Author Topic: EAF - GrafTech  (Read 18827 times)

johnny

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Re: EAF - GrafTech
« Reply #100 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?
« Last Edit: May 27, 2019, 12:01:35 PM by johnny »


peterHK

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Re: EAF - GrafTech
« Reply #101 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.

valueinvestor

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Re: EAF - GrafTech
« Reply #102 on: August 13, 2019, 01:53:48 PM »
Looks like Mohnish Pabrai is in EAF.

https://www.dataroma.com/m/holdings.php?m=PI

Fitz

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Re: EAF - GrafTech
« Reply #103 on: August 19, 2019, 10:08:21 PM »
Hey guys, this is my first post on the CB&F, I been lurking in the backgrounds reading all your great posts for a few years now and finally made an account, so really happy to be apart of this community.

Bad news is I didn't have the search option when I had no membership and thought there was no current EAF thread and I thought I would make one... so I basically typed up a few thoughts and just now read the previous 11 pages of posts and realized the ground has been well plowed. If its acceptable I would like to continue and post as if it was a new thread and please shoot holes in the thesis and thoughts.

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EAF GRAFTECH INTERNATIONAL LTD.

The investment in one sentence: Graphite rod manufacture that is world class and low cost provider of EAF rodís selling for 4.4 times cash flow, that has 3-5 year take-or-pay contracts locked up with profits of todayís entire market cap, with a kicker of 30-40% more utilization to go.

I had never looked at this company until Monish Pabrai took a position in it recently. I read through the IPO prospectus and the 2018 AR and here are some thoughts, it looks like a very nice investment with a path to earning its entire market cap within the next 4 years.

Quick Bio on the company GrafTech manufactures Graphite Electrodes which are used as conduction rodís in EAF furnaces that make steel out of scrap metal. Steel is made from a blast furnace or EAF furnace. EAF furnaces have a few advantages and have been taking market share from blast furnaces for the past 15 years (outside of China), they are much friendlier on the environment, use less energy and can use scrap metal to make steel. An EAF furnace requires much less capital, land and environmental hurdles than a blast furnace. As the use of EAF furnaces has risen, so has the demand for GrafTechís graphite rods, they are very complex to make and take up to 6 months per rod, these rods are consumed and destroyed every 8-10 hours or arching in a EAF furnace, so steel manufacturers need a continuous and steady supply.

Steel is a very cyclical industry and blast furnaces out of China have been over producing steel and flooding the world with exports for some years, during this time EAF suffered losses and it was bad to own any steel mill or dependent business. What has changed? In 2016 China started idling production and closing mills, (a blast furnace is built and run constantly for 8-10 years until is is decommissioned) or not re-building supply as it comes offline. Chinaís growth slowed and the subsidies shrank, and forced consolidation as they were unable to use more and more of their domestically produced steel. At the same time the US and other European partners imposed duties to protect domestic steel production. This has lead to a resurgence in EAF steel production, and now itís a great time to be in the business.

EAF was taken private from BAM in 2015 for 1.2 billion. EAF used to have 6 manufacturing plants running and produced 200,000 metric tons of graphite rodís a year. With BAMís management and streamlining they have divested an unrelated business, closed 2 plants, and browned out the only US plant for a total of 3 currently running. There were tremendous scale advantages to producing more Graphite Rods in fewer locations, they invested in debottlenecking at these facilities and in 2018 were able to crank out 202,000MT at 3 facilities. The Pennsylvania facility is browned out and could add another 30k to the total if fired back up. This cost cutting has saved 150mil a year according to BAM. EAF was listed as a controlled company IPO in 2018 with BAM loading 1.2 billion of debt back onto the company recovering there investment and retaining 79% of the stock.

2018 has been a banner year with pre-tax profits of 903 million, and 932 in the TTM.  This has largely been from an increase in commodity prices for the finished graphite electrodes, from a 2016 low of $2500 a metric ton to $10,000 a metric ton in 2018. During the lows of 2014-2016 aprox. 20% of graphite electrode production was permanently closed. Today EAF produces 25% of the Graphite Rod supply (ex-China) and is the second largest producer with there Pennsylvania factory idled currently, with it online it brings them at level with the top producer.

Prices have skyrocketed for several reasons, mainly EAF furnaces and the steel industry outside of China having a resurgence from decreased Chinese exports and more favorable domestic policies for the steel industry, shuttering of graphite rod supply, and a spike in the cost of the main input to graphite rods petroleum needle coke.

Rising petroleum needle coke prices in the graphite rod business is usually bad for the bottom line, but in EAFís case not so much. The crown jewel of this business is its 100% ownership of SeaDrift the 2nd largest producer of petroleum needle coke outside of china. GrafTech is the only vertically integrated Graphite Rod manufacture and this leaves them much less exposed to the fluctuations of this commodityís price. Sea drift can and does support 70% of EAFís needle coke needs. This is where EAF has really made some savvy moves, the price of needle coke has risen tremendously due to its demand for use in electric car batteries and this trend looks likely to continue for the next 1-2 years as more production comes online.

EAF has shifted their business model from annual contracts to 3-5 year take or pay contracts, these new contracts sold like hot cakes as suppliers were eager to fix the future price of their rods and hedge against higher prices in the next few years. EAF has contracts for 674,000 MT, or approximately 60% to 65% of our cumulative expected production capacity from 2018 through 2022. Approximately 90% of the contracted volumes have terms extending to 2022. We have contracted to sell approximately 147,000, 144,000, 127,000 and 120,000 MT in 2019, 2020, 2021 and 2022, respectively. Contracts have a weighted average price of $9,700 per MT. This is 6.5 billion in revenue and if capacity gets used at the same rate as 2018 (99%), a 42% net margin (current margin) leaves 2.75 billion in net income from the take or pay contracts alone.
The current valuation of 3.3 billion has it trading at 4 times net income and 3.5 times pretax profits for TTM earnings. This is a very cheap valuation but not unheard of for a very cyclical industry currently experiencing peak profits. Where I disagree with the markets valuation in the value is the 3-5 year take or pay contracts locking in today's high profits for years to come.
Why wouldnít all EAFís competitors use a similar approach? They canít, profitably at least. No one else has an in-house Needle coking plant. This allows EAF to lock in favorable and guaranteed supply of needle coke for the foreseeable future and make long term commitments on pricing. It appears to be a very powerful advantage. 
A few other areas of note: no new Graphite Rod manufacturing plant has been built in the last 10+ years, EAF management estimates it would take 3-5 years to get new supply online for a new build and require prices to exceed $10,000MT to be commercially viable. Chinaís 12th 5 year plan stated they wanted 20% of the steel production switched over to EAF furnace, although there 13th removed this fixed target and instead had language about new steel production needing to be environmentally friendly. This would result in a large increase in demand, and the supply side would be slower to keep up.

Risks:
1. Seadrift - If there is any stoppage (fire, malfunction, union strike, natural disaster etc..) of needle coking at Seadrift and the prices of needle coke remain elevated the 3-5 year contracts could become huge liabilities.
2. Debt load is now 2 billion leaving EAF with higher debt service and less ability to weather a downturn in prices as before IPO.
3. China: Makes multiples of the rest of the world's steel production and if the blast furnaces decide to power back on at full steam the world would again be flooded with steel.
4. Domestic Policy: Right now EAF and other non-chinese producers are enjoying some protection and duties this could change and effect the economics of EAF furnaces.
5. Slow down in economy reduces steel consumption
6. Minority share holder and possibility of having conflicting interest with majority owner / BAM

landstander

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Re: EAF - GrafTech
« Reply #104 on: September 13, 2019, 06:42:32 AM »
Mohnish sharing his thoughts on EAF - https://youtu.be/OgsKhFzyX2U?t=2933

valueinvestor

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Re: EAF - GrafTech
« Reply #105 on: September 13, 2019, 11:38:35 AM »

Risks:
6. Minority share holder and possibility of having conflicting interest with majority owner / BAM

I sold out after the pop - because with Teekay, Brookfield Office Properties, and GGP (to a certain extent), they were very opportunistic. The possibility is closer to a certainty, where BAM has conflicting interest. Hence, I look at this more of a trade, then an investment.
 
Unless someone gives me a tangible reason why this does not matter? Most times with acquiror like BAM, the intrinsic value does not equal the acquisition value of the company. Especially, when they can pay intrinsic and use platform value to obtain a fair return.
« Last Edit: September 13, 2019, 11:46:09 AM by valueinvestor »

Broeb22

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Re: EAF - GrafTech
« Reply #106 on: September 13, 2019, 12:41:31 PM »


The investment in one sentence: Graphite rod manufacture that is world class and low cost provider of EAF rodís selling for 4.4 times cash flow, that has 3-5 year take-or-pay contracts locked up with profits of todayís entire market cap, with a kicker of 30-40% more utilization to go.

Are these take-or-pay agreements the same kind that MLPs restructured when their O&G customers went bankrupt en masse?

Philbert77

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Re: EAF - GrafTech
« Reply #107 on: September 13, 2019, 09:27:15 PM »

I sold out after the pop - because with Teekay, Brookfield Office Properties, and GGP (to a certain extent), they were very opportunistic. The possibility is closer to a certainty, where BAM has conflicting interest. Hence, I look at this more of a trade, then an investment.
 
Unless someone gives me a tangible reason why this does not matter? Most times with acquiror like BAM, the intrinsic value does not equal the acquisition value of the company. Especially, when they can pay intrinsic and use platform value to obtain a fair return.

I just sold EAF today. After the whole TOO debacle i do not trust BAM affiliated companies to treat their minority shareholders fairly. I also hold MIC and am considering how to get rid of that one as well... though the special dividend just announced is pretty sweet!

johnny

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Re: EAF - GrafTech
« Reply #108 on: September 14, 2019, 03:24:51 PM »
I still don't understand why the Seadrift employees, who I think have an expiring contract (or negotiation period) THIS YEAR, are not opening up with a suggestion that 30% of the equity in the company be immediately deposited into their pension fund.