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EAF - GrafTech

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Very good write up on VIC ( 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.

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:

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.

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.

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?


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