Ferroglobe PLC (GSM) 2019 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Ferroglobe Second Quarter Earnings Call (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the call over to Pedro Larrea, Ferroglobe's Chief Executive Officer.

You may begin.

Good morning, everyone, and thank you for joining the Ferroglobe Second Quarter 2019 Conference Call.

Joining me on the call are José Maria Calvo-Sotelo, Deputy CFO and EVP Corporate Development; and Gaurav Mehta, EVP of Investor Relations and Corporate Strategy.

Before we get started with some prepared remarks, I'm going to read a brief statement.

Please turn to Slide 1 at this time.

Statements made by management during this conference call that are forward-looking are based on current expectations.

Risk 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 web page, www.ferroglobe.com.

In addition, this discussion includes references to EBITDA, adjusted EBITDA and adjusted diluted earnings per share, which are non-IFRS measures.

Reconciliation of these non-IFRS measures may be found in our most recent SEC filings.

Next slide, please.

We will first review the Q2 results across our core products.

Next we will update you on the corporate initiatives we are undertaking and particularly the divestiture of the Hydro assets and One Ferroalloys Plant, belonging to FerroAtlántica in Spain, and lastly, we will provide an update on the market outlook for the remainder of 2019.

Next slide, please.

As we have seen in our earnings press release, the second quarter results clearly reflect a continued weakening in end-market demand across all of our core products and an erosion in realized pricing across most of our products.

That said, adjusted EBITDA showed an improvement quarter-over-quarter, as actions taken by the industry more broadly and also actions we took in respect to our own operations are beginning to have a positive impact on our costs.

While we were expecting the cyclical downturn to continue through Q2, the overall financial results for the quarter are still disappointing.

In the beginning of the year, we announced a number of initiatives focused on operational changes, cost-cutting measures to counter our declining topline and most importantly ensuring that our balance sheet was derisk and well positioned to ride out this cyclical downturn.

We will touch on all of these areas, but I want to start by highlighting a very important transaction.

As you may have seen in our press release, last Friday we successfully closed the sale of FerroAtlántica that was announced in our previous earnings call in the month of May.

As a reminder, the entity we sold is the owner of 10 hydroelectric facilities and of the Cee-Dumbría ferroalloys plant.

The closing of this transition was the centerpiece of the cash generation plan we previously announced and it is a critical factor in derisking our balance sheet.

The transaction values the asset at EUR 170 million or approximately $188 million.

Gross proceeds from the sale are approximately $173 million, after adjustments agreed in the contract, and net proceeds are approximately $112 million after paying the capital leases linked to this asset.

The significant -- this significantly changes the financial profile of the company, bringing net debt down to around $308 million from a pro forma basis as of June 30, 2019.

And brings our total cash and cash equivalents balance to approximately $298 million on a pro forma basis.

I would like to thank our team for working relentlessly and delivering a successful outcome.

This transaction was very complex in a number of respect, and we demonstrated the ability to close it expeditiously as far as the execution of our near-term strategy.

The sale values FerroAtlántica at 12.7x on the cycle average EBITDA basis, which clearly indicates how the transaction is value enhancing for the company on top of helping improve the balance sheet profile.

Overall, we have significantly improved our debt level and liquidity, but feel it is prudent to continue strengthening the balance sheet even further.

Another element of this is the refinancing of our existing revolving credit facility.

With the sale of FerroAtlántica behind us, the company is better situated to refinance on terms that provide solid footing and flexibility for the company in this market environment.

Given the underlying challenges in our business and the actions we have taken, there is a lot of ground to cover on today's call.

We will provide further details on all of these areas.

So moving to Slide 5 please.

Q2 results are still reflective of an overall industry slowdown with revenues, EBITDA and net income at disappointing levels.

Adjusted EBITDA is above Q1, but revenues are still declining and net income continues to be negative.

Please note that our prior quarter financials have been restated to show the results of recently sold Spanish hydroelectric facilities as discontinued operations.

Overall, volumes were down 6% quarter-over-quarter as all 3 of our major product categories were adversely impacted by a slowdown in end customer demand, particularly in the silicon metal family of products.

An important factor of the Q2 results was reduced pricing across most of our products, although at a slower rate than previous quarters in silicon metal.

Specifically, average sales prices for silicon metal declined 1.6% versus Q1 2019 and average sales prices for silicon-based alloys fell by 5.8%, while manganese-based alloys continued to improve by 1.4% versus Q1 2019.

The overall weaker volumes in pricing during the quarter yielded an 8.5% decline in our topline revenue versus the prior quarter.

On a positive note, we realized cost improvement during the quarter across a number of key inputs.

Reported EBITDA was negative $7.1 million in Q2 compared to $3.3 million in Q1.

The adjusted EBITDA in the quarter was $5 million, up 51% from $3.3 million during the prior quarter.

The decline in revenues was offset by cost improvements yielding EBITDA margin of 1.2%, an increase of 49 basis points from the prior quarter.

Given these developments, we are actively making changes to our commercial, operational and financial strategy, which we will discuss momentarily.

Next slide, please.

Q2 2019 continued to be affected by the same headwinds we have been discussing over the past few quarters.

Our consolidated sales for the quarter have decreased 8.5% from $447 million in Q1 2019 to $409 million in Q2.

Revenues across our 3 primary product categories were down quarter-on-quarter due to the combined effects of lower volumes and/or weaker pricing.

This revenue weakness was offset with cost improvements, resulting in a slight improvement in adjusted EBITDA.

In historical terms, the softness in revenues is still coupled with relatively high cost in some of our inputs.

If we compare to where such costs were only a couple of years ago.

Prices for manganese ore coal electric components meta pet coke as well as power are coming down but are still at relatively high levels.

As has been the case in other industry cycles, these inputs should, according to industry experts, continue to come down leading to a recovery in margins.

The slowdown in end market demand coupled with the relatively soft pricing environment experienced during the first half of the year is expected to set the backdrop for the remainder of 2019.

We expect costs to continue to improve throughout the business, which will help alleviate some of the pressure.

Slide 7, please.

Adjusted EBITDA restated to exclude discontinued operations increased by $1.7 million over the previous quarter from $3.3 million in Q1 to $5 million in Q2 2019.

The biggest contributor to improvement during the quarter is improvement in cost across our key inputs.

The cost improvement of $14.2 million includes improved power pricing in Spain and France, which reduced cost by approximately $5.8 million.

Furthermore, we realized the benefit of declining manganese ore prices, which yielded $3.5 million in cost savings quarter-over-quarter.

In the aggregate, the realized selling price evolution across all products resulted in a negative impact of $6.5 million during the quarter.

Volume declined across our portfolio negatively impacted this quarter's adjusted EBITDA by $2.7 million as volumes overall decreased 6%.

Finally, a variety of multiple other factors adversely impacted results by approximately $4 million.

At this time, I'll turn the call over to Gaurav, who will discuss pricing and volume trends, earnings contributions and market observations for each of our key products.

Thank you, Pedro.

Moving on to Slide 8. Ferroglobe's realized average selling price for silicon metal declined by 1.6% to $2,320 per metric ton as compared to $2,358 per metric ton in the prior quarter.

The U.S. index pricing started flat at Q1 levels but eventually declined during the quarter.

Similarly, the European index showed the same trend during the quarter with both indices extending their gradual decline year-to-date, as the demand set of the equation has eroded faster than the supply side cutbacks.

Based on recent history, industry experts believe [parm] pricing levels are unsustainable for many foreign producers and feel that the current market prices should result in a further shutdown of unprofitable production capacity.

As a result, analysts now expect stabilization of prices, which we're beginning to see early signs of in the European and Chinese indices.

We continue to have a decent order book with fixed price contracts as well as with 4 limits in some of our index price contracts.

These types of contracts allow us to realize average prices that do not decline as much of the underlying index.

The bar chart on the top right hand of the slide shows the sequential decline in volumes to levels we have not seen in recent history.

Volumes during the quarter were once again negatively impacted by a slowdown across the aluminum, chemical and solar end markets.

The net impact of the trade war and corresponding tariffs further destocking along the value chain and the general slowdown in markets such as the automotive industry all contributed to a sharp decline in sales and volume this year.

There are commercial opportunities where we consciously turn business way because of the underlying economics.

And in these instances we are losing share, but feel that many transactions are being done at levels which are loss making for any supplier.

This dynamic reinforces the need to remain disciplined and also highlights that the current pricing dynamic is not sustainable.

We saw quite deterioration in our EBITDA from the silicon metal's business quarter-over-quarter.

The net impact of lower sales and over-realized prices slightly outweighed the positive impact of lower input costs and cost improvements driven by technical performance.

On a positive note, the Canadian International Trade Tribunal continued its anti-dumping and countervailing duty finding with respect to imports of silicon metal from China for a further 5-year period.

The anti-dumping duties range from 47% to 235% and the countervailing duties range RMB 1,460 to RMB 1,945 per metric ton, which has been in effect since 2013.

We thank the Canadian authorities for their diligent work.

Trade cases are important concerning (inaudible) sales and protecting our investments, we'll continue to pursue such cases as we deem appropriate.

Next slide, please.

In response to a drop in the end market demand during the quarter, we're taking further actions to idle silicon metal production capacity.

As a reminder, it is important to note that we are not permanently closing capacity but optimizing fixed and variable costs by concentrating production in a reduced number of facilities.

When demand recovers, additional production can be brought back online with limited cost and no significant new investments.

Our South African plant at Polokwane underwent regular maintenance during the winter months there and was idle as of August 1. The facility has 3 furnaces dedicated to silicon metal with production -- combined production of -- a capacity of 59,000 tons per year.

This decision addresses the need to adapt our production capacity to the market environment, and will also help reduce our working capital since this plant has higher inventory requirements due to the long lead times to end customers.

The partially offset the loss production volumes for Polokwane, we have restarted 1 furnace at Sabón, this facilitates sales in Europe.

Pro forma for these operational changes are remaining silicon metal production capacity will decrease by 39,000 tons from 281,000 tons, down to 242,000 tons.

However, ability to destock during the second half of the year pleases our total volumes available for sale above this number.

Slide 10, please.

Turning to silicon-based alloys.

Overall EBITDA contribution from this product category improved driven by lower costs.

During the quarter the average selling price decreased by 5.8% to $1,572 per metric, down from $1,669 per metric ton in the first quarter of 2019.

Although sales volume was stable during the quarter, the pricing pressure we saw at the onset of the year has continued, with capacity from new market entrants and converted capacity impacting silicon alloys supplying.

Sales volume was steady at approximately 79,000 tons for Q2.

Despite continued stability in demand, we are closely tracking the developments in the steel industry in plants for capacity reductions by producers, which could impact sales in the back part of the year.

As a result, we are considering capacity curtailments in ferrosilicon.

The silicon-based alloys business was positively impacted by approximately $11.8 million of cost reduction during the quarter, including the impact of lower raw materials and power cost.

Foundry products and calcium silicon, which represent approximately 44% of the overall silicon-based alloys business, had sales volume similar to the prior quarter.

These are tailor-made non-commodity products with greater stability in prices.

We're also focusing on specialty grade of ferrosilicon, currently representing approximately 19% of the revenues in the silicon alloys business, which will provide higher margins going forward.

Next slide, please.

The quarter-over-quarter EBITDA trend line during Q2 and the continuation of favorable developments in the manganese ore pricing into the current quarter is expected to support improvement and increase contribution from this business in the back part of 2019.

To give you some context, the Chinese index price were 44% grade ore, on a CIF Basis, was at highest $8.15 per dmtu back in March 2018.

Currently, the index is around $5.50 per dmtu.

Given ore mix requirements for different grades and overall lag due to the shipping and processing times in sales from finished goods inventory, the current quarter results do not fully reflect the benefit of the drop in ore prices.

We expect to see continued improvement in the EBITDA contribution of this part of the business going forward.

Our average realized price for manganese-based alloys increased 1.4% to $1,188 per ton, up from $1,172 per ton last quarter.

Index prices for both ferromanganese and silicon manganese have remained stable during Q2, we have seen this continue into the third quarter.

Volumes declined marginally by 4% quarter-over-quarter.

Once again, we view this positively despite the recent headlines in the steel industry.

In the interest of time and given the number of recent developments during this call, we have included some of our routinely disclosed information as an appendix to the presentation for those who would like those details.

Next slide, please.

The working capital increase during the second quarter of $59 million was primarily driven by increased finished goods inventory, which is the result of the quarterly decline in operating volumes in sales.

As noted previously, we have made operational changes to address the buildup of inventories, particularly at Polokwane, which will release cash over the coming months.

With an increase in working capital and net operating losses, there was cash consumption during the quarter.

We ended the quarter with $188 million of cash and cash equivalents, which is down from $217 million the prior quarter.

Slide 13, please.

During the quarter, both of our gross debt and our net debt balances increased.

Our gross debt increased by $30 million to $666 million, and we ended the quarter with net debt of $478 million.

On the right-hand side of the slide, we show the cash generation in more detail.

The loss during the quarter was $43.7 million.

Adjusting for noncash items, our loss was $4.3 million.

Our operations used cash flows of $37.4 million during the second quarter.

This was primarily due to an increase in working capital, offset by cash inflows from our accounts receivables securitization program.

Payments for maintenance CapEx were contained at a level of $7.1 million, resulting in free cash for the quarter of negative $44.5 million.

With that, I now turn the call back to Pedro to review the near-term outlook and corporate initiatives.

Thank you, Gaurav.

So we turn now to Slide 15.

On our prior calls, we have outlined a number of initiatives aimed at cash generation, cost cutting and the overall strengthening of our balance sheet.

I'll now take a few minutes to provide updates on the 4 distinct areas outlined on this slide.

So turning now to Slide 16, yesterday we announced the successful sale of FerroAtlántica, which closed on August 30.

The sale, which involved a number of complex elements, was expeditiously finalized within 3 months since we first announced the deal as we got all the approvals to meet the various conditions to closing.

The transaction yields and attracted valuation multiple of 12.7x based on cyclical average EBITDA.

While we launched a number of targeted noncore asset sales, this transition was the centerpiece of our cash generation plan.

This overall transaction value was $170 million or approximately $188 million -- sorry EUR 170 million or approximately $188 million.

The uses of these funds and pro forma impact are detailed on the following slide.

As part of the transaction, we have entered into a tolling agreement with FerroAtlántica, under which we will become the exclusive offtaker of finished goods from the ferroalloys facility.

In return for this facility, Ferroglobe commits to supplying FerroAtlántica with key raw materials over the long term.

Next slide.

On Slide 17, we show an illustration, summarizing the sources and uses of cash from the sale on the pro forma impact on the balance sheet.

Of the $188 million of gross proceeds, $15 million was deducted to account for closing adjustments, leaving net proceeds of $173 million.

$60.3 million of the $173 million was immediately used to repay certain leases and other loan obligations and $2.5 million would be paid to advisers, leaving a balance of $110 million as cash on our balance sheet.

The pro forma cash and cash equivalents balance as of June 30, is approximately $298 million, and includes any restricted cash.

Following the debt repayment, the pro forma net debt is approximately $308 million.

While it is true that our available cash is subject to certain covenants under our existing revolving credit facility, we believe the overall quantum of cash on a pro forma basis significantly derisks the business during this down cycle.

Furthermore, we still maintain our goal of getting the net debt down to $200 million through further cash generation and recovery in the business.

Next slide, please.

The other major initiative we discussed last quarter is the refinancing of our existing RCF, which contains leverage-based covenants and minimum liquidity thresholds, limiting our access to cash.

While we had originally targeted the closing of the refinancing by June 30, we decided to delay the refinancing in light of recent developments.

As our confidence in closing the sale of FerroAtlántica increased, we decided to delay the refinancing until after the sale.

With the sale now behind us, we believe we are in a more favorable position to negotiate terms that reflect the improved credit profile of the company.

We could pay back the entire grown amount under the RCF with our cash position and eliminate any covenant risk.

That said, we do think that having a credit line and additional liquidity in this time of market environment would be beneficial, particularly to fund working capital as the business recovers.

The structure we are evaluating consists of some combination of an asset--based revolving credit facility and a term loan.

With the benefit of the sale, we may also consider a smaller deal, including an asset-based revolving credit facility only that could offer a better terms and greater flexibility.

At the moment, we intend to complete the financing process around the end of Q3, and we'll update the market as necessary.

It is also worthwhile to note that the bank group was supported to suspend testing on the interest coverage ratio under the existing RCF for Q2.

Next slide, please.

On Slide 19, we provide an update of our -- on our cost savings achieved through the first half across the 3 cost-cutting areas.

For the year, we were expecting to realize $10 million of savings through reduction of corporate overhead costs.

During the first 6 months of the year, we have achieved $7.7 million of this target.

Improvements in overhead costs are primarily attributable to reduction in personnel costs, reduced use of third-party consultants and advisers as most -- more work has been handled in-house, particularly related -- relating to operational and legal matters.

As part of our continued focus to cut costs, management and the Board have decided to close our corporate headquarters in London.

We will be consolidating it with our office in Madrid, which is currently used by a number of our senior management team and critical support functions.

By having everyone at 1 location, we not only will save money but will improve the overall flow of communication and decision-making.

Numbers of senior management are transitioning as early as the middle of September.

Furthermore, there is a comprehensive plan underway to hire and train personnel in Madrid who will ultimately replace some of the finance and accounting staff who will not be moving with the company.

We have allowed for adequate transition time to ensure a smooth and effective handoff of responsibilities.

The next bucket is the KTM initiatives, the key technical metrics program is focused on achieving performance improvements through increased productivity and efficiencies, including changes to raw materials mix and focus on byproduct recycling and change to electrode technology.

To date, we have achieved only $1.5 million of the $15 million target for the year.

While we successfully adopted a number of operational and technical changes, the financial savings is clearly behind schedule.

Some of the savings during the first 6 months have been diluted by one-off factors, which have impacted plant performance at a few locations.

For example, our Bécancour facility faced a number of electrode breakages due to supplier quality issues, which resulted in several stoppages this year.

These type of events impact our productivity and distort the technical metrics, which we are measuring to calculate the savings.

We do remain confident in completing the initiatives identified in our KTM and achieving the run rate benefit.

Lastly, we have been focused on reducing fixed cost at the plant level.

During the first half of the year, we achieved savings of $7.2 million, which compares our full year 2019 target of $15 million.

It is important to note that the $7.2 million only reflects permanent costs eliminations on items which will not creep back in the future.

For example, the cost savings from idle plant is not capturing in this number.

Overall, we're on [paced] to reaching our $40 million of cost savings targeted for 2019.

On a run rate basis, our target savings remain $75 million.

So moving to Slide 20.

Finally, there are some noteworthy updates relating to a few specific items, which we have discussed in the past.

With regard to the sales of smaller and noncore assets, 2 pending transactions have seen important developments.

In South Africa, we now have the clearance from the Competition courts to finalize the sale of Timberlands.

We expect this transaction to close in the coming days.

The net proceeds from the sales -- sale of the Timberland is ZAR 150 million or approximately $9.4 million.

Additionally, we are also making progress on the sale of the Cored Wire facility in Poland.

At this point, we have agreed to deal terms and expect the transaction to close in September.

Net proceeds from this transaction will be approximately $3.5 million.

The sale of some remaining hydro assets in France has run into an administrative hurdle, which will limit our sales to a minority stake in 2019.

We still have a chance to close this portion of the sale in late 2019 with the remaining portion being sold in 2020.

Potential proceeds from the sale of a minority stake will be in the range of approximately $6 million to $7 million, depending on the ultimate percentage sold this year.

Lastly, you have heard us speaking of the solar grade silicon project in Spain on a number of occasions.

As many of you are well aware, the solar industry has been hit hard with the ongoing trade war, which are between U.S. and China, which are 2 important countries for the solar value chain.

As a result of the associated deterioration of the broader solar industry and collapsing prices, as well as our focus on cash generation, we have made the decision to restructure the project in an effort to save cost and maximize any future recovery of value.

In light of the near-term prospects, we canceled the joint venture effective June 30, 2019, and bought out our partner's equity stake.

There was a $2.75 million cash expense associated with this, but we avoided significantly greater ongoing fees and expenses tied to the JV.

In addition to this payment, there is approximately $6 million in ancillary equipment, which will be transferred to the partner as well.

The next step is to monetize the project by looking for financial and/or strategic partners.

Next slide, please.

So we turn to Slide 22.

The slower activity during the first half of 2019 certainly confirms the change in sentiment amongst our end markets.

Our commercial team routinely meets with customers across our end markets and from then -- from them, we understand that these market conditions continue to linger.

Our sales of silicon-based alloys and manganese-based alloys into the steel sector have not been materially impacted by a slowdown in steel production this year as the industry continues to produce at levels near multiyear high.

We recognized the risk of the trade war and the potential for further cuts by the steel producers and we'll continue to monitor these developments.

Our sales into the aluminum industry are being impacted by the slowdown in the automotive industry globally, including the emerging markets and trade war uncertainty amongst other factors.

This slowdown in the aluminum extends beyond auto sales as customers are also experiencing a reduction in aluminum geared towards building in construction, other transportation including airplanes and everyday consumer goods.

Even in the chemical side of our business, where silicon metal ultimately goes into thousands of everyday consumer industrial products, our customers continue to buy cautiously and are curtailing some of their production.

Despite a relatively strong global economy, we are hearing the larger chemical companies mention slowdown in everyday consumer products, particularly in emerging markets, which have been the driver of growing sales in recent years.

And finally, the picture for the photovoltaic industry has not changed much as the industry continues to suffer from low prices.

The contradiction in this market has been the expectation from experts for record photovoltaic installations in 2019 on the one hand and reduced level of activity by our customers on the other hand.

Recent commentary from some of the larger solar cell producers paint a grim picture for the remainder of the year so we do not see a reversal of this trend in the immediate term.

Clearly at some point, inventory levels will hit a point where our customers will need to restock, serving as a catalyst for recovery of this part of the business.

Next slide, please.

The commercial outlook across our portfolio for 2019 continues to mirror the general sentiment of our end market.

Given the looming uncertainties, we have taken some actions to curtail production to support our strategy in the back half of the year and are prepared to take additional measures as necessary.

Our silicon metal sales will be impacted by the slowdown (inaudible) in the aluminum, chemicals and photovoltaic end markets.

The continued erosion of the index prices into the third quarter will certainly impact the selling prices in the second half of the year.

Our diversified portfolio of contracts with fixed price contracts and priced floors indexed contracts will help mitigate such impact on our selling prices.

Despite curtailments by our global steel producers, the overall demand picture for manganese-based alloys remain sound.

With curtailments we made earlier in the year, we feel good about selling out our manganese alloys production this year.

The current dynamics on the pricing of finished goods and ore should continue to reflect more positively in the back half of the year.

In addition to declining ore prices, we continue to make changes to the ore mix and recycling of byproducts to further improve margin and provide greater flexibility.

We have also been developing our strategy to increase sales of refined products, which have significantly higher margins.

Finally, our silicon-based products, mainly ferrosilicon, is going to be paced with the same trends tied to the broader steel market, while ferrosilicon prices are showing some signs of stabilization, there could be pressures from potential capacity conversions from silicon metal or from certain [pockets] like Malaysia, where we believe producers are struggling to sell products.

We are prepared to take actions to curtail production as required.

The foundry business continues to grow with stable prices.

Next slide, please.

So all-in-all, the first half of the year has been disappointing, given the rate of deterioration in end market demand and pricing, both of which accelerated faster than what we initially anticipated at the beginning of the year.

We're pulling on various levers to get us through this cyclical downturn and remain confident in our ability to navigate this environment.

The successful closing of the divestiture of hydro generating facilities and a factory in Spain, is significantly value enhancing and has certainly changed our balance sheet profile.

With nearly $300 million of cash on a pro forma basis, we have gained optionality and flexibility.

We retain optionality as it relates to the refinancing process.

And with the cash on hand, we have greater flexibility in running our business.

We have remained focused on cash generation and cost-cutting in addition to capturing the $75 million of run rate cost-cutting initiatives, we are accessing the entire production platform and looking to right size the business as needed.

Other cash generation initiatives such as the divestiture of the remaining noncore assets and the working down of finished goods inventories will further help us.

Despite the current market environment, we believe in the fundamental value of our global asset base.

And we are committed to recovering this value for stakeholders.

We look forward to updating you on the refinancing and other initiatives highlighted on today's call.

Thank you for your time and participation this morning.

At this time, I would ask the operator to open the lineup for questions.

(Operator Instructions) Our first question comes from Vincent Anderson with Stifel.

So just starting with manganese alloy spreads.

What are you seeing that gives you the confidence that this improvement can be maintained given the Chinese market is just so fragmented and their capacity seems very ready and willing to come back to the market, the moments spread have increased?

Thank you, Vincent.

Well, so far if you look at the evolution of manganese alloys prices in -- mainly in Europe, which is our main market, they have been stable for the past 12 months with small ups and downs.

We believe that has to do partly with our action in terms of cutting back production capacity and in general, with just I think, overall players being rational with their production capacity.

So we see that outside China, the supply/demand balance is now balanced.

And we don't see, like new supply driven shocks in the market outside China.

As you know, China has enough capacity to service its own market, but given transport cost and other factors, they have not be an exporter to the rest of the world.

So we don't see that as being a threat in the near term.

No.

That's very fair and a good point.

I would say that the rest seems to be that they come in and buy any available ore in the global market.

So maybe if you could comment on how you've seen ore availability, kind of shape up over the course of the year?

Well, ore availability has been, I would say, more than plenty.

Manganese ore inventories have actually been going up in general.

And it is, I think cleared now that manganese ore suppliers have been unable to keep prices up and the trend is solid of those prices going down.

The last comments I've seen from analysts in the market as recently as today are talking about concerns in the ore market about additional volumes coming from Ghana, for instance.

So we see that market as well supplied, and we don't see reasons why, today, the manganese ore market would rebound the opposite.

We do see in general, and I think most analysts would agree that the trend is for manganese ore prices to still go down.

That's helpful.

And could you just quickly clarify your current silicon metal capacity?

When I was doing the math, I came up with a little over 220,000 tons, excluding the joint venture.

I think, is your other Sabón furnace also producing silicon metal at this time?

Yes, we have now 2 Sabón furnaces producing silicon metal now.

Okay.

All right.

Perfect.

And then just a clarification on the decision to switch to South African plant off and restart in Spain.

I know Spanish electricity cost has come down, but that between currency and I assume that was a plant that had the ESKOM power agreement that would seem very cost-effective.

Was the working capital build just to that extreme?

Or was it driven more by your current focus on liquidity?

And when those get -- when those issues get resolved, that would be a potential place that you would start bringing capacity back online?

It's a combination of 2 factors.

One is again optimizing cost and where we have a greater ability to eliminate, not only variable but also fixed cost.

And so as I was saying during the presentation, we are optimizing overall total cost for producing a given amount of silicon metal.

So it's really about optimizing total cost, including by the way, of course, our logistics cost.

The second is certainly also a focus on cash generation and the fact that South Africa structurally is just the higher working capital operation because of their distance to end markets.

So the 2 factors have weighted into the decision.

Great.

And then just one last one and I'll turn it over.

Now that you're fully on the UMG silicon joint venture, what is the plan for handling the government issued project debt?

And are there -- can you remind us are there any minimum capital outlays required to prevent -- if there's any acceleration of repayment that could be tied to that debt if the project is idled?

There is no additional capital requirement.

So there's going to be no additional capital invested in that project.

We have to go through tests run by the government in terms of whether we meet all the requirements of the loan.

And as we go through those tests, we will see whether there is a requirement to pay back part or all of that loan.

And when will those tests be completed?

Along the rest of this year.

And our next question comes from Sarkis Sherbetchyan with B. Riley FBR.

Pedro, can you help me understand the level of inventory you're carrying on the balance sheet?

Maybe help me understand, which segments comprise the inventory?

And I have a follow-up.

Well the increase in inventories, as we have said, is mostly linked to a declined volumes and mostly declined volumes in silicon metal.

So there's been a significant increase of inventories on the silicon metal finished products.

Total finished product inventories are somewhere around half of the total inventory numbers.

And all the increase between Q1 and Q2 in terms of inventory has come from finished products.

Of the other half, like 60% is raw materials inventory, those are more or less stable.

The trend from the beginning of the year is of a reduction on those ones, but you always have ups and downs on the raw materials linked to bulk shipments.

So manganese ore shipments come in 40,000 vessels -- 40,000 ton vessels.

So when you have one of those cargoes, your inventory just naturally goes up.

So -- but that trend in raw materials is for those who go down.

The rest of inventories are spread apart and work in progress, again, those are being stable in the past months.

So again, we have -- we know where the inventory increase has been.

There's also been a bit of inventory increase in manganese alloys that, again, has a lot to do with specific shipments, which go in, again, in thousands of tons from some of our plant coming out at the end of the quarter or at the building of the quarter.

So there is some thousand tons of manganese alloys inventories increase in Q2 versus Q1.

But again that is just normal, I would say, cyclical, short-term cyclical evolution.

All in all, that is why our focus now is concentrated on reducing finished product inventories and mainly on silicon metal.

Understood.

And if I kind of think back to the comments on the volume trends for silicon metal, for example.

Do you think that if you look at the balance of the year, the volume trends you're seeing for your order book here in the second half, would you be able to convert the inventory to cash?

Or do you anticipate it further build up?

Help us understand that.

No, we hope, I mean, we are working and that is already happening as we speak in the past weeks, a reduction in silicon metal inventory.

And that is what we're working on is a reduction there.

Sales volume and, I would say, demand out there in the silicon metal industry as a whole is stabilizing.

And our view is that towards end of the year demand should come back and we could have potentially even an increase on silicon metal sales, but still to be seen.

We are working under the assumption I would say that our silicon metal volumes would not increase in the rest of the year.

Got it, understood.

And I think you mentioned in your prepared comments, some producers potentially switching over to ferrosilicon.

Can you kind of help us understand what you've been seeing out in the industry?

How's that been happening?

And is that what's pressuring prices?

Or is it more so a demand issue?

Help us understand that.

We haven't seen for a while, I would say, any silicon metal producer or significant silicon metal producer switching to silicon alloys.

Frankly, given where ferrosilicon prices are, right now, we don't see the point of that happening.

It could -- we haven't seen a significant volume of that happening and, the comment was more, I would say potential rather than factual.

But there hasn't been a lot.

Today, the economics of producing ferrosilicon versus silicon metal is not necessarily favorable.

Got it.

And just switching gears to the divestiture of the hydro asset -- hydro assets.

So that's closed.

When do you get the cash on your balance sheet?

It is already there.

That was last Friday.

Got it.

And with regard to about -- call it the $60 million or so in capital lease repayment, has that already been satisfied as well?

Yes.

Yes.

So all the moves that you see there on slide, what number of slide is it, 18, of sources and uses of funds, those are already -- those were done on Friday.

There is, I think some final adjustments on working capital potentially, but those would be very minor by nature.

This does conclude today's question-and-answer session.

I would now like to turn the call back over to Pedro Larrea for closing remarks.

Well that concludes our second quarter earnings call, and thanks again for your participation.

We look forward to hearing from you, and have all a great day.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program, and you may all disconnect.

Everyone, have a wonderful day.