Globe Specialty Metals (“GSM”)

Leading vertically-integrated global producer of silicon metal, silicon-based alloys and manganese alloys

Globe was written up several years ago by Ruby831 and the stock has round-tripped since then.  Recent softness in silicon metal index pricing and utter destruction in commodity-related names has created a unique opportunity to buy the low-cost producer of silicon metal and alloys on the cusp of a transformational change in normalized earnings power.  Please reference that analysis for background on the business and the management team.  That analysis of a $30 value was based on generating $200mm of EBITDA which never materialized as silicon prices softened from 2011-2013. Upon closing the merger with FerroAtlantica, GSM will be on a path towards generating $500mm in EBITDA in 2016 and out years and over $2.00/share in FCF.

A recent presentation by the company does a pretty good job of describing the company and its core strengths. 

See http://files.shareholder.com/downloads/ABEA-3CRU4N/4013099561x0x849345/2E1171BA-F383-4F42-A277-9BC9D7D20810/Globe_Long_IR_Pres_Sept_4_2015_-_FINAL_2138377_1_CH_.pdf

Quick review of end markets:

-Silicon Metal is made from coal, wood chips and quartz pressured at high temperatures, 6+tons of raw materials to make 1 ton of silicon

-Silicones/Coatings which are used in oils, resins, rubber (50% of Silicon Metal Consumption); broadly tied to GDP growth

-Aluminum (40% of Silicon Metal Consumption); despite the decline in aluminum prices, content in cars continues to increase

-Solar (10% of Silicon Metal Consumption); secular growth long term

-Silicon Alloys end uses are in foundry products and steel; in midst of cyclical decline but consumption historically grows single digits

FerroAtlantica deal offers huge upside earnings power

GSM was arguably cheap on its own merits prior to the deal announcement based on historical and comparable multiples.  GSM trades at 7.0x 2016e EBITDA versus 9.3x for the group of peers (Haynes, OM group, SGL Carbon, Materion) and a median historical Enterprise/EBITDA multiple of 12.0.  The dividend yield of 2.25% is safe and offers some added total return.  Replacement value is estimated at $2b ($27/share) although that is a management-provided number so should be discounted somewhat.

The deal with FerroAtlantica has received all necessary approvals except for the DOJ which decided to take a second look in May of this year.  The current stock price seems to be discounting none of the likely scenarios outlined below and only continued declines in the price of Silicon metal and alloys.

1. Deal approved without concessions* 

Current SI prices @ $1.30/lb                  pro-forma EBITDA run rate of $500+mm @9.3x,   implies $1.70 in FCF, stock worth $25 (+80%)

$1.40                                                   pro-forma EBITDA run rate of $590+mm @9.0x,   implies $2.25 in FCF, stock worth $30 (+114%) 

$1.60                                                   pro-forma EBITDA run rate of $750+mm @8.5x,   implies $2.80 in FCF, stock worth $35 (+150%)

Current SI prices @ $1.30/lb                pro-forma EBITDA run rate of $140+mm @9.3x,   implies $1.00 in FCF, stock worth $18 (+30%)

$1.40                                                   pro-forma EBITDA run rate of $175+mm @9.0x,   implies $1.30 in FCF, stock worth $21 (+50%)

$1.60                                                   pro-forma EBITDA run rate of $245+mm @8.5x,   implies $2.00 in FCF, stock worth $28 (+100%)

-The above analysis only includes the synergies as stated of $100mm to be realized over three years ($65mm in cost synergies, $30mm in financial synergies and working capital release also an opportunity as GSM cash cycle is much higher than Ferro’s)

-GSM has done 9 deals in the last 9 years and made a net investment of $109mm after divestitures, growing revenue from under $200mm to over $800mm and EBITDA from $25mm to over $140m; previous deals like Alden Coal in 2011 (low sulfur coal is key raw material in production of silicon metal), Becancour in 2013 (added 24k tons capacity) and Siltech (added 45k tons capacity) in 2015 have provided upside

-Potential for hidden value in energy assets as 40% of silicon metal manufacturing costs are power and hydro is cheapest option around

-FerroAtlantica is the largest independent hydroelectric power producer in Spain and France, with an installed capacity totaling of 210MW; Average annual output of 600 GWh and

19MW of new hydro power currently under construction in Spain.  Production will commence during 1Q 2016

-Energy Division provides a power hedge and profit center; 2014 Revenue of $47mm and EBITDA of $25mm

Can Silicon Metal prices go down further?

            - Silicon Metal And Silicon-Based Alloy Prices have Proven More Resilient than Other Industrial Commodities  Silicon metal is down 14% YTD through August versus much steeper declines in aluminum, steel, iron ore and oil

-In a given year, GSM contracts approximately 30% of volume and the rest is done linked to an index or market pricing but index pricing on Bloomberg does not reflect the level of GSM pricing even if the directionality is accurate. Q4 shipments were priced on average at $1.31 (.$.10/lb higher than indices would have you believe) .  On the recent August q4 earnings call the CEO stated they are signing contracts today for next year at prices above current prices.  “I'm pleased to report that we have started to secure silicon metal business for next year at prices higher than in reported stock market, and higher than our current average selling price.  Our silicon alloy businesses continued to produce very good results in the quarter, while spot prices for standards grades of ferrosilicon have softened, we continue to have a very large percentage of our business in the specialty grades. We expect this business to remain strong through the balance of the year and into next year.”

Whether deal closes or not, solid balance sheet positions GSM well in commodity bear market

                                                            FerroAtlantica                                       Globe                                       Combined (pre-synergy)

Net Debt                                              $474mm                                              $(20)mm                                 $380mm

Net Working Capital                              $580mm                                              $111mm                                  $691mm

LTM EBITDA                                          $206mm                                              $143mm                                  $404mm

Net Debt / LTM EBITDA                         2.3x                                                     NM                                           0.9x

($mm)

An overlooked possibility in the event the deal is rejected by the DOJ is that GSM will have other options for other deals and the balance sheet to support them.  The Proxy http://www.sec.gov/Archives/edgar/data/1639877/000119312515286900/d911197d424b3.htm#rom911197_85 mentioned several other opportunities that were value-enhancing even if FerroAtlantica was the most attractive at the time.  Historically, GSM has always taken advantage of stressed times to build its asset base and create value (see pg. 5 of above presentation).  To the extent that is possible, a whole new range of outcomes would need to be calculated but given that the CEO owns almost 12% of the stock and his deal-making track record has been good, I trust any deal he does will be value enhancing.

Catalysts

· DOJ approval

· Improved Silicon metal pricing

Risks/Negatives

-DOJ blocks the deal, the stock will get hit but likely recuperate over time

-Silicon Metal pricing weakens further

- Global recession knocks prices down further to inflation-adjusted historically low prices under $1 and EBITDA declines more steeply than expected..estimated EBITDA of $200mm in that scenario with downside in stock pegged at $9 (-35%) based on a 9.5x EBITDA level

-FX risk:  GSM costs are in $ and prices are in $.  FerroAtlantica prices in both $ and Euros and costs are in Euros so the deal offers somewhat of a hedge against a weakening euro as costs decline.  At the same time dollar strength seems to be correlated with lower Silicon pricing as it did in 2011-2013 period and that could continue

*share count of 172mm for combined entity and assuming combined 420k metric tons of silicon metal shipped, or 88% utlilzation, holding alloy prices constant at current levels of $.90/lb

**share count of 74mm

 Sources.  Bloomberg, Company filings, SEC Filings