Ferroglobe PLC annual report, Q4 FY2022

Ferroglobe PLC — FY2022 Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2022. The filing is an annual Form 20-F, not a standalone fourth-quarter filing; quarterly results are not separately presented. Financial statements are prepared under IFRS as issued by the IASB and reported in U.S. dollars.

Business context

Ferroglobe is a global producer of silicon metal, ferrosilicon, other silicon-based alloys and manganese-based alloys. It also operates quartz and metallurgical coal mines, produces carbon materials and owns interests in hydroelectric power. Its customers primarily serve aluminum, steel, silicones, polysilicon, photovoltaic, automotive and construction markets.

Operations span North America, Europe, South America, South Africa and Asia. The business is highly energy-intensive, cyclical and exposed to global commodity prices, energy availability, raw-material costs and geopolitical conditions.

Key financial metrics

Metric	2022	2021	Change
Sales	$2,597.9 million	$1,778.9 million	+46.0%
Operating profit	$660.5 million	$31.4 million	Material improvement
Profit attributable to parent	$440.3 million	$(110.6) million	Returned to profitability
Basic earnings per share	$2.34	$(0.63)	Improved
Operating margin	25.4%	1.8%	+23.6 percentage points
Net margin	17.1%	(6.5)%	Improved
Cash flow from operating activities	$405.0 million	$(1.3) million	Strong improvement
Capital expenditures	$52.2 million	$27.6 million	+89.0%
Cash, restricted cash and equivalents	$322.9 million	$116.7 million	+176.8%

Sales growth was driven principally by higher realized prices despite lower shipment volumes. Silicon metal sales rose to $1,116.2 million, manganese-based alloy sales to $525.5 million, ferrosilicon sales to $561.5 million and other silicon-based alloy sales to $192.4 million.

Average selling prices increased to $5,332 per metric ton for silicon metal, $1,778 for manganese-based alloys, $3,623 for ferrosilicon and $3,918 for other silicon-based alloys. Shipments declined for silicon metal, silicon-based alloys and manganese-based alloys, reflecting weaker demand in parts of Europe, steel-market pressure and production curtailments caused by high energy costs.

Raw-material and energy consumption increased to $1,285.1 million, but declined to 49% of sales from 66.6% in 2021 because of operating leverage from higher prices. Other operating income increased to $147.4 million, including significant energy compensation and emissions-related items.

Liquidity, debt and balance sheet

Total assets were $1,957.8 million and total equity was $756.8 million at December 31, 2022.
Net debt instruments were $343.4 million, primarily the 9.375% secured Reinstated Senior Notes due December 31, 2025. The company repurchased $19.05 million principal amount of those notes during 2022.
The $60 million Super Senior Notes due 2025 were redeemed in July 2022.
Bank borrowings totaled $77.8 million, including $61.0 million associated with receivables factoring.
A new five-year $100 million North American asset-based revolving facility was entered into in June 2022 and remained undrawn at year-end.
Operating cash flow was $405.0 million; investing cash outflow was $51.8 million; and financing cash outflow was $140.5 million in the audited cash-flow statement.
Working capital increased to $705.9 million from $464.9 million, primarily because inventories rose to $500.1 million from $289.8 million and receivables increased.
Contractual obligations totaled $1.385 billion, including $643.5 million of debt obligations, $526.8 million of power-purchase commitments, $23.2 million of leases and $142.2 million of other long-term liabilities.
No dividends were paid in 2022. Debt agreements and the SEPI financing impose restrictions on dividends and certain intercompany payments.

Material changes versus 2021

Ferroglobe moved from a $110.6 million parent-attributable loss to $440.3 million of parent-attributable profit.
Operating profit improved substantially, although 2022 included a $57.0 million net impairment charge, primarily related to facilities in Spain, France and Norway, partially offset by reversals in South Africa.
Income tax changed from a $4.6 million benefit to a $148.0 million expense, including taxes recorded in the United States, France and Canada.
Finance costs declined to $61.0 million from $149.2 million, as 2021 included approximately $90.8 million of refinancing-related accounting charges.
Inventories increased by approximately $210.3 million, and the company recorded $29.9 million of inventory write-downs to net realizable value.
High European electricity prices caused production reductions and plant idling in Spain during the second half of 2022. The Polokwane facility in South Africa restarted during late 2022, while the Selma, Alabama facility had restarted earlier in the year.
Ferroglobe revised its operating-segment structure in 2022 and restated comparable segment information.

Outlook, management commentary and unusual items

Management stated that demand and pricing peaked around mid-2022 and normalized during the second half as concerns about end-market demand increased. Management expected 2023 dynamics to be supported by steel demand, construction and automotive activity, while seeking shorter-duration contracts to retain exposure to anticipated price improvement, particularly in the second half of 2023. The filing does not provide formal quantitative 2023 revenue, EBITDA or earnings guidance.

The company’s turnaround plan targets operational flexibility, plant efficiency, commercial excellence, centralized procurement, overhead reduction, working-capital improvement and disciplined capital allocation. Management reported $188 million of cost savings and $50 million of commercial-excellence benefits against a broader $225 million EBITDA-improvement target.

Key unusual items include the $57.0 million impairment charge, $29.9 million of inventory write-downs, energy compensation received in France, the redemption and repurchase of debt, and the $18 million Selma litigation settlement paid directly by the insurer in the first quarter of 2023. A partial early repayment of €16.3 million on the REINDUS loan was made in February 2023.

Ferroglobe concluded that it remains a going concern and that working capital is sufficient for present requirements, based on management’s financial model and stressed scenarios. However, cash flows are highly sensitive to product prices, volumes, energy costs and working-capital requirements.

Principal risks and contingencies

Commodity and end-market cyclicality: Revenue and margins depend heavily on global silicon, ferroalloy, steel, aluminum, chemical and photovoltaic markets.
Energy exposure: Electricity is a major production input. European and South African power availability and pricing remain significant risks, and production may need to be curtailed during high-price periods.
Raw materials and logistics: Coal, manganese ore, electrodes, quartz and transportation costs are exposed to supply disruptions, inflation and geopolitical events. Approximately 59% of third-party coal purchases came from a single Colombian mine.
Customer concentration: The ten largest customers represented approximately 50.1% of 2022 consolidated revenue; Dow Silicones accounted for 16.8%.
Debt and refinancing: The Reinstated Senior Notes mature in December 2025. The company must maintain sufficient cash generation and covenant compliance to refinance or repay debt.
Environmental matters: EPA and DOJ proceedings concerning the Beverly, Ohio facility may require pollution-control investments and civil penalties. The filing records a $2.8 million provision but notes statutory maximum penalties could be substantially higher.
Legal matters: Approximately 100 former FerroPem employees have declared asbestos-related injuries; approximately half of unresolved cases include allegations of inexcusable negligence. A $955 thousand provision was recorded, but ultimate exposure is uncertain.
Mining and permitting: Several mining rights, environmental permits and operating approvals require renewal or continued compliance, including matters relating to Fort Klipdam, Serrabal and Spanish mining plans.
Internal controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end. Deloitte issued an adverse opinion on internal control, citing material weaknesses in the control environment, control activities, financial close and reporting, manual journal-entry review and impairment controls.
Related-party and governance risk: Grupo Villar Mir beneficially owned approximately 43.7% of outstanding shares at year-end and has significant influence over corporate matters. Related-party energy and service transactions totaled material amounts.

Investor verification checklist

Verify the sustainability of 2022 pricing and margins after the second-half normalization in silicon and ferroalloy markets.
Review 2023 shipment volumes, contract durations, indexed pricing and customer demand, particularly from chemical, aluminum and steel customers.
Assess electricity costs, production curtailments, plant restarts and the availability of power in Spain, France and South Africa.
Reconcile debt maturities, factoring usage, covenant headroom and the plan to address the December 2025 Reinstated Notes maturity.
Monitor inventory levels, the risk of additional write-downs and working-capital conversion.
Track remediation of the material weaknesses and whether management and Deloitte conclude that internal controls are effective for 2023.
Follow the Beverly, Ohio environmental proceedings, asbestos claims, permitting matters and other unresolved litigation.
Evaluate restrictions on subsidiary cash transfers, dividends and related-party transactions, including the SEPI loan covenants.
Note that the filing text contains inconsistent narrative figures for certain 2022 investing and financing cash-flow amounts; the audited consolidated cash-flow statement reports investing outflows of $51.8 million and financing outflows of $140.5 million.