By MARILYN MUCH, INVESTOR'S BUSINESS DAILY
Posted 06/24/2011 02:53 PM ET
Silicon metal being poured at Globe Specialty Metals' Niagara Falls, N.Y., manufacturing plant.
It took guts to float a new issue just as the offering window opened after being shut tight during the recession.
But executives at silicon metal and silicon-based alloy producer Globe Specialty Metals (GSM) knew the timing was right when they took the company public on July 30, 2009.
"We believed we had the characteristics to be able to complete an IPO successfully, even though the market was just reopening for new offerings," said Chief Financial Officer Malcolm Appelbaum. "We had very strong fundamentals. We made money throughout the recession other than a noncash impairment charge, and we had a very strong balance sheet."
Keeping that in mind, Globe became the first domestic industrial company to go public since the market closed down during the recession, Appelbaum says.
Globe's business has been thriving amid strong demand, particularly for its main product, silicon metal. It's an essential raw material in making silicone compounds, aluminum and polysilicon used in solar cells.
In fiscal Q3, profit surged 675% to 31 cents a share. Sales climbed 54% to $172.8 million.
"The silicon metal market is growing, and our capacity is running at full utilization as are the rest of the producers in the Western world," said Appelbaum.
Demand has been strong in all of Globe's key end markets.
Globe sells silicon metal to chemical firms such as Dow Chemical (DOW), which use the material to make silicone compounds. Silicone is used in a broad range of applications, including personal care items like shampoo and industrial products like caulking for insulation.
The demand for silicone chemicals has been growing for many years as new applications have been developed, especially in emerging markets, says B. Riley & Co. analyst Ian Corydon.
People in developing nations are buying more consumer products, which have silicone as an ingredient such as shampoo and lipstick, adds Appelbaum.
Globe also markets to aluminum producers, which use silicon metal mainly to make auto components, which have a high content of the material.
The aluminum market has been quite strong, says Corydon. He sites a report by aluminum giant Alcoa (AA) that estimates primary globally aluminum demand will grow 12% in 2011 on top of a 13% gain in 2010.
A key driver of demand is the fact that the aluminum content of cars keep going up because cars are being made lighter to meet fuel efficiency requirements, Corydon says.
A third end market, polysilicon producers, use silicon metal to make solar cells.
That market is also growing as new polysilicon plants come on line and need silicon metal as the main raw material, says Appelbaum.
Corydon expects silicon supply to stay tight. He estimates demand will rise 6% to 7% a year for the next three years, while supply won't be up more than 5% a year over the same time frame.
The tight supply will lead to higher silicon metal prices, which are already rising, says Corydon.
The price of silicon metal is around $1.60 a pound, up from $1.05 during the depths of the recession, says Appelbaum.
Corydon estimates the price will pop to $1.85 a pound in 2012.
Meanwhile, Globe is sitting pretty with its supply. Its current capacity stands at 100,000 metric tons.
It's building a new plant in Iceland with a minority partner, Tomahawk Development Co., that will add roughly 40,000 metric tons of silicon metal a year. Globe will own 85% of the plant, expected to be operational in 2013, and Tomahawk will own the rest. It will sell the output mainly to European customers.
Globe also produces silicon-based alloys, which are used as raw materials in making steel, automotive components and ductile iron.
Demand should remain strong for this product amid expected growth in steel utilization and auto production, says a company filing with the Securities and Exchange Commission.
A recent buy has helped Globe expand its offerings to the steel industry. Last April, it bought Core Metals Group from Ospraie Funds. It paid $52 million for the producer of high-purity ferrosilicon and other specialty steel ingredients. Core services the steel, chemical and other industrial markets.
Appelbaum says the acquisition broadened Globe's product line and expanded the amount of ferrosilicon it produces.
Core also brings to the table high-quality specialty grade products, he adds, that carry a higher gross margin.
In June, Globe agreed to buy one of its suppliers, Alden Resources. Alden is a miner, processor and supplier of specialty coal to the silicon and silicon-based alloy industries and thermal coal to other industries. Alden owns roughly 32 million gross recoverable tons of coal in various properties in Tennessee and Kentucky.
Globe will pay NGP Capital Resources Co. (NGPC)$73.2 million plus an added $6.8 million payment if Alden meets certain operational conditions. The deal is expected to close in July.
"This specialty low-ash coal is a critical raw material in making silicon metal, and it's a key raw material we didn't own," said Appelbaum.
He says Globe will use "quite a lot" of the coal it produces and sell the rest to third parties.
Globe likes to control its raw material supply, and low ash coal was the last remaining raw material it didn't own, says Corydon.
Oppenheimer & Co. analyst Ian Zaffino calls the buy "phenomenal."
"It effectively creates some really good barriers to entry and makes them in charge of their own fate," he said. "Now they have their own supply."
So if coal prices go up, Globe won't be faced with cost increases.
Zaffino estimates Alden will probably generate $45 million in annual revenue.
Globe is no stranger to acquisitions. It closed six deals since its founding in 2004. Appelbaum says the company is actively looking to make more buys, and it has "considerable capacity" for doing transactions.
Watchers expect Globe's business to stay strong with the current mix. Analysts polled by Thomson Reuters see earnings for the 2011 fiscal year ending June 30 to rise 95% to 82 cents a share. They see a 77% jump in fiscal 2012.
"Globe is one of our favorite names," said Corydon. "It has a great management team and a really unique product. They control their input costs and there's not a lot of supply."
Given its control over input costs, he adds, its margins should expand very rapidly as prices go higher.
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