Ferroglobe - Q3 2023
November 8, 2023
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to Ferroglobe's third quarter 2023 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call may be recorded. I will now like to turn the call over to Alex Rotonen, Ferroglobe's Vice President of Investor Relations. You may begin.
Alex Rotonen (VP of Investor Relations)
Thanks, Sandra. Good morning, everyone, and thank you for joining Ferroglobe's third quarter 2023 conference call. Joining me today are Marco Levi, our Chief Executive Officer, and Beatriz García-Cos, our Chief Financial Officer. Before we get started with some prepared remarks, I'm going to read a brief statement. Please turn to slide number 2 at this time. Statements made by management during this conference call that are forward-looking are based on current expectations. Factors that could cause actual results to differ materially from these forward-looking statements can be found in Ferroglobe's most recent SEC filings and the exhibits to those filings, which are available on our website at ferroglobe.com. In addition, this discussion includes references to EBITDA, adjusted EBITDA, adjusted gross debt, net debt, and adjusted diluted earnings per share, among other non-IFRS measures.
Reconciliation of non-IFRS measures may be found in our most recent SEC filings. At this time, I would like to turn the call over to Marco Levi, our Chief Executive Officer. Next slide, please.
Marco Levi (CEO)
Thank you, Alex, and good morning, good day, and good evening to everyone. Thanks for joining us on the call today. We appreciate your interest in Ferroglobe. Since I joined Ferroglobe almost four years ago, we have focused on revamping the business and operations by optimizing the cost structure, improving the balance sheet, and positioning the company for growth. During this time, we increased Adjusted EBITDA from $33 million in 2020 to $860 million in 2022. We are on track to meet our 2023 guidance of $270 million-$300 million in a period of extremely weak demand, declining market pricing for five quarters in a row, coupled with unprecedented macro uncertainty.
In addition, we reduced our gross debt from $473 million at the end of 2019 to a current level of $237 million, significantly strengthening our balance sheet and approaching the target that we indicated more than a year ago. The dramatic improvement in performance has been the result of our cost-cutting efforts and various initiatives focused on improving efficiencies and driving sales productivity, such as focusing on higher-margin specialty products, which has ultimately made us more competitive in the marketplace. Although we continue emphasizing continuous improvement and further cost reductions, the initial optimization phase of our plan is essentially complete, and our leverage objective has been reached.
We are now focused on positioning the company to lead the silicon metal industry in addressing the solar and the electric vehicle battery market, which we believe represents an enormous opportunity for Ferroglobe. Recent legislation in the U.S. and Europe has provided incentives to increase onshoring, which will further benefit Ferroglobe with its strong presence in these regions and worldwide production capabilities. At the same time, we are looking to maximize the value of our manganese and silicon-based alloy businesses. One primary requirement to produce advanced silicon metal, that is needed for these growth and market applications is access to high-quality quartz. To ensure access to a reliable supply, we recently completed the acquisition of a high-quality quartz mine located in South Carolina.
This quartz supply will support our silicon metal production plants in the U.S. as we position the company to benefit from the secular growth in solar and EV batteries. The South Carolina mine has annual production capacity of roughly 300,000 tons with an expected reserves life of at least 10 years. Our current quartz mine in Alabama has annual capacity of about 200,000, with approximately 3 years of mine life remaining. We expect to begin production at the new mine in the second half of 2024. Not only will this increase our self-reliance on quartz for our current needs but also for the coming years, a silicon metal demand in U.S. is expected to grow significantly. In fact, we believe that North America will have a structural shortage of silicon metal in the next 2-3 years.
Our total investment is expected to be around $15 million, including $11 million for the property, plus an additional $4 million for infrastructure, mainly rail access, a processing facility, and a loadout. We anticipate the cost structure to be favorable, approximately 10%-15% lower than the current cost in our Alabama mine, and its proximity to our operations secures the long-term competitiveness of our U.S. footprint. One of Ferroglobe's key differentiators is our backward integration, where we have access to critical materials needed for the production of our products. In addition to the quartz mine just purchased in South Carolina, we also have other mines supporting our production facilities around the world, ensuring that we have access to high-quality quartz. In Europe, we have the Serrabal quartz mine in Spain, which supplies primarily to Spain and France.
We have rights to operate this mine until 2038. In South Africa, we have several quartz mines supplying our operations there. Overall, our mines supply over 70% of our internal needs, a key competitive advantage in managing our costs and ensuring reliable availability of this key raw material. Having a stable supply of high-quality quartz is essential in addressing the solar and EV battery market, which we expect to be a significant long-term opportunity for the company. In batteries, high-purity silicon provides significant advantages over graphite in battery anodes, such as increasing battery capacity and reducing charging time. As the percentage of silicon content in the next generation batteries continues to increase, we expect to see a dramatic increase in demand for high-quality silicon metal.
In line with our focus on solar and EV batteries, we continue to actively develop partnerships and alliances to position us to maximize our participation in these growth opportunities. These prospective partnerships are aligned with our strategic vision and seek to enhance our capabilities within our core areas of expertise. Our focus with these partnerships is to further enhance our position in developing high-purity silicon metal that is used in advanced solar and battery markets, including vertical integration, further advancing the technologies or using different approaches in our production process that improve our decarbonization initiatives. Our objective in securing these partnerships is to enhance our market leadership in the value-added silicon metal sector. One recent development worth paying attention to relates to China, the largest graphite exporter, which recently announced that it's curbing exports of certain graphite material used in batteries, putting upward pressure on graphite anode prices.
We believe this restrictive action by China will accelerate the shift towards increased use of silicon in anodes, especially in light of its superior performance. In solar, we are positioning Ferroglobe to be the leading provider of silicon used in solar panels. Given worldwide effort to transition to green energy, we expect significant demand in solar for years to come. Our opportunity in solar is amplified by increasing onshoring trends in North America and Europe to expand local supply of these critical materials. Recent legislation, including the Inflation Reduction Act, the CHIPS Act, and European Green Initiatives, will drive significant demand in this market. Ferroglobe's market leadership and worldwide distribution position us to benefit from these trends. In our ongoing efforts to access a stable supply of power in Spain, we signed an additional PPA that locks in an increased portion of energy for the coming years.
This agreement has a term of three and a half years and became effective on November first. This PPA, combined with two we signed last quarter, are expected to allow us to produce higher volumes in Spain to serve our customers during the winter months when our facilities in France are idle. Our facilities in North America continue to benefit from favorable U.S. policies. In September, a bipartisan bill was introduced in the U.S. Senate to enact a 35% tariff on imports of Russian and Belarusian ferrosilicon. We believe this is a very positive trend for the American industry and employees, showing the U.S. commitment to increase reliance on friendly supply chain participants. While we are excited about the long-term outlook, the near-term visibility remains open. Prices for our products continue to be weak, and demand remains subdued.
Recently, there has been commentary from various market participants citing weakness in the solar and EV end market. Higher interest rates have negatively impacted demand for electric vehicles, and recent commentary from auto manufacturers indicates a very competitive market with increased pricing pressure. While there is currently weakness in this market, we are focused on the significant long-term opportunity. The EV market, battery market, sorry, is expected to be driven more by the increasing content of silicon in the anodes and less by short-term supply-demand imbalances. The solar opportunity is expected to be driven by increased government incentives and the focus on onshoring the supply of silicon metal, a critical material for solar cell production. Our integrated asset footprint, combined with favorable long-term market trends and support from the U.S. and European legislative actions, paints a bright future for Ferro's future in the coming years.
I am very pleased with our operations, of how our operations have been performing in the third quarter. We are executing at a high level in nearly all our locations, as evidenced by the fact that our plant efficiency is at the highest level in 30 years. The efficiency of our furnaces is very strong, and we are navigating the energy landscape exceptionally well in all regions, with the exception of Spain, as we modulate production based on advantageous energy prices. This was made possible by the efficient management of our capital expenditures over the past couple of years. After an extensive evaluation, we have made the decision to implement a capital allocation policy and plan to announce details of our capital return in the first quarter of 2024.
At the same time, we are reiterating our 2023 guidance of $270 million-$300 million. We are not immune to the current soft market conditions and anticipate the fourth quarter Adjusted EBITDA to come in below the third quarter results. Next slide, please. Silicon metal revenue was $199 million in Q3, up from $195 million in Q2, an increase of 2%, Adjusted EBITDA for this segment remaining strong, down only 2% from the prior quarter. Volumes increased 13% over the prior quarter to approximately 57,000 tons, driven by strong shipments in North America. Our average realized price for silicon metal sales decreased by 10% compared to the previous quarter, driven by lower index pricing in U.S. and Europe. This price decline negatively impacted Adjusted EBITDA by $19 million.
We continue to benefit from our energy agreement in France and in direct CO2, which together contributed roughly half of the cost benefits, with lower material costs being the next largest contributing factor, primarily coal. As for silicon metal outlook, the market continues to show muted demand and a lack of liquidity due to macroeconomic uncertainty, affecting both the chemical and the aluminum sector. While we are positive about long-term opportunities for silicon metal, we expect demand to remain weak in the near term, particularly in Western markets. This weakness is partially offset by our expansion into new markets, such as Asia, where we have started actively participating in their solar value chain. Next slide, please. Silicon-based alloys revenue was $150 million in Q3, down from $133 million, a decrease of 14%, primarily driven by weaker prices.
Adjusted EBITDA for Q3 was $25 million, down 20% from the prior quarter. Sales volumes declined by 6% from the quarter to 46,000 tons, and average realized pricing was down 8% over the same period, negatively impacting EBITDA by $10 million. Relative to the prior quarter, silicon alloys benefited from lower material costs, which was the largest contributor to cost improvement. The silicon alloy segment was adversely affected by the weak steel sector in U.S. and Europe, partially offset by the strong specialty ferrosilicon sales into the electrical steel market. In addition, our sales into diverse segments, such as foundries, have been more resilient. Next slide, please. Turning now to manganese-based alloys. Manganese-based alloys revenue was $59 million in Q3, down 25% over the prior quarter. Adjusted EBITDA for Q3 was $11 million, up from $1 million in the prior quarter.
Sales volumes were down 10% over the prior quarter, negatively impacting our adjusted EBITDA by $43 million, while average realized pricing was down 16% over the same period, which negatively impacted EBITDA by $11 million. This was offset by higher energy and CO2 compensation in France and lower manganese ore prices. The end markets, primarily steel, remain under pressure with a lack of visibility in 2024. Within the construction segment, we expect incremental improvement in the first half of next year as a result of a seasonal uptick in demand. Now, I would like to turn the call over to Beatriz García-Cos, our CFO, to review the financial results in more detail. Beatriz?
Beatriz García-Cos Muntañola (CFO)
Thank you, Marco. Please turn to slide 9 for a review of the income statement. Sales in the third quarter declined approximately 9% from $456 million the prior quarter to $417 million. The decline in Q3 was primarily due to weak pricing and lower volumes in our silicon alloy and manganese alloy segment. Higher volumes in silicon metal. Silicon metal volumes was up 13% over the prior quarter. The increase in volumes in Q3 was primarily due to stronger shipments in North America, while declines in silicon alloys and manganese alloys were a result of weak end markets, particularly steel. Average realized prices were lower across all product categories as a result of continued price decline in index prices.
Raw materials and energy consumption costs improved during the third quarter to $196 million, down from $229 million in the prior quarter, or 47% of sales versus 50% respectively. This improvement was driven primarily by our energy agreement in France. The energy agreement provides a benefit of approximately $56 million in the third quarter. We expect an additional benefit in the fourth quarter. In addition, raw materials, primarily coal, benefited from lower prices in the third quarter. Staff costs in the third quarter increased to $84 million, up from $75 million in the second quarter. Operating profits in the third quarter were $75 million versus $63 million in the second quarter. Operating margins were 18% in Q3, up from 14% in the prior quarter.
Net finance expenses in the third quarter were $9 million, up from $1 million in the prior quarter. The increase over the prior quarter was a result of the call premium related to the $150 million partial redemption of senior notes and the accounting impact. In addition, in the second quarter, we had a one-time true-up of accrued interest of one of our government loans. We expect net financial expenses to decrease going forward, consistent with the significant reduction of our gross debt. Next slide, please. Our Adjusted EBITDA in the third quarter was $104 million versus $106 million in the second quarter. Adjusted EBITDA margins increased to 25% in the third quarter, up from 23% in the second quarter.
Overall, volumes provide a benefit of $8 million, primarily driven by higher volumes in silicon metal, which increased 13% over the prior quarter, partially offset by volume declines in silicon alloys and manganese alloys, which declined by 6% and 10%, respectively. Prices in the third quarter were weak across the board, with the overall average realized price declining 11%. Weakened markets with pricing pressure across our three segments result in a negative impact of $37 million on our Adjusted EBITDA. Cost had a positive impact on Adjusted EBITDA in the third quarter versus the second quarter, primarily driven by our energy agreement in France, as well as lower raw material costs, primarily coal. Next slide, please.
We end the third quarter with a cash balance of $166 million, down from $363 million in the second quarter. This decline reflects the redemption of $150 million of the 9.375% senior secured notes during the third quarter. This redemption will save the company approximately $14 million in annual interest cost. As a result of the reduction, total adjusted gross debt declined to $237 million, down from $400 million in the second quarter. This is a record low for Ferroglobe. Net debt increased to $71 million, up from $37 million, primarily to increase working capital. Next slide, please. During the third quarter, cash used by operations was $9 million, versus $24 million of cash generated in Q2.
The primary factors impacting our cash flow include a $51 million impact from working capital and non-cash items of $44 million. These non-cash items, more energy benefits, are expected to boost our cash position in the first quarter of 2024. CapEx in the third quarter was $19 million, versus $23 million in the prior quarter. Lastly, cash flow from financing activities in the third quarter was negative $171 million versus positive $19 million in the second quarter. The negative cash flow from financing activities was a result of the bond redemption and associated premium call. Next slide, please. At this time, I will turn the call back over to Marco.
Marco Levi (CEO)
Thank you, Beatriz. Moving to the corporate update on slide 14, please. As we already discussed during the call, the strategic acquisition of high-quality quartz mine ensures that we remain self-sufficient in North America, enabling us to take advantage of the significant solar and EV battery growth in the coming years. We completed an additional long-term PPA in Spain to enable us to reduce costs and increase production in Spain. We are actively looking to add more PPAs. We are pleased to receive continued government and legislative support in the U.S., highlighted by the recent introduction of the U.S. Senate bill to enact a 35% tariff on imported silicon from Russia and Belarus. Also, the inclusion of silicon as a critical material, as discussed last quarter, is expected to benefit us going forward as it encourages local supply chain development.
In January of this year, we reached an agreement to divest the Châteaubriant property in France to Swiss Steel Group. Last week, on October 31st, the transaction was officially completed. This is the final step in the original footprint optimization process that we started 3 years ago. Through our innovation and technological advancement, we're able to produce high-quality silicon, which has enabled us to expand our market opportunity into the advanced technological portion of the silicon metal business. In line with this strategy, we recently added a new large global customer, increasing our presence in Asia. Finally, we provide more details about our capital allocation policy on our first quarter earnings call in February.
Operator (participant)
We will now start the question and answer session. As a reminder, to ask a question, please press star one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will now take the first question. From the line of Lucas Pipes from B. Riley Securities. Please go ahead.
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
Thank you so much, operator. Good morning, everyone, and congratulations on good results in what I understand is a tough environment. Marco, Beatrice, my first question is on the capital allocation point. Marco, if I heard you right, just there at the end, you expect to provide details on the fourth quarter results update call in February. And I wondered, can you maybe share at this time, kind of what, what are some of the key items you're still looking to address or determine, I assume with the board, too, between now and then? Thank you very much.
Marco Levi (CEO)
Well, in a nutshell, we believe that it is the right time to implement a prudent capital allocation policy. Our balance sheet is much stronger than it was in the past. Our gross debt is pretty close to the $200 million that we mentioned several times. We are in a difficult, extremely difficult market condition, but we are extremely confident on our medium- and long-term opportunities. So we really think is the right time to implement this policy. This implies, of course, two scenarios. Either we pay down the remaining bonds, or we got an agreement with the current bondholders. But we're gonna do one of the two, and we are gonna finalize our policy by February, I think it's February twenty-second-
Beatriz García-Cos Muntañola (CFO)
Yeah.
Marco Levi (CEO)
the date when we are gonna disclose our policy, which is gonna be in place, I expect, starting second quarter of next year.
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
That's helpful. And so in terms of paying down the bonds, is part of the dynamic here that you had some working capital uses during Q3, and that maybe cash flow is going to improve between now and then, that you have more flexibility to just pay those bonds down as an alternative to an agreement?
Marco Levi (CEO)
Well-
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
Part of it.
Marco Levi (CEO)
Let me tell you, and then I will allow Beatriz to elaborate on that. But in a nutshell, we're gonna be in a healthy position. We are gonna be in a healthier position in the first quarter. And we think that when you consider the balance of the cash that we have available, the cash that we are gonna generate, releasing working capital, we are gonna be in a good position either to pay completely down the bonds or to pay most of this part and still have the right level of cash to run the company.
Beatriz García-Cos Muntañola (CFO)
Yeah, maybe just Lucas-
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
Got it.
Beatriz García-Cos Muntañola (CFO)
To add on to that point. I think overall what we plan to do in February, we are thinking in a nominal dividend and maybe an opportunistic share buyback, right? But as Marco said, we will provide more details on our policy in February. And over time, as we have been repeatedly saying, we expect the share buybacks to be larger than dividends if our shares continue to be undervalued as they are today. If this is helpful.
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
Thank you very much, both of you for those details. I wanna touch on another theme, and that is the market environment and your contract process. So if I understand correctly, you're in the market with your customers. You negotiate offtake commitments. There might be ceilings, there might be floors. I understand there kind of are always lags to spot prices. But in the current environment, how are those conversations going? What visibility do you have on the volume side, on the price side for 2024 at this stage? Thank you very much.
Marco Levi (CEO)
Yeah, this is a broad question, Lucas. Let me say that clearly, we come from five quarters. We're in the market. We have seen index deterioration, and for most of the product, weakening demand, maybe with the exception of silicon metal, that I think was particularly low in the first quarter of this year based on what we could see. We don't see the current market conditions improving short term in the coming couple of quarters. But we expect some improvement on demand and as a consequence of pricing in the second half of the year. We are fully involved in the contract negotiations for next year.
Our overall balance between contracted volumes, spot volumes has not changed. It's more or less 50/50, 50% contracted, 50% in the open market. In silicon, when you exclude the joint venture volumes, the contracts cover 51%, the quarterly contracts, 12%, the six months contract, 24%. So there is very little left for the spot business, which tells you that the liquidity is not there, and the liquidity index for us in the West is mainly aluminum in ferrosilicon, 63% is contracted, like in manganese alloys. At the end, most of the volume goes to steel. 24%-26% go to quarterly contracts, and the rest is spot business. So this is the current picture.
Customers are clearly extremely cautious in committing volumes, but we have already closed the contracts with most of our large accounts.
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
Thank you very much for that. And just to follow up, in terms of price, is it right to think that it is floating with various lags, but you're not locked in to lower prices for next year, due to the fact that prices are lower today when you've closed some of these negotiations?
Marco Levi (CEO)
Yeah, you're right, Lucas. We are still in silicon metal; we are still. The contracts are based on index and get adjusted quarterly. So, this is why I mentioned that we expect the last quarter being weaker than Q3. Same fate for ferrosilicon and manganese alloys. So the prices are under pressure, but when you look at the different value centers, when you look at the cost of key raw materials, the energy cost, and the transformation cost, overall in the industry, prices reflect pretty are pretty close to the cost position of most of the players. So I don't think. And the pressure on coal is still there, the pressure on energy is still there in a lot of countries.
So I expect that sooner or later, prices are gonna improve during 2024.
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
Marco, I really appreciate your comments. I have more questions, but I'll jump back in queue, and in the meantime, continue. Best of luck. Thank you.
Marco Levi (CEO)
Sure, Lucas. Thank you.
Operator (participant)
Thank you. As a reminder, it is star one on one if you wish to ask a question. We will now take the next question from the line of Martin Englert from Seaport Research Partners. Please go ahead.
Martin Englert (Senior Equity Research Analyst of Metals and Mining)
Hello, good afternoon, everyone.
Marco Levi (CEO)
Ciao, Martin.
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
Hey, Martin.
Martin Englert (Senior Equity Research Analyst of Metals and Mining)
Thanks for a moment for questions here. I wanted to discuss silicon metal, ASPs. They did remain strong relative to market index prices. Can you discuss the components of this? Is there a bit more of a premium mix or something more favorable about the South Africa volume contribution or something else going on here?
Marco Levi (CEO)
Yes, Martin, as you know, we, most of the price is linked to our contracts, and most our contracts are in the chemical sector and now in solar sector. So the price dynamic is dictated mainly by these components. While we are less present, being less present in the spot transactional business, we are less exposed to the more commoditized business, which is aluminum related. So, we suffer like anybody else out of the price pressure, but the index effect allows us to enjoy an overall better average price than others.
Martin Englert (Senior Equity Research Analyst of Metals and Mining)
Okay. Thank you for that. Coming back to order books and what you're seeing, volumes and expectations around seasonality when thinking about fourth quarter across the business segments, can you discuss what you're seeing there and expecting?
Marco Levi (CEO)
In terms of trend, I see a similar trend to Q4 of last year and Q1 of this year. We've asked slowing down some of the production in Western Europe already during this quarter, shutting down production in France in the first quarter of next year. This is in terms of operations. In terms of demand, we don't see short term any resurrection of demand, except for a couple of trends that we need to watch, which are related to the rebound of partial rebound perspective in the overall construction business that has been down for a long time. And we need to watch what happens in China, and all the measures that they're taking to reinvigorate the economy.
So these two things might have a positive impact on overall demand to be seen. At this stage, we're quite conservative on our volume estimates. So we are planning for volumes for a volume level that we have seen in the recent quarters.
Martin Englert (Senior Equity Research Analyst of Metals and Mining)
Thank you for that. Could you review your comment on year-to-date EBITDA, and then you had a specific on fourth quarter, I think, relative to first quarter EBITDA? I just didn't catch that earlier.
Marco Levi (CEO)
Well, let me make sure. I'm not sure I understood your question. We closed the first half of the year at $155 million EBITDA. We are at 104 in Q3, so we are at 259. So we feel pretty comfortable to close the year on the high side of our guidance. This is what I can say. But if your question covers, I think, you asked also about first quarter 2024. We are in the middle of the budgeting process. Of course, we are, like everybody else, we're facing a lot of challenges, right? Because pricing during this year has been going down, so we need to make our assumptions for next year.
Like we already said in the previous calls, the very favorable impact of the energy contract in France of this year will not be so big next year, due to the fact that market price for energy is lower compared to the beginning of this year. So pricing, we are at the bottom. We are gonna have less. Still a very competitive position in France, but less advantage than this year. On the other side, I think we are looking with a lot of optimism at our increased sales position in Asia, of silicon metal. So these are the main factors. The other key positive that I want to mention is that the fact that we, and I already mentioned that in my presentation, is that we have spent CapEx very well in the last two years.
You know that in the last 2 years, we spent $75 million-$80 million of CapEx, versus $30 million-$35 million in the previous couple of years. Well, our plan has worked, run much better, like I said in my presentation. So we have the opportunity to count on more viable assets, and this is gonna give us much more flexibility in terms of volume allocation.
Martin Englert (Senior Equity Research Analyst of Metals and Mining)
Appreciate the optionality on the production footprint there. Thanks for highlighting that again. Oh, one last one, if I could. You did provide annual EBITDA guidance for this year. Is that something that you've determined internally that you'll provide again in, for the upcoming year, or was that a one-off?
Marco Levi (CEO)
Well, we will provide guidance. We haven't decided yet which guidance, because we are working, like I said, on the budget, revising our business plans, and we will need to discuss with our board. But I think once you have started giving guidance, you have to continue to give a certain guidance. So we will do that.
Martin Englert (Senior Equity Research Analyst of Metals and Mining)
Okay, appreciate it, and congratulations, navigating the market and the results.
Marco Levi (CEO)
Thank you, Martin.
Beatriz García-Cos Muntañola (CFO)
Thank you, Martin.
Operator (participant)
Thank you. We will now take the next question from the line of Lucas Pipes from B. Riley Securities. Please go ahead.
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
Thank you very much for taking my follow-up question. It's on the quartz investment, if I heard you right there in the prepared remarks. It's gonna be a total of $50 million. And you mentioned, Marco, I think 15% cost reductions associated with that, and there are some other strategic benefits. But just on terms of the numbers, I, in terms of the expected rate of return, is there a range that you could maybe provide for the market would be, would be really helpful to get a feel for that? Thank you very much.
Marco Levi (CEO)
... Again, I, when you mentioned $50 million, you were cut, so I want to make sure that I understood your question correctly.
Alex Rotonen (VP of Investor Relations)
Hey, Lucas, it's Alex. Were you asking if the investment of $15 million, it's 15, about $11 million?
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
Yeah, maybe I didn't hear that right. The question is really, first and foremost, about the expected rate of return.
Beatriz García-Cos Muntañola (CFO)
On the mine.
Marco Levi (CEO)
On the mine.
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
That's correct, yes.
Marco Levi (CEO)
I think we need to.
Beatriz García-Cos Muntañola (CFO)
We can revert back on this.
Marco Levi (CEO)
Revert back on this number, but the key point about this mine is security of supply, of course, the right quality, of course, $11 million investment plus $4 million to operate the mine, and an expected cost for our quartz backward integration that is gonna be 10%-15% lower than our current facility. So... and there is an enormous advantage in terms of proximity to our plants. Alex, you want to add something?
Alex Rotonen (VP of Investor Relations)
Yeah. No, it just, yeah, the IRR is clearly, it's meaningfully above our cost of capital. I don't know if we ever kind of said what our rates are. So, you know, maybe we'll decide on that, but I don't think we want to disclose it publicly at this time.
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
I appreciate that. I'll try to find out what costs are and then apply that 15% savings. But no, I appreciate the color. And then
Marco Levi (CEO)
More than 12%, more than 12.5%. Okay? The IRR is higher than 12.5%. Yeah.
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
That is helpful. Thank you, Marco. And final question from me for today. I think you said, Marco, on your pre-prepared remarks, Q4 is going to be above, sorry, it's gonna be below first quarter results. There's still a bit of a range in terms of high end, low end of EBITDA, and I wondered if you could point us to the remaining risk factors between kind of now and year-end. We're almost halfway through the fourth quarter that could push us towards the lower or the higher end of that implied fourth quarter EBITDA range. Thank you very much.
Marco Levi (CEO)
Well, you know, we are at $259 million EBITDA year to date. We gave a guidance of $270 million-$300 million. In the first quarter, we are gonna operate some of our plants at a lower rate to control inventories. This is not gonna be the case for silicon metal in Europe, in view of our shutdown in France in the first quarter. The advantage on the energy contract in France is gonna be lower in the fourth quarter versus Q2 and Q3. And, I wouldn't classify it like a risk, but is the fact that quarter four is always a slower quarter due to the December month. So, this is where we are.
Of course, we have an impact related to the weaker index prices across our portfolio in Q3 that are gonna impact pricing, contract pricing in Q4. These are the main thing that I see. I don't know, Beatriz, if you see anything else.
Beatriz García-Cos Muntañola (CFO)
No, nothing to add, to that, Lucas.
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
Marco, Beatriz, Alex, really appreciate all the color. Keep up the good work. Thank you.
Alex Rotonen (VP of Investor Relations)
Thank you. Thanks, Lucas.
Operator (participant)
Thank you. We will now take the next question. From the line of Greg Bennett, shareholder. Please go ahead.
Greg Bennett (Shareholder)
Good morning, or good afternoon. Thank you for the great results. The quartz mine that you bought in South Carolina, I'm just curious, how much competition is there for assets like this? I would think that, or are these very difficult to find a high-quality quartz mine in America?
Marco Levi (CEO)
Well, we've been lucky enough to find it. Probably, you refer to a blog that I am aware about, where there are some controversial opinions about the opportunity. But we are experts in this field. We know what we are doing. When you acquire a mine, you need to make sure that—
Greg Bennett (Shareholder)
Hello?
Operator (participant)
Just one moment, please. Your conference will resume.
Greg Bennett (Shareholder)
Hello?
Operator (participant)
Just one moment, please. We're running technical problems. Our conference will resume shortly. Just one moment, please. Please stand by, your conference will resume shortly. Please continue to stand by, your conference will resume shortly. One moment, please. Your conference will resume shortly.
Marco Levi (CEO)
Hello?
Greg Bennett (Shareholder)
Hello.
Marco Levi (CEO)
Yeah. Sorry, we had a-
Lucas Pipes (Managing Director and Equity Research Analyst of Energy and Natural Resources)
We had a technical difficulty.
Marco Levi (CEO)
We had a technical difficulty here. I don't know at which point of my answer I was interrupted, but what I say, the quality of the mine in South Carolina, based on the analysis that we have run, is far better than the current quality that we have in Alabama, in terms of impurities. And as a consequence, we plan to use the quartz out of this mine, starting second half of this year, to supply our silicon production and use Alabama to produce ferrosilicon.
Greg Bennett (Shareholder)
Are you facing competition in this market?
Marco Levi (CEO)
So are you-
Greg Bennett (Shareholder)
Are you referring to competition in quartz for quartz mines or-
Marco Levi (CEO)
Yeah, I guess.
Greg Bennett (Shareholder)
For silicon, I would think that with what's going on in the Inflation Reduction Act, that sort of thing, that it would invite a lot of competition. But I guess I wanna know how strong your franchise is.
Marco Levi (CEO)
In silicon metal, you mean?
Greg Bennett (Shareholder)
Yeah.
Marco Levi (CEO)
Or in Quartz?
Greg Bennett (Shareholder)
In quartz.
Marco Levi (CEO)
In quartz. Well, this is why we moved pretty fast, a few months ago, because we expect a significant growth in demand of silicon metal in the United States, and we assessed that our reserves in Alabama were not enough. And we were looking for quartz of a certain quality that we have found in South Carolina, and we have been, I don't know, faster or whatever than competition, but we have secured the rights of this mine, on this mine. Yeah, quartz is very common, but and the point is that it's true that what you said before, quartz is very common, but the right quality of quartz is not necessarily so common everywhere, particularly in the US.
Greg Bennett (Shareholder)
Okay. You mentioned in your comments about you closed on a French facility. Did that bring in capital, or is that future cost savings? I think it was at the end of your presentation.
Marco Levi (CEO)
Yeah, yeah. No, no, this is, we, we, a couple of years ago, we decided to stop production in, at one of our plants in France that was producing ferrosilicon foundry and silicon metal for furnaces in Châteaubriant. This process in France is always long, and one of the requirements when you operate in France and you stop production at one site, is there is a Loi Florange that imposes the company, to the company who stops production in France to look for a buyer. And, we, we had a long process where we had hundreds of interested buyers, but at the end, and at the end, this process has been finalized on October thirty-first, with, the divestiture, at a nominal value, I would say, with the divestiture of nominal value of the plant to Swiss Steel.
Greg Bennett (Shareholder)
So are there cost savings going forward or it's everything's nominal?
Marco Levi (CEO)
Yeah, cost saving going forward, because we, we are not, we are not operating this plant anymore, and we have reallocated productions at other sites.
Greg Bennett (Shareholder)
Okay. On your capital allocation that you're gonna tell us in February, for whatever it's worth, pay off all the debt, do a base dividend, and then have your cash flow 50% to a cash dividend and 50% to, or, and, or buy back and 50% to... Do you have other projects that you want to do, that you use cash flow for?
Alex Rotonen (VP of Investor Relations)
Yeah. No, we will announce the official plan with details in February. So, you know, we are obviously haven't finalized it. If we had, we would have announced it today on exact form of that return. So, yeah, we'll discuss it more in February with details.
Greg Bennett (Shareholder)
Okay. Thanks for the great work. Appreciate it.
Marco Levi (CEO)
Thank you.
Alex Rotonen (VP of Investor Relations)
Thank you.
Beatriz García-Cos Muntañola (CFO)
Thank you. Good to meet you.
Operator (participant)
Thank you. I would now like to turn the conference back to Marco Levi for closing remarks.
Marco Levi (CEO)
Thank you. Thank you for the Q&A. That concludes our third quarter 2023 earnings call. Thank you again for your participation. We look forward to hearing from you on the next call. Have a great day.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.