether there's a big risk and Needle Coke prices spike a lot, thus making the 1/3 unprofitably - possibly by a large margin. Seems like it would take some extreme moves, but it wouldn't be the first time a company was screwed by fixed contracts with variable costs.

No because GE prices are largely based on coke plus a margin (usually), so there is a floor in the market based on coke prices. One of the reasons GE prices are so high is that coke prices are so high, so one has to watch them both to get a sense of the business.

Any chance you can clarify more? For some reason, my interpretation is that the take-or-pay agreements say the price of their graphite electrodes is "coke price + some margin," as opposed to an actual price, therefore factors in any possible extreme movements in needle coke. It's not unheard of but I never saw a client sign a contract where the margin is well in excess of 20%. Unless the price they receive from their Seadrift production is significantly lower than the third-party vendors.

1) The MARKET price of electrodes is driven by needle coke as a cost of production.

2) The CONTRACT prices are based on a negotiated rate, lower than spot to account for the lack of optionality for the customer and value for the producer. 

3) They produce their needle coke, and have hedged the cost of needle coke production through hedging oil production, so they know their cost.

The profit to EAF is the difference between the negotiated rate, and the cost to produce the needle coke. Because they have both locked in, they know their margins and there can be no risk of increases in coke prices etc. for the duration of the contract.

Going forward, the way you make a contract is to 1) see what rate you can get from the customer, which depends on the current spot prices, 2) hedge your oil needs so your cost is known, 3) profit is the rate you get from the customer less the cost to produce (which is known).

Thus, contract profitability is driven by the spot price.

However, GE spot prices are driven by both supply and demand, but also by needle coke prices, so higher needle coke prices support higher GE spot prices, which in turn supports higher contract prices. Thus, the two move together, so you can think of them like a spread.

Title: Re: EAF - GrafTech
Post by: johnny on December 15, 2018, 02:29:37 PM
Has anybody given any thought to antitrust risk here? You have two players controlling ~75% of the needle coke market, needle coke price has been a ten-bagger in the past year, and both players keep blowing off questions about building new supply.

Before the acquisition of Seadrift, GrafTech actually had contractual audit-rights into Phillips' needle coke business to enforce an MFN clause. DOJ made them drop that, and any formal contracts between the two firms now get reviewed by DOJ. OK, cool.

Just concerned that there's a very obvious solution here where Phillips guarantees St Mary's supply in exchange for an assurance that Graftech won't expand production at Seadrift and possibly enter the coke market as a seller. I mean, I'm concerned that this solution is obvious and that the people negotiating the deal are going to get legally sloppy with it. Paranoid?
Title: Re: EAF - GrafTech
Post by: valueinvestor on December 17, 2018, 10:07:58 AM
Has anybody given any thought to antitrust risk here? You have two players controlling ~75% of the needle coke market, needle coke price has been a ten-bagger in the past year, and both players keep blowing off questions about building new supply.

Before the acquisition of Seadrift, GrafTech actually had contractual audit-rights into Phillips' needle coke business to enforce an MFN clause. DOJ made them drop that, and any formal contracts between the two firms now get reviewed by DOJ. OK, cool.

Just concerned that there's a very obvious solution here where Phillips guarantees St Mary's supply in exchange for an assurance that Graftech won't expand production at Seadrift and possibly enter the coke market as a seller. I mean, I'm concerned that this solution is obvious and that the people negotiating the deal are going to get legally sloppy with it. Paranoid?

Contractual audit-rights? MFN Clause? To say I'm not an expert is an understatement, but if you could elaborate more, I am more than happy to put in the time to see if it is a risk. Not sure how MFN Clauses applies really, but from what I'm interpreting, it prevented P66 at the time to provide needle-coke at better terms for other potential purchasers?
Title: Re: EAF - GrafTech
Post by: johnny on December 17, 2018, 01:16:50 PM
Details aren't important. You understand the substance and, as you say, the audit rights were just to protect the pricing promises.

My point is more general: there's this very deep relationship between GrafTech and Phillips that predates GrafTech's absorption of their major competitor. We're being given a bull-case of decade plus secular growth in needle coke demand. And the two companies that make up 75% of its supply just blow-off the prospect of substantially increasing production as if only an idiot would ask about it.

This is, in-and-of-itself, only mildly eyebrow raising, I guess my real issue is that I haven't found any hard numbers to run the hypothetical of: "WE BUILD A NEW NEEDLE COKE FACILITY". I get that it's expensive, and that it's dirty, or whatever. But if somebody could make the clear case to me that the economics of building out new supply are actually Not Good, I think it'd help me abandon the conspiracy theory.

#needlegate
Title: Re: EAF - GrafTech
Post by: valueinvestor on December 17, 2018, 02:11:03 PM
Details aren't important. You understand the substance and, as you say, the audit rights were just to protect the pricing promises.

My point is more general: there's this very deep relationship between GrafTech and Phillips that predates GrafTech's absorption of their major competitor. We're being given a bull-case of decade plus secular growth in needle coke demand. And the two companies that make up 75% of its supply just blow-off the prospect of substantially increasing production as if only an idiot would ask about it.

This is, in-and-of-itself, only mildly eyebrow raising, I guess my real issue is that I haven't found any hard numbers to run the hypothetical of: "WE BUILD A NEW NEEDLE COKE FACILITY". I get that it's expensive, and that it's dirty, or whatever. But if somebody could make the clear case to me that the economics of building out new supply are actually Not Good, I think it'd help me abandon the conspiracy theory.

#needlegate

#needlegate - funny  :)

I have no idea on the economics of building out new supply, which is why my position may only be 15% of my portfolio maximum. However the graphite electrode manufacturers with considerable resources (forgot the names, but I'll see if I can get the information again) who announce they will be building out new manufacturing facilities, say it will take at least 2-5 years to get construction started (guess due to the regulatory hurdles and permits required), from what I read.

Title: Re: EAF - GrafTech
Post by: bjakes00 on December 18, 2018, 01:12:20 PM
You talking about Tokai or Showa Denko?

Would be epic if an industry expert could chime in on the technical and economic complexities of building out a delayed coker for needle coke production but that may be hoping for too much.

For those that are technically inclined (there are further citations at the bottom if you want to go down the rabbit hole): https://patents.google.com/patent/US3704224 (https://patents.google.com/patent/US3704224)

This is the refinery where P66 has a delayed coker for the production of needle coke: https://www.phillips66.com/refining/lake-charles-refinery (https://www.phillips66.com/refining/lake-charles-refinery)
I think they could expand this / debottleneck potentially but I have no idea how much time/capital that would require. I highly doubt they would build a new refinery just because needle coke prices are high - one would think that many stars would have to align before a new refinery build is on the table.

Gazprom is building a Delayed Coking Unit that is expected to be completed by 2020 (and started in 2017):
https://www.gazprom-neft.com/press-center/news/1120294/ (https://www.gazprom-neft.com/press-center/news/1120294/)

Interestingly, it says that the petroleum coke is used in the Aluminium industry for smelting and makes no mention of Needle Coke. Seems like the needle coke tech is a tightly held secret but unclear if that's right?



Title: Re: EAF - GrafTech
Post by: valueinvestor on December 25, 2018, 02:37:27 PM
Thought this was interesting. I still think it does not apply to EAF, but weíll see. Iím sure itís stull a show me story and it will definitely show in a couple of quarters.

https://www.cnbc.com/2018/12/22/reuters-america-china-carbon-industry-to-face-severe-overcapacity-association.html
Title: Re: EAF - GrafTech
Post by: peterHK on December 26, 2018, 06:41:24 PM
Thought this was interesting. I still think it does not apply to EAF, but weíll see. Iím sure itís stull a show me story and it will definitely show in a couple of quarters.

https://www.cnbc.com/2018/12/22/reuters-america-china-carbon-industry-to-face-severe-overcapacity-association.html

High grade GE needs needle coke:

"However, despite the capacity expansion, China will still face tight supply of high-quality carbon products such as needle-coke, which is used to make lithium-ion batteries."

GE prices are usually based on needle coke plus a spread, thus tight needle coke supports tight GE.
Title: Re: EAF - GrafTech
Post by: heth247 on December 30, 2018, 12:35:58 PM
High grade GE needs needle coke:
"However, despite the capacity expansion, China will still face tight supply of high-quality carbon products such as needle-coke, which is used to make lithium-ion batteries."
GE prices are usually based on needle coke plus a spread, thus tight needle coke supports tight GE.

I thought it is the demand of GE that drives the price of needle coke up, not the other way around. I mean, the needle coke supply has always been there limited, how come the last down turn started?

Reading the latest 10Q, there is a section of "Global economic conditions and outlook" that gives good information of how the 2011-2016 downturn started and ended. I mean, needle coke price jumped in 2017 because GE demand is back due to EAF back on growth, which was the results of China cutting steel export, reducing BOF capacity, and scrape steel price coming down.

Going forward, I think the main driver/risk is still the demand for EAF for steel industry. Needle coke price alone (due to lithum battery) will not prop up the GE price, if the demand of EAF is going down due to an economic downturn. Maybe that is what the market is worrying about?

Here is another VIC writeup -
https://valueinvestorsclub.com/idea/GRAFTECH_INTERNATIONAL_LTD/2383790419 (https://valueinvestorsclub.com/idea/GRAFTECH_INTERNATIONAL_LTD/2383790419)
Title: Re: EAF - GrafTech
Post by: valueinvestor on December 30, 2018, 01:25:29 PM
High grade GE needs needle coke:
"However, despite the capacity expansion, China will still face tight supply of high-quality carbon products such as needle-coke, which is used to make lithium-ion batteries."
GE prices are usually based on needle coke plus a spread, thus tight needle coke supports tight GE.

I thought it is the demand of GE that drives the price of needle coke up, not the other way around. I mean, the needle coke supply has always been there limited, how come the last down turn started?

Reading the latest 10Q, there is a section of "Global economic conditions and outlook" that gives good information of how the 2011-2016 downturn started and ended. I mean, needle coke price jumped in 2017 because GE demand is back due to EAF back on growth, which was the results of China cutting steel export, reducing BOF capacity, and scrape steel price coming down.

Going forward, I think the main driver/risk is still the demand for EAF for steel industry. Needle coke price alone (due to lithum battery) will not prop up the GE price, if the demand of EAF is going down due to an economic downturn. Maybe that is what the market is worrying about?

Here is another VIC writeup -
https://valueinvestorsclub.com/idea/GRAFTECH_INTERNATIONAL_LTD/2383790419 (https://valueinvestorsclub.com/idea/GRAFTECH_INTERNATIONAL_LTD/2383790419)

The investment thesis does not exclude the possibility of EAF demand going down, but rather if EAF demand goes down, then it does not really affect Graftech. As they are one of the few that manufactures Ultra High-Quality Graphite Electrodes, one of fewer that produces their own supply of Needle Coke, and if prices crash by 50% their net profit margins are still 40% and ebitda margins at 65%.

For this thesis to not work out, prices would have to crash by almost 80%. However, even if the company is not affected, it does not mean the company's security would not inevitably go down in price. Hence, position sizing is key.

I really do wonder why Brookfield invested in the first place? Maybe the purchase price of Graftech limited their downside to almost zero? I do not see them foreseeing the massive increase in price at all such as China's restructuring... any chance anyone knows?
Title: Re: EAF - GrafTech
Post by: heth247 on December 30, 2018, 04:54:57 PM
The investment thesis does not exclude the possibility of EAF demand going down, but rather if EAF demand goes down, then it does not really affect Graftech. As they are one of the few that manufactures Ultra High-Quality Graphite Electrodes, one of fewer that produces their own supply of Needle Coke, and if prices crash by 50% their net profit margins are still 40% and ebitda margins at 65%.

For this thesis to not work out, prices would have to crash by almost 80%. However, even if the company is not affected, it does not mean the company's security would not inevitably go down in price. Hence, position sizing is key.

I don't disagree with that. I like the fact that they are 60% hedged, hopefully it will increase to 75% later. That will really make the margin of safety bigger.

Quote
I really do wonder why Brookfield invested in the first place? Maybe the purchase price of Graftech limited their downside to almost zero? I do not see them foreseeing the massive increase in price at all such as China's restructuring... any chance anyone knows?

Maybe buying the lowest-cost + the only vertically integrated producer at the bottom of the cycle was their idea?
Title: Re: EAF - GrafTech
Post by: valueinvestor on December 31, 2018, 07:51:05 AM
If my memory serves me right, I think they acquired seadrift, after they acquired Graftech. However I still think you're in the right direction, but there must of been an "aha" moment, such as they were purchasing it below replacement cost.
Title: Re: EAF - GrafTech
Post by: topofeaturellc on December 31, 2018, 08:09:01 AM
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.

Title: Re: EAF - GrafTech
Post by: topofeaturellc on December 31, 2018, 08:13:53 AM
I believe Seadrift has been in bankruptcy twice in the last 20 years.
Title: Re: EAF - GrafTech
Post by: bjakes00 on December 31, 2018, 01:46:42 PM
"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?
Title: Re: EAF - GrafTech
Post by: topofeaturellc on December 31, 2018, 01:53:27 PM
Total EAF growth ex China is basis points at this point. The shift is mostly complete.  And electrode utilization improves overtime
Title: Re: EAF - GrafTech
Post by: johnny on December 31, 2018, 03:42:09 PM
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.
Title: Re: EAF - GrafTech
Post by: valueinvestor on January 28, 2019, 10:26:20 AM
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.
Title: Re: EAF - GrafTech
Post by: heth247 on February 08, 2019, 03:31:42 PM
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?
Title: Re: EAF - GrafTech
Post by: valueinvestor on February 08, 2019, 04:25:20 PM
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 havenít listened to conference call, but I typically donít 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 doesnít know, and anyone who claims to know probably doesnít. 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.
Title: Re: EAF - GrafTech
Post by: bjakes00 on February 10, 2019, 11:46:29 AM
Agreed except itís 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)
Title: Re: EAF - GrafTech
Post by: valueinvestor on February 10, 2019, 11:52:54 AM
Agreed except itís 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?
Title: Re: EAF - GrafTech
Post by: bjakes00 on February 11, 2019, 01:24:16 PM
They havenít officially changed their minds, it was the price they seemed willing to transact at post the IPO. There wonít be any buybacks until the share price can get back there again.
In any case theyíve committed $100m now to paying down debt which seems prudent.
Title: Re: EAF - GrafTech
Post by: heth247 on March 04, 2019, 04:11:22 PM
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?
Title: Re: EAF - GrafTech
Post by: bjakes00 on March 05, 2019, 01:33:23 PM
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".
Title: Re: EAF - GrafTech
Post by: bargainhunter on April 23, 2019, 08:33:43 AM
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)?
Title: Re: EAF - GrafTech
Post by: peterHK on May 22, 2019, 10:15:03 AM
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.
Title: Re: EAF - GrafTech
Post by: valueinvestor on May 22, 2019, 10:40:05 AM
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.
Title: Re: EAF - GrafTech
Post by: heth247 on May 22, 2019, 12:15:02 PM
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.
Title: Re: EAF - GrafTech
Post by: chrispy on May 22, 2019, 12:31:01 PM
Agree with heath
Title: Re: EAF - GrafTech
Post by: tripleoptician on May 22, 2019, 03:01:13 PM
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 isnít happening soon

Title: Re: EAF - GrafTech
Post by: racemize on May 22, 2019, 04:03:54 PM
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.
Title: Re: EAF - GrafTech
Post by: Spekulatius on May 22, 2019, 04:41:34 PM
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.
Title: Re: EAF - GrafTech
Post by: BG2008 on May 22, 2019, 09:04:58 PM
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.   
Title: Re: EAF - GrafTech
Post by: Jurgis on May 22, 2019, 09:58:27 PM
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)
Title: Re: EAF - GrafTech
Post by: writser on May 23, 2019, 01:01:46 AM
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.
Title: Re: EAF - GrafTech
Post by: petec on May 23, 2019, 01:07:33 AM
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.
Title: Re: EAF - GrafTech
Post by: valueinvestor on May 23, 2019, 04:52:22 AM
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.

This was a real eye opener for me. I remember a time where I had a large part of my portfolio in Brookfield Office Properties, made a good solid return, especially looking at the time spent researching on each investment. I was especially pissed that Brookfield took it private for less than liquidation value, as opposed to paying a fair price and making good returns, at the very least.

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.

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.


This is true for the most part, but I rather hoped that the board do their duties in finding a buyer who can extract a lot of strategic value, such as Facebook and Instagram or Blackstone and Equity Office Properties.

They paid a very large premium, and made good money in return.

Title: Re: EAF - GrafTech
Post by: Packer16 on May 23, 2019, 05:44:41 AM
I agree that most of these investors to various degrees will take advantage of minority investors when they can.  That is why there are SoTP discounts associated with their entity valuations like BAM.  The more they act like predators the larger the discount.  If they take advantage of minorities when they can, when do you become a minority to be taken advantage of?  Once this approach is part of your business model, IMO it is difficult to draw the line.  I think the market rewards good actors vs. worse ones.  If you look at the valuation of SSW vs. TOO you can see this in action.  SSW is a much tougher & IMO worse business than TOO but the share price is much higher.  The Fairfax approach of fair & friendly IMO will be rewarded in the long-term versus the take what you can get now approach. 

I also think for public businesses in these situations that at some point there will be more rights given to minorities (maybe by legislation or lawsuits) to force the bad actors to act according to their duty to the minorities.  The intent of minority shareholder protection is to say if you control a public company then you should be partners with them & not predators taking advantage of them.  In most of these cases, the control folks feel they have no duty to minority shareholders.  This will show up in pricing of securities the bad actors are a part of. 
 
The one difference I noted with TOO is that BBU management told shareholders one thing when asked about a take down (we will keep the company public for an exit) & did another.  I would just like those who act this way to be honest & say we may do this to minorities & not give an impression they are something they are not.  IMO this is a disclosure issue as well as a governance issue.

Packer
Title: Re: EAF - GrafTech
Post by: BG2008 on May 23, 2019, 07:37:31 AM
Jurgis/Writser,

I love the candid and direct feedback on this governance issues.  I am a big boy and fully understand that investing is probabilistic.  I actually stated that it is possible that Brookfield may try a take under. I just want to distinguish that there are two types of shareholders here in Teekay situation

1) Teekay Corporation was a distressed seller that needed liquidity recently and
2) A patient/long term shareholder base (letter writer) that is willing to wait years for TOO to play.  We don't need liquidity and we are also provider of liquidity. 

If Brookfield either

1) Refuse to acknowledge a difference between the two types or
2) Knows the difference but treats all of them like lambs

In the long run, no one will pay fair price for any Brookfield sponsored entities if they seek public market IPO.  There is a trade off.  You mentioned recency bias.  Yeah, you could say that.  But maybe that adage of  "brands are built in 10 years and destroyed in 10 minutes" means something and we are seeing it happen in real time.     

I'm glad you guys bought up Berkshire and Clayton, and Malone and etc.   They should all go into the governance watch list database a.k.a. "Shitlist project"  It may not be worthy, but I assume that is how Glass Lewis and ISS got started. 

Title: Re: EAF - GrafTech
Post by: peterHK on May 23, 2019, 07:38:08 AM
If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.
Title: Re: EAF - GrafTech
Post by: 5xEBITDA on May 23, 2019, 07:56:41 AM
If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.

I agree with you from an outsiders perspective. Understanding each parties' incentives is crucial in investing, and in this case it looks like BAM's incentives had been misunderstood. One of the original presentations from a fund listed on the letter to TOO has BAM's involvement as a positive in big bold letters, its just simply wrong and frankly naive. BAM is doing the logical thing here and it is what is best for their investors, they could care less about the minority investors and the idea that this will harm the BAM brand is laughable.

I legitimately do not think there is even a governance issue going on at the moment with TOO and minority shareholders are just pissed off they got the rug pulled out from under them. This is not the first time shareholders listed in the letter have gotten burned by not understanding how distressed investing works. Is this really a BAM issue, or is this really an issue of buy and hold investors style drifting into distressed?
Title: Re: EAF - GrafTech
Post by: valueinvestor on May 23, 2019, 09:39:53 AM
If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.

I agree with you from an outsiders perspective. Understanding each parties' incentives is crucial in investing, and in this case it looks like BAM's incentives had been misunderstood. One of the original presentations from a fund listed on the letter to TOO has BAM's involvement as a positive in big bold letters, its just simply wrong and frankly naive. BAM is doing the logical thing here and it is what is best for their investors, they could care less about the minority investors and the idea that this will harm the BAM brand is laughable.

I legitimately do not think there is even a governance issue going on at the moment with TOO and minority shareholders are just pissed off they got the rug pulled out from under them. This is not the first time shareholders listed in the letter have gotten burned by not understanding how distressed investing works. Is this really a BAM issue, or is this really an issue of buy and hold investors style drifting into distressed?

I do not think people were complaining about how they got burned, or at least in my case. I was more frustrated on finding another investment, than being mad at BAM. Whether I am right or wrong, it does not changes the fact that they are buying us out. However, I do hold the view that if they (or anyone really) keep screwing minority investors, especially if they screw them harder in the future, many people would not buy what they sell, which would significantly impair their ability to exit. Are they unethical? Maybe. Are they going to have a brand that will diminsh? No. Are people going to be more skeptical in getting into bed with Brookfield? Yes.

That also means getting into bed with them on a holding level, and hence there maybe a discount.
Title: Re: EAF - GrafTech
Post by: heth247 on May 23, 2019, 10:12:36 AM
If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.

Well it is easy to say TOO shareholders were stupid in the hindsight. But things changed fast, I suspect this take under was not in the cards of BBU until recently when TK sold all of its TOO stake to BBU.
Title: Re: EAF - GrafTech
Post by: peterHK on May 23, 2019, 12:37:20 PM
If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.

Well it is easy to say TOO shareholders were stupid in the hindsight. But things changed fast, I suspect this take under was not in the cards of BBU until recently when TK sold all of its TOO stake to BBU.

But that was always a risk. BAM has been positioned this way for a while now: if the business didn't work out, then they can take it private themselves and they control the GP and the debt. If it works out, then they hold the equity so they're fine.

Their involvement wasn't good or bad, there were a range of outcomes, and the way BAM invests, they need plans to ensure that the outcome for BAM in each of those is favorable. The issue for shareholders is that in a number of those outcomes, the result was good for BAM and bad for shareholders.
Title: Re: EAF - GrafTech
Post by: peterHK on May 23, 2019, 12:38:43 PM
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.
Title: Re: EAF - GrafTech
Post by: Spekulatius on May 23, 2019, 12:59:39 PM
On top of the loss, you might also get unexpectedly worse taxes when you fill out your K-1 on Sales next year. These things work in mysterious ways. Been there before...
I am avoiding LP‘s where an buyout is possible for that very reason. In this case, there weren’t any recent distributions, so it might be OK, but I have heard about cases, where LP‘s had to pay taxes on „Phantom gains“. These also accrue to the buyer of the entity in most cases.
Title: Re: EAF - GrafTech
Post by: BG2008 on May 23, 2019, 01:38:36 PM
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

PeterHK,

Love the sharp wits and the straight talk.  I guess we're back talking about another BAM sponsored company trading cheaply.  A pattern maybe?

Title: Re: EAF - GrafTech
Post by: heth247 on May 23, 2019, 03:01:17 PM
If you want to invest with BAM, you need to invest IN BAM. As others have pointed out, it's not BAM's duty to care for minority shareholders, it's their duty to earn returns for their LP's.

TOO shareholders were stupid IMO: BAM's incentives were as a GP and debtholder (because that's how the majority of their investment was structured) not as a shareholder. BAM is doing exactly the right thing for BAM: taking control of the whole thing. I did not go long TOO for that exact reason.

EAF is in a different boat because BAM has already monetized it. Would they take it back? Maybe, but I wouldn't be pissed off about it, I'd say "yea, that's BAM being BAM." I'm also a BAM shareholder, and I don't take a loss personally, I take it as a situation where I made a mistake and move on. People need to grow the heck up and realize who they're getting into bed with.

Well it is easy to say TOO shareholders were stupid in the hindsight. But things changed fast, I suspect this take under was not in the cards of BBU until recently when TK sold all of its TOO stake to BBU.

But that was always a risk. BAM has been positioned this way for a while now: if the business didn't work out, then they can take it private themselves and they control the GP and the debt. If it works out, then they hold the equity so they're fine.

Their involvement wasn't good or bad, there were a range of outcomes, and the way BAM invests, they need plans to ensure that the outcome for BAM in each of those is favorable. The issue for shareholders is that in a number of those outcomes, the result was good for BAM and bad for shareholders.

I can argue the same thing for EAF. The critical part is what probability you assign to each outcome. If you tell me that you had the vision a year ago to assign the probability of "taking under at $1.05" to something >20% and used it as one of the main reasons to fail the TOO investment thesis, I have my hats off to you.



Title: Re: EAF - GrafTech
Post by: aglittell on May 24, 2019, 10:00:47 AM
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.
Title: Re: EAF - GrafTech
Post by: valueinvestor on May 24, 2019, 10:24:28 AM
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.
Title: Re: EAF - GrafTech
Post by: rkbabang on May 24, 2019, 10:37:09 AM
If you were to go into business with a friend and you were going to own 49% of the company and your friend was going to own 51%, would you not consider the fact that your partner has majority control of the company a risk that you should take into account before making your decision to invest?   You would want to assess your partner's capabilities to run the business as well as his likeliness to make a decision that benefits him over you.  Whenever you are thinking of becoming a minority shareholder in a company (which is every investment for most equity investors) this is a risk you should think about.  Assuming everyone else is going to care about you because you think they "should" doesn't seem like a good plan.
Title: Re: EAF - GrafTech
Post by: aglittell on May 24, 2019, 10:45:44 AM
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

Title: Re: EAF - GrafTech
Post by: valueinvestor on May 24, 2019, 11:02:02 AM
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.
Title: Re: EAF - GrafTech
Post by: aglittell on May 24, 2019, 11:10:47 AM
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?
Title: Re: EAF - GrafTech
Post by: valueinvestor on May 24, 2019, 11:25:08 AM
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?

As you said, it's thinking of reasons why they may take it private. Typically I invest in companies with an upside of 100% or more, and the reason why I liked Graftech is because there's an optionality that prices will go up, but even if it goes down, I don't lose too. However, my upside is capped with Brookfield, as they may take it private if prices for Graphite goes sporatically up due to the rise in demand for EV vehicles or tightening of supply.
Title: Re: EAF - GrafTech
Post by: BG2008 on May 24, 2019, 12:14:49 PM
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?

Dude, BAM is trying to screw TOO shareholders on an $113mm of S/O not owned by BAM.  EAF is way bigger than that.  From my experience, once someone cheats, they will cheat again.  There is a very important distinction between EAF and TOO and that is EAF is a C Corp and if it is domiciled in Delaware, you have appraisal rights.  This is not a luxury afforded LPs in TOO.  Check this yourself.  I am not going to scrub through the corp structure for you.     
Title: Re: EAF - GrafTech
Post by: valueinvestor on May 25, 2019, 09:24:48 AM
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?

Dude, BAM is trying to screw TOO shareholders on an $113mm of S/O not owned by BAM.  EAF is way bigger than that.  From my experience, once someone cheats, they will cheat again.  There is a very important distinction between EAF and TOO and that is EAF is a C Corp and if it is domiciled in Delaware, you have appraisal rights.  This is not a luxury afforded LPs in TOO.  Check this yourself.  I am not going to scrub through the corp structure for you.   

I know right? At the end of the day, if you need to look into the corporate structure is the investment really worth it? There are other investments with either "minority shareholder-friendly" majority holders or no majority holders that would provide the same upside with limited downside. If not, then I would wait until one comes into my radar.
Title: Re: EAF - GrafTech
Post by: Deepdive on May 25, 2019, 10:51:51 AM
Mark Leonard of Constellation Software has some weird take on buybacks.  He is very much against share buybacks as he feels like he is cheating his shareholders (many who are employees) if he bought back shares from them on the cheap.   I used to roll my eyes at that.  Given what BAM has done, I have grown to appreciate that guy with the weird beard. 
Title: Re: EAF - GrafTech
Post by: chrispy on May 26, 2019, 07:05:47 AM
Deep dive, yes I too thought it was an odd approach but view it in a much different light now
Title: Re: EAF - GrafTech
Post by: johnny on May 26, 2019, 10:06:55 AM
I think I can guess the answer here, but is there a more bullish explanation for why they are so aggressively paying down debt even though they're under their leverage target?
Title: Re: EAF - GrafTech
Post by: peterHK on May 27, 2019, 07:08:17 AM
I think I can guess the answer here, but is there a more bullish explanation for why they are so aggressively paying down debt even though they're under their leverage target?

If you assume electrode prices normalize, then they are over their leverage target. My read on it is that they're paying down debt because they expect pricing to fall and cash flows to weaken.
Title: Re: EAF - GrafTech
Post by: johnny on May 27, 2019, 11:59:27 AM
But they haven't actually explicitly defined what they think normalworld is going to look like right? So, if I'm trying to reverse engineer what number they're preparing for.

40-50% of FCF earmarked for debt in 2019. I don't know why they would front-load they pay-down given the LTAs, so if we assume similar through 2022 that would leave something in the range of $1B in debt? So that suggests they're preparing for something like $500M 2023 EBITDA?
Title: Re: EAF - GrafTech
Post by: peterHK on May 27, 2019, 01:35:23 PM
But they haven't actually explicitly defined what they think normalworld is going to look like right? So, if I'm trying to reverse engineer what number they're preparing for.

40-50% of FCF earmarked for debt in 2019. I don't know why they would front-load they pay-down given the LTAs, so if we assume similar through 2022 that would leave something in the range of $1B in debt? So that suggests they're preparing for something like $500M 2023 EBITDA?

Funnily enough, I have them doing $642, so it's not too too far off.