GLBM is a specialty metals business that seems to be trading at a valuation more similar to an option than an equity. This characteristic is probably not unusual among metals/resource stocks. What is unusual about GLBM is that this company has a clean balance sheet and reasonable near-term earnings prospects, and thus should be more asymmetric than most “option-equities” in the resource space. Said differently, while many “option-equities” risk getting “stopped out” as operating losses mount and debt matures, GLBM should be building net cash and generating earnings.

 We believe GLBM represents a “spin-in” opportunity to own an interesting specialty metals business at a cheap multiple of current period earnings and a large discount to asset value. Despite near-tern cyclical headwinds, we believe the industry is in the midst of a structural upturn and we own the company that is the largest player with the lowest cost assets. With a balance sheet that has no net debt, the company should be well protected from negative surprises and should be well positioned to drive per-share equity value over the medium-term by allocating excess cash flow. Finally, management are large shareholders and are intelligent capital allocators who have taken a leading role in identifying the opportunity and trying to improve the industry structure.

The company has no sell-side coverage and historic earnings are both messy to piece together and understate the current earnings power of the business. Further, since most of the assets were acquired at distressed prices, historical book value doesn’t capture replacement value well. We estimate replacement value at $15-20/shr. These factors presumably contribute to the pricing of the stock. We believe that GLBM had core EPS of approximately $1/shr in 2008, rising to $1.50 in 2009.   Free-cash flow should be comparable.   Most industry pricing is conducted annually in the fall for the following year. This fall, contracted industry prices rose despite deteriorating prices for most metals. While we expect volumes to be down in 2009 because of the global economy, higher prices should more than offset this. However, the real opportunity for GLBM should be to expand off of this earnings base.  This should be driven by four principal factors:

 

 

• The company has the only brownfield project in the Western world, with its shuttered Niagara facility. The company secured a low-cost power contract earlier this year and is planning to begin bringing on the facility in mid 2009. This facility has the capacity to increase the company’s silicon production by 30k tonnes, or almost 20%. Clearly the timing of this will be somewhat dependent on the economy.
• Approximately 20% of silicon sales are still on legacy contracts with Dow Corning that have marginal profitability. These roll-off after 2010 and will be re-done at market levels.
• There are meaningful cost saving opportunities through headcount reductions and energy efficiency improvements, particularly in the company’s South American operations.
• Perhaps most importantly, the company’s Solsil division represents an opportunity to move down the solar value chain by producing upgraded metallurgical silicon (“UMG Si”). We’ll describe this in more detail.

 

The conventional technology for producing solar grade silicon is to convert silicon metal (GLBM’s product) into polysilicon through a capital and energy intensive chemical process. Companies like Hemlock and Wacker Chemie (WCH GR) are involved in this business. The basic idea is bringing a product that is 98-99% pure silicon to a product that is 99.9999% pure. GLBM’s Solsil division is commercializing an alternative technology to produce solar grade silicon via a metallurgical path that is considerably less capital and energy intensive: UMG Si. Polysilicon was originally designed for the purity requirements of semiconductors, and using it for solar wafers is arguably using a Ferrari to do the job of a BMW. It does the job fine, but at quite a cost. 

Solsil has the potential to be a disruptive technology and reduce costs in the solar supply chain. Our discussions with potential buyers of Solsil’s product suggest they are getting close to “polysilicon-equivalent” results. GLBM has announced that Solsil is building a facility at Niagara, that will go to 4k tonnes.  The state of Ohio has announced that the company is going through an approval process for a similarly sized facility near its Beverly plant. Since polysilicon has recently sold for well over $100/kg (vs. under $4/kg for silicon metal) there is a huge earnings opportunity for GLBM. We believe ultimate operating costs for this product will end up at around $30/kg, although this is difficult to pin down with precision. If the company sell its product for $50-60/kg and earns a $20-30/spread on 8k tonnes, this represents another $1-1.70 of EPS. Timminco (TIM CN) was a controversial high-flyer over the past 18-24 months. The company has one high cost Canadian silicon facility that was marginally profitable, but its valuation is entirely related to its plan to commercialize UMG Si. While GLBM has been very quiet on its progress (unlike TIM it did not need to raise equity capital to execute its plans), our work suggests it is better positioned with a superior product. Interestingly, despite the crash in its share price, TIM’s ~$370MM market cap (entirely based on this call option) is higher than GLBM’s today.

We believe the company has $1.50/shr of EPS that it is likely to achieve in 2009. Furthermore, we do not believe this represents a peak result that deserves a low multiple. With no net debt, the company should be well positioned to enhance per-share earnings by allocating excess capital intelligently. The company recently announced a stock buyback with this idea in mind. Finally, we believe the company’s direct and indirect exposure to the solar supply chain represents an interesting “call option” that is receiving little value currently.

Note 1:

In addition to a little over 63MM basic shares there are 19.5MM warrants at a $5 strike price and 1.65MM “Unit Purchase Options” that are a little more complicated. For the purpose of our EPS and adjusted NAV estimates we are using a $10 stock price, which results in approximately 75MM FDS and gets us well into the dilution (e.g. as the warrants are more and more in the money, further changes in the stock price are less meaningful to FDS)

Note 2:

The stock is illiquid, presumably due to its listing on the AIM and concentrated ownership. Collins Stewart seems to be the principal “market maker” so that is probably a good place to check. There have been distressed sellers recently so it’s worth getting “the picture” from them as they may have blocks around.

Catalysts:

• Earnings grow in 2009, rather than declining precipitously like most metals businesses.
• The company lists on a U.S. stock exchange.
• Solsil is established as a viable business and the company increases its exposure to the solar supply chain.
• The company uses cash flow in attractive ways, either buying back stock from distressed sellers or buying distressed assets.

Principal risks:

• A number of the company’s end markets are economically sensitive and thus the global recession is negative for demand growth and pricing trends.
• There is significant subsidized capacity in China. This is gradually changing, and because of the subsidized status most of the Western world has tariffs. Nevertheless, there is some regulatory and second-derivative risk associated with this.
• Uneconomic supply could be added or new participants could get access to subsidized power contracts that are very low cost.
• While most of the company reports under U.S. GAAP, historic financials are messy due to the SPAC legacy and AIM listing.