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.
Title: Re: EAF - GrafTech
Post by: valueinvestor on August 13, 2019, 01:53:48 PM
Looks like Mohnish Pabrai is in EAF.

https://www.dataroma.com/m/holdings.php?m=PI
Title: Re: EAF - GrafTech
Post by: Fitz 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.

-----------

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
Title: Re: EAF - GrafTech
Post by: landstander on September 13, 2019, 06:42:32 AM
Mohnish sharing his thoughts on EAF - https://youtu.be/OgsKhFzyX2U?t=2933 (https://youtu.be/OgsKhFzyX2U?t=2933)
Title: Re: EAF - GrafTech
Post by: valueinvestor 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.
Title: Re: EAF - GrafTech
Post by: Broeb22 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?
Title: Re: EAF - GrafTech
Post by: Philbert77 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!
Title: Re: EAF - GrafTech
Post by: johnny 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.
Title: Re: EAF - GrafTech
Post by: elliott on October 05, 2019, 03:04:04 AM

If petcoke and graphite electrode supply increases, then Graftech may become a poor business to own - just as it was before. Whats more, for a stockholder it is not about capacity actually increasing - so long as the market can confidently see that happening in the future, why would anyone invest in the company?
My point is that this may literally be a cigar butt.

We may look at the contracts and think that there is margin of safety there. But, even if the company makes so much money in contracts in the next 3Y-5Y, how much will actually trickle down into common stockholders pockets? Management targets a 50%-60% return of FCF to shareholders, ie dividends and buybacks, but buybacks may prove worthless if shares tank in the future. Therefore, will dividends received before the market can see the business turning ugly cover much of the investment?

Appreciate any comments.
Title: Re: EAF - GrafTech
Post by: Spekulatius on October 05, 2019, 06:25:14 AM
  • Another key point of the bull thesis is that the Chinese lack the know how for building UHP graphite electrodes. However, management indicated some months ago that 2-3 players there had managed to build some UHP graphite electrodes, even if not yet production ready. Nevertheless, should we see this as an indication that the chinese will eventually get there? If so, it would only be a matter of time before graphite electrode supply increases.


I am no expert in this field, but based on my general knowledge of material science and the Chinese abilities to reverse engineer, I donít think it will be too hard for Chinese companies to create their own UHP needle coke supply. The general process is known, equipment to do this can be purchased, so itís matter to learn some tricks of the trade that are proprietary. It will happen, itís just a matter of time.
Title: Re: EAF - GrafTech
Post by: Fitz on October 06, 2019, 05:42:03 PM
  • A key argument of the bull thesis is that there is not enough petroleum needle coke. Now, a lot of capacity was shut down some years ago (partly the reason of the recent under supply). That capacity may take some time to rebuild cannot be denied, but the fact that much more capacity existed in the past, however, must mean that enough input existed, and possibly is still available today to expand capacity again. I am talking about decant oil. If decant oil is not a constraint, does that mean that it is only a matter of time before petroleum needle cake supply increases?
  • Another key point of the bull thesis is that the Chinese lack the know how for building UHP graphite electrodes. However, management indicated some months ago that 2-3 players there had managed to build some UHP graphite electrodes, even if not yet production ready. Nevertheless, should we see this as an indication that the chinese will eventually get there? If so, it would only be a matter of time before graphite electrode supply increases.

If petcoke and graphite electrode supply increases, then Graftech may become a poor business to own - just as it was before. Whats more, for a stockholder it is not about capacity actually increasing - so long as the market can confidently see that happening in the future, why would anyone invest in the company?
My point is that this may literally be a cigar butt.

We may look at the contracts and think that there is margin of safety there. But, even if the company makes so much money in contracts in the next 3Y-5Y, how much will actually trickle down into common stockholders pockets? Management targets a 50%-60% return of FCF to shareholders, ie dividends and buybacks, but buybacks may prove worthless if shares tank in the future. Therefore, will dividends received before the market can see the business turning ugly cover much of the investment?

Appreciate any comments.


- I'm not aware of needle coke supply shutting down, UHP Graphite rod production was taken off line. The squeeze on needle coke supply has been the increase in demand in the lithium ion batteries used in EV's.

- The main thesis for this trade wouldn't ride on needle coke supply at 70% is made in house and already locked up in 3-5 year contracts. The spot price of needle coke gives you the margin on 30% of revenus and if it persists at elevated levels this will allow for future contracts to be signed at much higher prices. These rosy assumptions aren't built into the buy today but would just be nice kickers!

- As for China entering the UHP or Needle Coke production market, I'm sure they are working very hard right now to produce needle coke or an alternate domestically and would be supersede if they were unsuccessful, but would also be surprised if it came online in a couple years. They are the largest manufacture of Lithium batteries and with all the uncertainty in the global trade market it would be crazy if they weren't working on an in house alternative.

- Capital allocation, I see a majority of the capital returned to be in dividends, at least I hope this is the case. Not because I wouldn't like to see a lot of buy backs today but there just isn't enough float to make this happen. The two people who own most of the stock are BBU and Pabrai both are pretty smart investors and I doubt will be selling back at low prices. This will leave them paying down debt at a higher clip than originally projected or more special and large dividends, and buying back whatever small amounts they can in the public market. If prices rise I hope there is enough independence in management / board to not blindly take in BBU's stock, but after seeing TOO debacle its something to look out for.

Look forward to hearing your thoughts.

-Fitz
Title: Re: EAF - GrafTech
Post by: elliott on October 09, 2019, 02:13:36 AM
Fitz, you are right about the petroleum needle coke capacity. The capacity decrease I was talking about was of graphite electrodes - I mixed the two. Still, it remains to be seen for how long petroleum needle coke capacity will remain as it is, and not increase over demand as it usually happens with commodities. Decant oil is certainly not a constraint.

As for your comment that persisting elevated prices might give the opportunity for Graftech to sign contracts at higher prices, I have some doubts. For one, coke prices seems to be dropping off their recent highs, and I think no one is really surprised. Further, I am not sure about the timing so maybe I am wrong here, but Graftech has managed to sign contracts at an average price short of USD 10,000 / MT when petroleum needle coke spot prices ranged between 15-30,000 per MT. What prices will they get if coke price drops to, say, 10,000 / MT?
EDIT: Actually, most of the capacity that management "sells" in the form of contracts, 3Y-5Y out, is already contracted, so any new contract should only have a very minimal impact anyways. It will be interesting to see what the situation is like 3 years from now, though, when some of these contracts expire and must be renewed.
Title: Re: EAF - GrafTech
Post by: elliott on October 09, 2019, 02:32:21 AM
Another thing I also think about is...
How much FCF will Graftech generate when the chinese start producing and selling UHP graphite electrodes? Half of what it does today? Less? Not to mention that in such a reality, FCF would probably swing from the positive to the negative, unpredictably as is the case with other commodities.

The reason I ask myself that question is becasue Graftech is currently doing ca USD 700M in FCF. Lets say it keeps generating that amount through 2023, so that by the end of 2023 Graftech has made USB 3.5B in FCF. Its current EV is still higher than that though, ca USD 5.5B, and I am not sure that in 2024, if the chinese are actually producing UHP graphite electrodes and the necessary coke, the company will be worth USD 2B or more.
So, is Graftech really that cheap?
Title: Re: EAF - GrafTech
Post by: Saluki on October 09, 2019, 07:50:05 AM
if the chinese are actually producing UHP graphite electrodes and the necessary coke,

The second part is a very big if.  You can only get needle coke when you start by scraping the crud out of a petroleum refinery coker and work it from sponge coke to the good stuff.  But only certain refineries use the crude that you need to start with.  My understanding is that you can't make it from a refinery that processes that venezuelan junk. Since it's a by product, to make more, you would need more refineries that work with light crude. To do that, you would need to find more oil.
EAF and PSX own 70% of the needle coke production capacity in the world. So if you want to make more graphite rods, you can buy the coke from EAF, but if you want more needle coke, where will you get the stuff to make it with?  If you want a house made out redwood trees, you can't just tell people to plant them in georgia because the ones from oregon are getting too expensive.
Title: Re: EAF - GrafTech
Post by: elliott on October 09, 2019, 08:04:50 AM
Couldnt the chinese (or anyone else) buy the decant oil from the US?

According to Graftech, there is abundant decant oil.
Quote
While Seadrift has purchased a substantial majority of its raw material inventory from a limited number of suppliers in recent years, we believe that there is a large supply of suitable decant oil in the United States available from a variety of sources.

Also, note that I am not considering if the chinese will be competitive 2 years from now, but in say 5 years. The economy there is planned, or at least semi planned. Even if the economics dont look good, they will spend as much money as is necessary in order to be able to manufacture their own needle coke - at least if they believe its a strategic concern or something of the sort.
Even Graftech management acknowledged that the chinese will make it at some point - I am pretty sure they said this in one of the last two conference calls, in the Q&A sessions. Dont ask me if they said it will happen in 3 years or 20, I think they didnt mention, but somehow was clear they were not thinking in 20 years. Anyway, I think this was also discussed in the Value investors club writeup. You may check there for more info, Saluki.
Title: Re: EAF - GrafTech
Post by: Stuart D on October 25, 2019, 12:47:40 PM
Apr2020 calls, strike price $17.50, last selling for $0.05 seems cheap.
Title: Re: EAF - GrafTech
Post by: johnny on October 25, 2019, 01:02:35 PM
Given the action of the past year, what worldly events could you imagine causing this to get to $18 within six months? Even if they contracted every last remaining ton of capacity through 2022 at the previous highs, you couldn't quite get there
Title: Re: EAF - GrafTech
Post by: Fitz on October 25, 2019, 01:31:26 PM
If EAF is going to be above 17.50 in April the common seems like quite the deal!

Elliot, one thing I have thought about with the timing and amount of Needle coke production coming on line is this. No one has any coming right now (that I have been able to find, if anyone has more accurate information please share!), so the near term looks to be more of the same; supply is fixed and demand conintues to rise. But as more Needle Coke comes online EAF will be able to benefit in there ability to bring back St. Mary's PA with 28,000 more MT of production annually. With prices sky high right now the only logical reason the PA facility hasn't been restarted is they are unable to obtain the additional Needle Coke for production.
Title: Re: EAF - GrafTech
Post by: Stuart D on October 25, 2019, 02:50:05 PM
Given the action of the past year, what worldly events could you imagine causing this to get to $18 within six months? Even if they contracted every last remaining ton of capacity through 2022 at the previous highs, you couldn't quite get there

I see the call option as $0.05/share to protect against the chance of BAM doing something shareholder friendly before April. On second thoughts, perhaps $0.05 is not cheap enough!

The dynamite is there (800m float & 800m fcf), itís just whether or not they want to light a match.

Title: Re: EAF - GrafTech
Post by: elliott on October 27, 2019, 06:32:21 AM
Given the action of the past year, what worldly events could you imagine causing this to get to $18 within six months? Even if they contracted every last remaining ton of capacity through 2022 at the previous highs, you couldn't quite get there

I see the call option as $0.05/share to protect against the chance of BAM doing something shareholder friendly before April. On second thoughts, perhaps $0.05 is not cheap enough!

The dynamite is there (800m float & 800m fcf), itís just whether or not they want to light a match.

Maybe you already counted with this, but...

"Going forward, we are expanding our capacity by 20,000 TPA. This will catapult HEG into a new orbit."

Stated about a year ago, when capacity was 80TPA. Worse yet expressed using the rhetoric typical of managers who clearly dont understand the capital cycle, and instead are skillful at carving their own tombs. To be clear, that ongoing expansion will take some time to come online, but is already in process.

Also from a year ago is this comment by HEG:
"Currently, the graphite electrode capacity is delicately balanced Ė additional capacity will take anywhere between 2-3 years to become operational."
Title: Re: EAF - GrafTech
Post by: Fitz on October 27, 2019, 08:17:30 PM
Elliott youíre correct that HEG is in the process of adding 20k of annual production of UHP Graphite rods. Iím sure Iím just not reading your posts correctly but I think Needle coke supply and UHP rod supply has been used interchangeably.

More EAF rod production coming online would be a good thing if your concerned about the price of needle coke declining as stated earlier. If I have mis read your posts My apologies and look forward to being educated :)
Title: Re: EAF - GrafTech
Post by: Stuart D on October 27, 2019, 11:18:23 PM
Given the action of the past year, what worldly events could you imagine causing this to get to $18 within six months? Even if they contracted every last remaining ton of capacity through 2022 at the previous highs, you couldn't quite get there

I see the call option as $0.05/share to protect against the chance of BAM doing something shareholder friendly before April. On second thoughts, perhaps $0.05 is not cheap enough!

The dynamite is there (800m float & 800m fcf), itís just whether or not they want to light a match.

Maybe you already counted with this, but...

"Going forward, we are expanding our capacity by 20,000 TPA. This will catapult HEG into a new orbit."

Stated about a year ago, when capacity was 80TPA. Worse yet expressed using the rhetoric typical of managers who clearly dont understand the capital cycle, and instead are skillful at carving their own tombs. To be clear, that ongoing expansion will take some time to come online, but is already in process.

Also from a year ago is this comment by HEG:
"Currently, the graphite electrode capacity is delicately balanced Ė additional capacity will take anywhere between 2-3 years to become operational."

Yeah, that's a good point on the overcapacity. I'm looking at it from a slightly different angle. I'll expand a bit on my thesis.

Iím trying to think about options like rolling a dice. Where each roll represents the time left on the option before expiry (in this case a bit less than 6 months), and the result that shows up on the dice is the share price outcome. Then Iíll pick a price above the strike, e.g. $20/share, and ask:

ďhow many times would I need to roll the dice before this number showed up?Ē

In this case, I think if we were able to roll the dice 10-20 times we would almost certainly have 1 x scenario where the EAF share price surged beyond $20. Maybe it would be caused by buybacks, perhaps BAM performs a pump & dump, institutional investors take large positions, a takeover bid from a Japanese company or some other tail-end probability event that no one could predict. The point is, that while unlikely in any single roll, I think it becomes almost a certainty when we hit 10-20 rolls.

At $0.05 it is priced as though we need 50 rolls ($20.00 - $17.50)/$0.05 = 50. Does this line of thinking make sense?
Title: Re: EAF - GrafTech
Post by: Fitz on October 29, 2019, 10:06:33 PM
Pabrai Interview with Graham and Doddsville, he speaks about his EAF investment in more detail. Interview starts on page 22.

https://www8.gsb.columbia.edu/valueinvesting/sites/valueinvesting/files/files/Graham%26Doddsville_Issue37.pdf
Title: Re: EAF - GrafTech
Post by: johnny on November 01, 2019, 02:48:08 PM
His comparison to IPSCO really feels like a stretch. There you were buying a no-debt company for 2x earnings and 2 years of contract. Okay, so you get a free company operating in the spot market two years from now--seems like a straightforward thesis that doesn't require strong convictions about the steel industry.

Here, you have $2B of debt and a bit more than that in net income coming from the LTAs. So we're mostly transforming the capital structure, not working our basis in the company anywhere near $0. It's still a company you're paying ~$3B for, in a market where there's a lot of weird stuff going on and a graveyard full of corpses. 1/3 of a portfolio in EAF sounds insane to me; I'm not sure I understand where he is coming from at all.
Title: Re: EAF - GrafTech
Post by: peterHK on November 03, 2019, 09:38:18 AM
His comparison to IPSCO really feels like a stretch. There you were buying a no-debt company for 2x earnings and 2 years of contract. Okay, so you get a free company operating in the spot market two years from now--seems like a straightforward thesis that doesn't require strong convictions about the steel industry.

Here, you have $2B of debt and a bit more than that in net income coming from the LTAs. So we're mostly transforming the capital structure, not working our basis in the company anywhere near $0. It's still a company you're paying ~$3B for, in a market where there's a lot of weird stuff going on and a graveyard full of corpses. 1/3 of a portfolio in EAF sounds insane to me; I'm not sure I understand where he is coming from at all.

His risk management ability is basically 0. The guy buys cheap, but often really really terrible and cyclical businesses, and then takes them in huge size. Some years he does great, others he has like 60% or 70% drawdowns.
Title: Re: EAF - GrafTech
Post by: elliott on November 03, 2019, 11:17:03 AM
His risk management ability is basically 0. The guy buys cheap, but often really really terrible and cyclical businesses, and then takes them in huge size. Some years he does great, others he has like 60% or 70% drawdowns.

Do you know his performance? I thought his letters were not widely available, so if they are instead being published, would you mind sharing the source? Thank you :-)
(13Fs/Tiprank/etc are no good. As far as I know Pabrai has been investing globally for quite some time now)
Title: Re: EAF - GrafTech
Post by: RadMan24 on November 04, 2019, 03:17:26 AM
His comparison to IPSCO really feels like a stretch. There you were buying a no-debt company for 2x earnings and 2 years of contract. Okay, so you get a free company operating in the spot market two years from now--seems like a straightforward thesis that doesn't require strong convictions about the steel industry.

Here, you have $2B of debt and a bit more than that in net income coming from the LTAs. So we're mostly transforming the capital structure, not working our basis in the company anywhere near $0. It's still a company you're paying ~$3B for, in a market where there's a lot of weird stuff going on and a graveyard full of corpses. 1/3 of a portfolio in EAF sounds insane to me; I'm not sure I understand where he is coming from at all.

His risk management ability is basically 0. The guy buys cheap, but often really really terrible and cyclical businesses, and then takes them in huge size. Some years he does great, others he has like 60% or 70% drawdowns.

Why are you all hating?

1.) Are you investors in his funds? If so, his returns have been pretty good lately.

2.) He doesn't tell you to buy his ideas, he just shares them and his strategy.

3.) A lot of folks on this thread are over analyzing this idea. It's not that complicated.
Title: Re: EAF - GrafTech
Post by: roark33 on November 04, 2019, 08:08:37 AM
His letters are pretty accessible if you look around on twitter, etc.  Basically, if you exclude his few 2-3 years, he has trailed the S&P since then...
Title: Re: EAF - GrafTech
Post by: elliott on November 07, 2019, 10:39:34 AM
His letters are pretty accessible if you look around on twitter, etc.  Basically, if you exclude his few 2-3 years, he has trailed the S&P since then...

Havent found them in Twitter, neither in Reddit (and there are some good compilations there). Would you mind sharing someone to follow in twitter?
Title: Re: EAF - GrafTech
Post by: elliott on November 07, 2019, 10:51:59 AM
I have not gone through the financial statements of the Q3 yet, but attended the call today.

Shares are down 7%.
Title: Re: EAF - GrafTech
Post by: johnny on November 07, 2019, 01:25:48 PM
Gonna have to listen to the call, I'm blown away that they actually said in public that they are flexible on the LTAs. I can't believe they answered a question like that. The shares deserve to be down 7% on the basis of that statement alone.
Title: Re: EAF - GrafTech
Post by: Fitz on November 07, 2019, 06:06:20 PM
David Francis Gagliano -- BMO Capital Markets -- Analyst

No. I was actually more asking about the other topic that comes up quite a bit in terms of I guess more directly are you having customers approach you to renegotiate those existing contracts that are in place?

David J. Rintoul -- President and Chief Executive Officer

So our approach to customers that inquire we're flexible in our approach to that as long as the outcome of their needs are such that GrafTech and our shareholders are a whole at the end of the day with the way the initial contract stood. So there haven't been any significant changes heretofore to speak to but I would be -- we would be remiss if we were not as good business people partnering with our customers to be open to things that might be of value to them that still allow us to be in a situation where the value of the LTA is in fact kept intact. So that's our position on that subject.

David Francis Gagliano -- BMO Capital Markets -- Analyst

Okay, thanks very much.

Operator

Your next question comes from the line of Alex Hacking with Citi. Your line is open.

Alexander Nicholas Hacking -- Citigroup Inc Research Division -- Analyst

So just a follow-up on those last comments. I would -- am I correct in assuming that what you're saying there is that you are willing to potentially cut prices on existing LTAs as long as customers are willing to extend those out? So in that sense the customer is getting potentially a lower near-term price but you guys are locking in more volume into the future is -- would that be an example of the kind of flexibility that you were talking about?

David J. Rintoul -- President and Chief Executive Officer

Alex not quite. I was very deliberate in saying that the outcome of those discussions would have to be that the value of the existing LTA is kept intact. So that would mean if you look at the net present value or the value of the LTA at this point in time whatever changes we want to make would have to preserve obviously for the -- in the interest of our shareholders that NPV. So it's not quite as simple as your example might suggest.

Alexander Nicholas Hacking -- Citigroup Inc Research Division -- Analyst

Okay. Could you give an example of what you're talking about be more specific I guess? Or you don't want to do it?

David J. Rintoul -- President and Chief Executive Officer

I don't think on this call that I want to put out into those and the marketplace suggestions on such modification because I think it's an individual one-on-one. We've had discussions with certain customers. And at the end of the day some have decided to think through and others have said no we'll just leave the LTA in place. There are a number of combinations and permutations that can allow us to assist the customer in a near-term request to preserve the net present value of the LTA. So I don't think it's inducive or good business for us to try and align on this call the combinations and permutations that could exist in that. It's really a customer-by-customer preference and personal. What matters to one customer might not matter to another in terms of how they might view that. So I don't expect that there'll be a great number of those things transpire. But as good business people we are always willing to work with our customers to find an optimal solution that works for both parties.



------

Looks like they did a decent job of half answering the questions; with "We've had discussions with certain customers. And at the end of the day some have decided to think through and others have said no we'll just leave the LTA in place. There are a number of combinations and permutations that can allow us to assist the customer in a near-term request to preserve the net present value of the LTA. "


Looks like Bayou Steel and Hamilton Specialty are two smaller EAF producers that have gone bankrupt recently. Bayou purchased a majority of their steel from Chinese scrap and were heavily affected by Tariffs.

---

I think this answers one important question, what happens with the LTA's during a bankruptcy and we can safely say there value goes to zero...
Title: Re: EAF - GrafTech
Post by: peterHK on November 07, 2019, 06:23:52 PM
The LTA stuff was basically the entire thesis.

I gotta say this mgmt is one of the worst at communications I've seen. The flip flopping on capital allocation, cageyness on pricing and now this sort of is amazing.
Title: Re: EAF - GrafTech
Post by: racemize on November 08, 2019, 06:45:51 AM
His letters are pretty accessible if you look around on twitter, etc.  Basically, if you exclude his few 2-3 years, he has trailed the S&P since then...

He has outperformed the index (for PIF2) `80% of rolling 5 year periods:
https://drive.google.com/file/d/0BxTPR9eP5nWebFdOTnZSR3l1eVk/view

See page 19.
Title: Re: EAF - GrafTech
Post by: roark33 on November 08, 2019, 09:20:28 AM
This performance record created doesn't account for what I am trying to point out, that if you exclude the first two years, he has significantly underperformed. Same thing with Guy Spier. 
Title: Re: EAF - GrafTech
Post by: RadMan24 on November 08, 2019, 06:50:57 PM
This performance record created doesn't account for what I am trying to point out, that if you exclude the first two years, he has significantly underperformed. Same thing with Guy Spier.

Rubbish. His performance has cycles, would you rather have consistent returns that ultimately give you 12% or volatile returns that give you 15%?

All this talk on this board is like people expected EAF to do better than steel market which is in the duldrums. Demand will come back. EAF had ttm fcf of what $770m? And have another $200-300million left to ear mark debt and capital returns?

Again, focus on the minor minute possibilities if you like but it really misses the broader picture.

Title: Re: EAF - GrafTech
Post by: peterHK on November 09, 2019, 09:24:19 AM
This performance record created doesn't account for what I am trying to point out, that if you exclude the first two years, he has significantly underperformed. Same thing with Guy Spier.

Rubbish. His performance has cycles, would you rather have consistent returns that ultimately give you 12% or volatile returns that give you 15%?

All this talk on this board is like people expected EAF to do better than steel market which is in the duldrums. Demand will come back. EAF had ttm fcf of what $770m? And have another $200-300million left to ear mark debt and capital returns?

Again, focus on the minor minute possibilities if you like but it really misses the broader picture.

Here's the thing. Most clients don't want volatile 15% returns. Many clients withdraw funds periodically, so the volatile return structure increases the risk of a bad result for the client. If you're in wealth building mode and never have to withdraw then yes, you don't care, but the fact is that is not most people so to say that one would prefer a higher number IMO misses this nuance.
Title: Re: EAF - GrafTech
Post by: ValuePadawan on November 20, 2019, 12:41:14 PM
I emailed GrafTech to see if they could help clarify what they meant in regards to the LTAs I got fairly boilerplate answers but perhaps you'll find them useful.

Q: Does GrafTech require a small, medium or large percentage of their customers with LTAs to have parent guarantees or collateral arrangements?
 
A: The majority of the customers have strong balance sheets with a weighted average cost of debt of ~4.2% as of our IPO.
 
Q: Does GrafTech track the counter-party risk of its customers after they have signed the LTA?

A: yes
 
Q: What can GrafTech do to mitigate that risk if a customer is becoming insolvent and their LTA does not include a parent guarantee or collateral arrangement?

A: This is relatively rare Ė i.e. most customers who are financially weak have credit protections and vice versa.
 
Q: It was stated in yesterdayís call that these contracts are flexible as long as the overall value is maintained for shareholders, as a shareholder Iím curious what that means as it is kind of ambiguous.

A: We are willing to work with customers if possible, but the contracts are fair, well-worded, enforceable contracts.  We would need to be made whole for any changes we agreed to.
 
Q: If a contract is cancelled due to a bankruptcy can that contract be replaced to another customer quickly (matter of months) to keep visibility or does it take a while (matter of years) to repurpose that capacity which was lost in a new LTA?

A: A contract in bankruptcy is not cancelled.  It falls below the threshold for collectability and therefore is excluded from our accounting and IR disclosures; however, we could and would continue to pursue collection.  It could be some time for that to resolve.  In the meantime, we could sell the electrodes elsewhere.
Title: Re: EAF - GrafTech
Post by: elliott on November 20, 2019, 02:06:41 PM
Thanks for sharing EAFs reply.

As you say, management was a little bit ambigous about contract modifications.

Title: Re: EAF - GrafTech
Post by: Steven B on November 27, 2019, 07:54:14 PM
I have respect for Mohnish and  but the fact is that if you take out the first 3 years he has under performed. Fact. No bashing involved.




This performance record created doesn't account for what I am trying to point out, that if you exclude the first two years, he has significantly underperformed. Same thing with Guy Spier.

Rubbish. His performance has cycles, would you rather have consistent returns that ultimately give you 12% or volatile returns that give you 15%?

All this talk on this board is like people expected EAF to do better than steel market which is in the duldrums. Demand will come back. EAF had ttm fcf of what $770m? And have another $200-300million left to ear mark debt and capital returns?

Again, focus on the minor minute possibilities if you like but it really misses the broader picture.
Title: Re: EAF - GrafTech
Post by: Lakesider on November 27, 2019, 08:05:02 PM
Doesnt he own a crap load of moutai shares? surly the past few years haven't been so bad for him.
Title: Re: EAF - GrafTech
Post by: bakerstreet on November 28, 2019, 08:23:56 AM
He sold out of Moutai last year ó but did catch a 4-5 bagger along the way.

I do believe Pabrai has significantly outperformed over time, with his significant outperformance coming in the early years and likely the last few years. Certainly a rough patch around the crisis.

I also agree with some of the other folks on this thread. I think people are significantly overthinking this investment (forest vs trees). The facts are:
-NC Supply is constrained
-Contracts are guaranteed
-Theyíre vertically integrated, leaving room for contract renegotiation
-Debt isnít overbearing
-And yet, if you view valuation as a probabilistic range, theyíre trading far closer to their floor than they are their ceiling. (And at a price of 10-11 where a lot of us bought it, it was below the rational floor). So now we sit and wait.

Happy Thanksgiving all
Title: Re: EAF - GrafTech
Post by: valueinvestor on November 28, 2019, 08:37:28 AM
He sold out of Moutai last year ó but did catch a 4-5 bagger along the way.

I do believe Pabrai has significantly outperformed over time, with his significant outperformance coming in the early years and likely the last few years. Certainly a rough patch around the crisis.

I also agree with some of the other folks on this thread. I think people are significantly overthinking this investment (forest vs trees). The facts are:
-NC Supply is constrained
-Contracts are guaranteed
-Theyíre vertically integrated, leaving room for contract renegotiation
-Debt isnít overbearing
-And yet, if you view valuation as a probabilistic range, theyíre trading far closer to their floor than they are their ceiling. (And at a price of 10-11 where a lot of us bought it, it was below the rational floor). So now we sit and wait.

Happy Thanksgiving all

Unless it goes lower, and as value investors we bought more because it is cheap but only to be "brookfield" when they buy us out at $10-11. (Yes an oversimplification, but certainly emphasizes the point I am trying to make).
Title: Re: EAF - GrafTech
Post by: skanjete on November 28, 2019, 08:41:08 AM
Basically, this is a commodity business.

My experience is that the best time to buy commodity businesses is when commodity prices are depressed, not when they are at sky high prices.

The forward contracts don't change this fact. They only postpone the effect of lower commodity prices in the future.

The forward contracts reflect somewhat his investment in ipsco, but that was an environment with rising commodity prices from a very low base. This imo is a fundamental difference.
Title: Re: EAF - GrafTech
Post by: roark33 on November 28, 2019, 08:51:45 AM
"Contracts are guaranteed."

If your counterparty is hurting, you are hurting, no matter what you say in your conference call about "guaranteed contracts".  It happens so often, most recently in oil field services companies. They all had guaranteed contracts, but even without bankruptcy of their customers, those customers come back and asked to have the agreements re-cut. 

You just have to think harder about the idea that the revenues are not guaranteed. 
Title: Re: EAF - GrafTech
Post by: RadMan24 on November 29, 2019, 07:17:48 PM
He sold out of Moutai last year ó but did catch a 4-5 bagger along the way.

I do believe Pabrai has significantly outperformed over time, with his significant outperformance coming in the early years and likely the last few years. Certainly a rough patch around the crisis.

I also agree with some of the other folks on this thread. I think people are significantly overthinking this investment (forest vs trees). The facts are:
-NC Supply is constrained
-Contracts are guaranteed
-Theyíre vertically integrated, leaving room for contract renegotiation
-Debt isnít overbearing
-And yet, if you view valuation as a probabilistic range, theyíre trading far closer to their floor than they are their ceiling. (And at a price of 10-11 where a lot of us bought it, it was below the rational floor). So now we sit and wait.

Happy Thanksgiving all

I concur and welcome!
Title: Re: EAF - GrafTech
Post by: khturbo on November 30, 2019, 06:37:16 AM
I can't find the letter anywhere but I'm pretty sure Pabrai was down ~50% in 2018.
Title: Re: EAF - GrafTech
Post by: ValuePadawan on November 30, 2019, 10:28:38 AM
I can't find the letter anywhere but I'm pretty sure Pabrai was down ~50% in 2018.
His largest holdings were Fiat and Rain and in 2018 Fiat went from 24 to 14. Rain went from 400 to 120 so its very possible.

That being said he bought rain for 40 and Fiat for 5.
Title: Re: EAF - GrafTech
Post by: RadMan24 on November 30, 2019, 12:10:47 PM
Aren't EAF shares up like 30-40% since this whole Pabrai returns thing went off on this thread?
Title: Re: EAF - GrafTech
Post by: brose514 on December 05, 2019, 08:49:45 AM
Interesting price movement on block trade + buyback. Wonder if timing coincides with potential Dec.15th tariffs. Seems like Brookfield wants to unload quickly and there may be overhang on stock until that's completed.

On another note, was wondering why CEO has no skin in the game?
Title: Re: EAF - GrafTech
Post by: RadMan24 on December 05, 2019, 10:19:52 AM
Unless I'm missing something, the market reaction (down 11% so far today) is due to the share repurchase. $250m / 11.18m shares = repurchased at $22/share Vs yesterday's closing price of $14/share.

I haven't seen too many share repurchases executed at a 57% premium that benefits only one shareholder. It appears to me that ~$75m of shareholder value has just been destroyed overnight.

Looks like the discussion within this thread about the majority owner's track record regarding minority shareholders was warranted.

Ugh I figure Brookfield affiliates are selling 11m shares to Morgan Stanley for broker determined price.

If consummated, EAF will buy $250 million worth of shares from Brookfield at the same price MS bought.
Title: Re: EAF - GrafTech
Post by: brose514 on December 05, 2019, 10:22:16 AM
Yup, block trade is for 11.18 Million shares and repurchase is $250M (price of repurchase will be based on block trade price). These are two separate transactions.
Title: Re: EAF - GrafTech
Post by: Nelg on December 05, 2019, 10:25:42 AM

Ugh I figure Brookfield affiliates are selling 11m shares to Morgan Stanley for broker determined price.

If consummated, EAF will buy $250 million worth of shares from Brookfield at the same price MS bought.

Got it, comment removed
Title: Re: EAF - GrafTech
Post by: RadMan24 on December 05, 2019, 10:29:24 AM
the market reaction is nonetheless weird. On one hand, they are reducing Brookfieldís stake and while Brookfield is increasing float with its sale to MS. On the other, Brookfield is showing it is willing to sell below $19 a share. Net net I see this as a slight positive given all the worries about Brookfield.
Title: Re: EAF - GrafTech
Post by: gokou3 on December 05, 2019, 10:49:12 AM
On one hand, the $250M buyback increases the per-share intrinsic value of EAF assuming the shares are indeed under-valued.  On the other hand, I don't want to be sitting across the table from Brookfield.

Disc: Long various Brookfield entities.