AMG Advanced Metals - featured here
before - is a metallurgist that’s specialized in specialty metals and complex alloys. The company is listed in the Netherlands.
The metallurgical products company that’s listed in the Netherlands designs complex alloys from specialty metals like ferrovanadium, niobium, tantalum and, to name a few more commonly known ones, lithium and titanium.
The various uses of these materials are developed in parallel with the sophistication of the industrial demand, where there is a need for structures that are lighter - to save fuel and reduce the emission of carbon dioxide - but at the same time more resilient and efficient.
Twenty-eight specialty metals have also been identified as ‘strategic’ by the United States and Europe, as they are essential for certain sectors, for example, the defense industry and the aerospace segment.
AMG treats and provides a third of said ‘strategic’ materials. Over time, this portfolio of skills should become very useful in serving the interests of the group.
However, as we mentioned in our first analysis, the financial dynamics are a little more nuanced. The turnover has been stagnating for ten years, so far without a strong imbalance between supply and demand having an impact on the rising prices of rare metals.
In reality, apart from the occasional speculative mania, the prices have more or less followed those of traditional metals like copper, iron, and zinc since 2008. Beyond the macroeconomic considerations mentioned above, the market seems to prosaically index the price of rare metals to the global economic conditions.
The momentum has however been positive since several quarters and the prices are generally rising - like those of traditional metals, which are recovering from their depression caused by the slow down of the Chinese growth.
The current market conditions have led the analysts who follow AMG to raise their earnings projections.
For the first semester of the year, the turnover has increased by 23% compared to the previous year (from $520 to $637.7 million), and the operating profit by 75% (from $43.6 to $76.6 million). For 2018, the management expects an increasing EBITDA from 40% to 50%.
In April, we underlined the existence of an important operating leverage - capable of rapidly boosting or plummeting the profit from even the tiniest variations in the business activity. Here we see it in full swing!
At the bottom of the table, the net profit increases less spectacularly with 24% (from $28.6 to $35.5 million) mainly caused by a severe taxation and a higher interest expense. The group has doubled its debt during the first semester (from $165 to $360 million) to finance an important concentrated lithium production project which has been presented by the management as the number one priority for this year.
This is why we see in the margin of the net profit - a purely accounting concept - that the upgrade of the production capacities has consumed almost two times more cash ($40 million) than the business activities have generated ($23 million).
Lithium, as we know, is the base material for the manufacturing of electric vehicle batteries - a bet that AMG has thus decided to take. While the opportunity seems real, we have to take the Asian competition into account. In particular, the competition coming from China which is technically on point and generally able to produce at low prices.
The biggest part of the funds raised in the first semester has been obtained against extremely favorable conditions (LIBOR +3%), something that is unparalleled in the heavy metal and the commodity treatment industry. The management has without a doubt been inspired to refinance the company before the much-anticipated hike of the interest rates for which we can be grateful.
When we know how hard the management has tried to clean up its balance sheet since the last financial crisis, we can hardly imagine that they will undermine the efforts that have been made in the last years.
In the short and medium term, however, it will still be the price of rare materials that will have a decisive impact on the results of AMG. In that regard, the positive momentum that is expected by analysts maybe the first result of an open trade war between the major powers of this world - particularly between China and the United States.
If one of the blocks, by way of repercussion against new import barriers, were to decide for example to suspend its export of rare materials, an upwards explosion of the volatility would be imminent, and potentially equally as bad for the industry as good for AMG.
The Dutch group trades at 10 times its expected profit for 2019. A continuation of the positive momentum that started a few quarters ago will without a doubt - if it takes place - lead to an expansion of this valuation multiple that’s far below the market average at the moment.
If, on the other hand, the market conditions get worse, it’s important to get out because - obviously - the operating leverage works both ways.
Article published on 10/01/2018 | 12:09