Q2 2019 Earnings Call
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 would now like to turn the call over to page Olivia.
So close Chief Executive Officer, you may begin.
Joining me on the call are for somebody else goes with their little Deputy CFO and VP of corporate development and girls Mehta, VP 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 one at this time.
Statements made by management. During this conference call that are forward looking or based on current expectations.
Risk factors that could cause actual results to differ materially from these forward looking statements can be found in Peru Globe's. Most recent SEC filings on the exhibits to those filings which are available on our web page Www <unk> Dot com.
In addition, the discussion includes references to EBITDA and adjusted EBITDA and adjusted diluted earnings per share, which are non all your power as measures reconciliation of these non I have heard various 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 initiative, we are undertaking and particularly the divestiture of the hydro assets I'm, one ferroalloy plant belonging to put romantic in Spain.
And lastly, we will provide an update on the market outlook for the remainder of 29 King.
Next slide please.
What we have seen in earnings press release, the second quarter results clearly reflect the continued weakening in end market demand across all of our <unk> core product.
On an erosion in realized pricing across most of our products. That's that adjusted EBITDA showed an improvement quarter over quarter. Its actions taken by the industry more broadly and also actions. We took in respect of our own operations are beginning to have a positive impact on our cost.
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 a declining top line and most importantly, ensuring that our balance sheet was de risk 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 put atlantica 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 I know that said Umbria Ferroalloys plant.
The closing of this transaction was the centerpiece of the cash generation plan, we previously announced and is a critical factor in de risking our balance sheet.
The transaction values, the asset at 170 million euros or approximately $188 million.
Gross proceeds from the sale or approximately $173 million after adjustments I read in the contract and net proceeds of approximately $112 million after paying the capital leases linked to these assets.
The significant vis vis a vis significantly changes the financial profile of the company, bringing net debt down to around $308 million from a pro forma basis as of June 32019, and brings our total cash and cash equivalents balance, particularly.
At a $98 million on a pro forma basis.
I would like to thank our team for working or in 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 part of the execution of our near term strategy.
The sale values for Atlantic got 12.7 times 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 same upper Atlantic are 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 on the actions. We have taken there is a lot of ground to cover on today's call. We will provide further details on that.
So moving to slide five please.
Our Q2 results are still reflective of the overall open overall industry slowdown with revenues EBITDA and net income a disappointing levels.
Adjusted EBITDA for both 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 Spendings hydroelectric facilities as discontinued operations.
Overall volumes were down 6% quarter over quarter.
That's all three of our major product categories were adversely impacted by a slowdown in customer demand.
Particularly in the silicon metal familiar products, an important factor of the Q2 results was reduced pricing across most of our products, although at a slower rate than previous quarters and silicon metal.
Specifically average sales prices for silicon metal declined 1.6% versus Q1, Plenti 19, 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 and pricing during the quarter yielded an 8.5% decline topline revenue versus the prior quarter.
On a positive note, we realized cost improvements during the quarter across a number of key inputs.
Reported EBITDA was negative.
$7.1 billion in Q2 compared to 3.3.
A million dollars in Q1.
Yes, Justin 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, 29 team continued to be affected by the semi same headwinds we have been discussing over the past few quarters.
Our consolidated sales for the quarter decreased 8.5% from $447 million in Q1 2019.
$409 million in Q2.
Revenues across our three primary product categories were down quarter on quarter due to the combined effect 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 to softness in revenues is still coupled with relatively high cost in some of our inputs and we compare that to where such costs were only a couple of years ago.
Prices for manganese ore coal illiquid components made on 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 a 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 that pressure.
Slide seven 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 the 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 realize the benefit of declining manganese ore prices, which yielded $3.5 billion 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 declines across the portfolio negative negatively impacted this quarters adjusted EBITDA by $2.7 million as volumes overall decreased 6.6%.
Finally, a variety of multiple other factors adversely impacted results by approximately $4 million.
At this time I will turn the call over to Garth, who will discuss pricing and volume trends and his contributions and market observations for each of our three products.
Thank you Pedro moving on to slide eight.
Marigolds realized average selling price for silicon metal declined by 1.6% to $2320 per metric ton as compared to $2350 per metric ton in the park in the current quarter. The U.S. index pricing started to flat Q1 levels, but eventually declined during the quarter.
Similarly, the European Index showed the same trend during the quarter with both indices extend their gradual decline year to date.
As the demand side of the equation has eroded faster than the supply side cutbacks.
Based on recent history industry experts believe current pricing levels are unsustainable for many foreign producers and feel that the current market price and should result in a further shutdown of unprofitable production capacity.
As a result analysts now expect stabilization of prices, which are 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 four limits in some of our index price contracts. These types of contracts allow us to realize average prices that did not decline as much as 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 times further destocking, along the value chain and general slowdown in markets such as the automotive industry all contributed to a sharp decline in sales volumes this year.
Their commercial opportunities, where we consciously turn business way because of the underlying economics in these instances, we intend to 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 at the current pricing dynamic is not sustainable.
We saw slight deterioration in our EBITDA from the silicon metals business quarter over quarter, the net impact of lower sales and lower realized prices slightly outweighed the positive impact of lower input cost 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 further five year period, the anti dumping duties ranged from 47% to 235% and the countervailing duties ranged from 1460 to 1945 RMB per metric ton, which has been in fact since 2013.
We thank the Canadian authorities for the diligent work trade cases are important to ensuring an even playing field and protecting our investments will 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 were taking further action to idle silicon metal production capacity as a reminder, it is important to note that we're 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 Pelican underground regular maintenance during the winter months, there and was idled as of August Onest. The facility has three furnaces dedicated to silicon metal with production combined production of capacity of 59000 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 plan has higher inventory requirements due to the long lead times to end customers.
The partially offset the lost production volumes for park, one we have restarted one furnace at some bone to facilitate sales in Europe .
Pro forma for these operational changes.
Silicon metal production capacity will decrease by 39000 tons.
From 281000 tons down to 242000 tons. However, our ability to destock during the second half of the year places 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 $1572 per metric ton down from $1669 per metric ton in the first quarter of 2019.
Although sales volumes 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 converting capacity impacting silicon alley supply.
Sales volume was steady at approximately 79000 tons for Q2. Despite continued stability in demand we are closely tracking the developments in the steel industry and plans 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 ferrous silicon 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 volumes 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 ferrous silicon currently representing approximately 19% of revenues in the silicon Alley's 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 development in the manganese ore pricing into the current quarter is expected to support improvement an increased contribution from this business in the back part of 2019 to give you some context, the Chinese index price for 44% grade or on assist basis was as high as $8.15 per DM to you back in March of 2018 currently the indexes are on $5.50 per diem to you.
Given warm mix requirements for different grades and overall lag due to the shipping and processing times and sales from finished goods inventory. The current quarter results do not fully reflect the benefit of the drop in oil 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 $1180 per ton up from $1172 per ton last quarter.
Index prices for both for manganese and silica 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 to read during this call. We have included some of our routinely disclose information as an appendix to the presentation for those who would like those details.
Next slide please.
The working capital increased 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 and sales as noted previously we have made operational changes to address the buildup of inventories, particularly at Pollo planning, 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 in 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.
The right hand side of the slide we show the cash generation more detailed the loss during the quarter was 43.7 million adjusting for non cash 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 receivable securitization program.
Payments for maintenance Capex for 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 from corporate initiatives.
Thank you Laura so if we turn now to slide 15 on our prior calls we have opened 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 four distinct areas outlined on the slide.
So turning now to slide 16 yesterday, we announced the successful sale for Atlantic, which closed on August 30.
The sale, which in both the number of complex elements was expeditiously finalize within three months since we first announced the deal as we got all the approvals to meet the various conditions to closing.
The transaction yields an attractive valuation multiple of 12.7 times based on cyclical average EBITDA.
Why we launched a number of targeted noncore asset sales. This transaction was the centerpiece of our cash generation plan. The total transaction value was $117 million or approximately 188 million, sorry, 170 million euros 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 Atlantic under which we will.
We will become the exclusive offtaker of finished goods from the fair all those facility.
In return for this is considered the paragraph commits to supplying for atlantica 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 of $15 million was deducted to account for closing adjustments.
Leaving net proceeds of $173 million.
$60.3 million over a 173 million was immediately used to repay certain leases another loan obligations and 2.5 million would be paid to advisors.
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 de risks the business during this down cycle.
Furthermore, we still maintain our goal of getting the net that 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 Rcs, which contains leverage based covenants and minimum liquidity thresholds.
Limiting our access to cash.
Well, we had originally targeted at closing of the refinancing by June 30, we decided to delay the refinancing in light of recent developments.
Yes, our confidence in closings for Atlantic 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 Rcs with our cash position and eliminate any covenant risk.
That said, we do think that having a credit line and additional liquidity in this type of market environment would be beneficial, particularly to fund working capital of the business recovers.
The structure. We are evaluating consists of some combination of an asset based revolving credit facility and the 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 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 supportive to suspend testing all the interest coverage ratio under the existing Garcia for Q2.
Next slide please.
On slide 19, we provide an update on our cost savings achieved through the first half across the three cost cutting areas.
For the year, we were expecting to realize $10 million with savings through reduction of corporate overhead costs. During the first six months of the year, we have achieved $7.7 million of this target.
Improvements in overhead costs are primarily attributable to a reduction in personal costs reduced use of third party consultants and advisors as most more work has been handled in house.
Particularly related relating to operational and legal matters.
As part of our continued focus of growth cost 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 one location, we not only will save money, but will improve the overall flow of communication and decision making.
Members of senior management are transitioning as early as the middle of September .
Furthermore, there was a comprehensive plan underway to hire and train personnel in Madrid 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 smooth and effective handle both responsibilities.
The next bucket is a 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 unchanged Politico technology to date, we have achieved only $1.5 million of 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 six months have been diluted by one off factors, which have impacted plant performance at a few locations.
For example, our become core facility faced a number of Unaccrued brokerages due to supplier quality issues, which resulted in several stoppages this year.
These type of event impact our productivity and distorts the technical metrics, which we are measuring to calculate the savings.
We remain confident in completing the initiatives identified in or KTM and achieving the run rate benefit.
Lastly, we have been focused on reducing fixed costs 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 reflect permanent cost eliminations on items, which will not creep back into future.
For example, the cost saving from idled plant is not capturing this number.
Overall, we are on pace 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 sale of smaller non core assets two pending transactions have been have seen important developments in South Africa. We now have the clearance from the competition courts to finalize the sale Timberlands, we expect this transaction to close in the coming days.
The net proceeds from these sales since the sale of the timberlands, its 150 million South African Rand 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 district section will be approximately $3.5 million.
The sale of some remaining hydro assets in France have run into an administrative hurdle, which will limit our sale 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 locations.
As many of you are well aware the solar industry has been hit hard with the ongoing trade war, which are two between the us and China, which are three important countries for the solar value chain sort of fold open. So did the duration of the broader solar industry collapsing prices as well as our focus on cash generation. We have made the decision to restructure the project in an effort to save costs and maximize any future recovery of value.
In light of the near term prospects, we canceled the joint venture effective June 32019, and bought out our partners equity stake.
There was a two point $75 million Cas expense associated with this.
But we avoided significantly greater ongoing fees and expenses tied to the JV.
In addition to the statement there is approximately $6 million in ancillary equipment, which will be transferred to the partner as well.
The next step so monetize the project by looking for financial and or strategic partners.
Next slide please.
So if we turn to slide 22, the slower activity during the first half of 2019 suddenly confirms a change in sentiment amongst our end markets.
Our commercial team routinely meets with customers across our end markets and from then from then we understand that these market conditions continue to linger.
Our sales of Silicon based alloys, and manganese based alloys in to the steel sector.
I've not been material impacted by a slowdown in steel production. This year as the industry continues to produce at levels near multiyear highs.
We recognize the risk of the trade war on 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 on trade war uncertainty amongst other factors.
As low slowdown in aluminum extends beyond auto sales as customers are also experiencing a reduction in aluminum geared towards building and construction, although transportation, including airplanes and everyday consumer goods.
Even in the chemicals, so side of our business, where silicon metal ultimately goes into thousands of everyday consumer industrial products.
Our customers continue to be to bite cautiously and are curtailing. Some older 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 portable dike industry has not changed much as the industry continues to suffer from low prices.
The conviction in this market has been the expectation from experts for record portable type installations in Plenti 19 on the one hand.
Reduced level of activity by our customers on the other hand.
Recent commentary from some of the larger solar cell producers paying to 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 for this part of the business.
Next slide please.
The commercial outlook across our portfolio for 2019 continues to mirror the general sentimental for end markets 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 just describing the aluminum chemicals in photovoltaic end markets. The continued erosion of the index price 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 contract on price floors. So VIX contract will help mitigate such impact on on our selling prices.
Despite curtailments by a global steel producers the overall demand picture for manganese based follows remains sound.
With the 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 or should continue to reflect more positively in the back half of the year.
In addition to declining ore prices, we continued to make changes to the ore makes on recycling of by products and 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 for silicon is going to be faced with the same friends tied to the broader steel market.
Well first silicon prices are showing some signs of stabilization there could be pressure from potential capacity conversion from silicon metal ore from southern pockets like Malaysia, where we believe producers are struggling to sell product.
We are prepared to take action 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.
[laughter] significantly value enhancing and has certainly changed our balance sheet profile with nearly $300 million of cash on a pro forma basis, we have Dave 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 remain focused on cash generation and cost cutting in addition to capturing the $75 million or run rate cost cutting initiatives. We are assessing the entire production platform and looking to rightsize the business as needed.
Other cash generation initiatives, such as the divestiture of the remaining noncore assets.
On the working down on finished goods inventories will further help us.
Despite the current market environment, we believe in the fundamental value for global asset base and we are committed to recovering this value for our 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 line up for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
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Our first question comes from Vincent Anderson with Stifel. Your line is now open.
Yes. Thanks.
So just starting with manganese alloys spreads what what are you seeing that gives you that confidence that this improvement can 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 moment spreads have increased.
Thank you Vincent well so far if you look at at the evolution all all manganese alloys prices in mainly in Europe , which is our main market all they have been stable for the review 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 juice I think overall players being rational with there or with their production capacity. So we see that outside China up 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 or has enough capacity to serve its own market, but given transport costs and other factors. They have not been an exporter to the to the rest of the world. So we don't see that as being a threat.
In the near term.
No. That's that's a very fair and a good point I would I would say that the risk seems to be that they come in and buy any available or in the global markets. So maybe if you could comment on how you've seen or availability.
Yes kind of shape up over the course of the year.
Well or availability has been no I would say more than that.
More than Plenti.
Manganese ore inventories have actually been going up in general and.
And it is I think clear now that manganese ore suppliers have been unable to keep prices up and the trend is solid.
Those prices going down.
All the lots Coleman's I've seen from analyzed in the market us.
Recently us today are talking about concerns in the <unk> or market about additional volumes coming from Ghana for instance, so we see that market is 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 still go down.
That's helpful. Thank you.
And could you just quickly clarify your current silicon metal capacity when I was doing the math I came up with a little over 220000 tons. Excluding the joint venture I think is your other subone furnace also producing silicon metal at this time.
Yes, we have now too.
For silicon metal now.
Okay, all right perfect. Thank you.
And then just a clarification on the decision to switch the South African plant off and restart in Spain, I know Spanish electricity costs have come down, but that between currency and and I assume that was the plant that had the Exxon power agreement.
That that would seem very cost effective boards. The working capital build just just to that extreme or was it driven more by your current focus on on liquidity and that when those get read when those issues get resolved.
That would be a potential place that you would start bringing capacity back online.
It's a combination of two factors one is again optimizing cost and where where we have a greater ability to.
To eliminate not only variable to fixed costs up and so I thought that 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 costs, including by the way of course, our logistic costs.
The second is certainly also a focus on cash generation and the fact that South Africa are structurally is just the higher working capital operation because of their.
Distance to when markets. So the two factors weigh that into the into the decision.
Great. Thank you and then just one last one and I'll turn it over.
Now that you fully on the U.M.G.
Silicon joint venture what what is the plan for handling the government issued project debt and are there can you remind us if there are any minimum capital outlays required to prevent.
If there is any acceleration of repayment that can be tied said that if the project is idle.
There is no additional capital requirements. So there there's going to be no additional capital or invested in that project. We have to go through all the tests are run by the government in terms of whether we made we meet all the older requirements of the of the loan and.
As we go through those through those tests, we will see whether there is a requirement to pay back part or all of that although that loan.
And with those tests be completed.
All along the.
All the rest of this year.
Okay. Thank you.
Thank you.
And our next question comes from Sarkis Sherbetchyan with B. Riley FBR. Your line is now open.
Thanks for taking my question here.
Pedro can you help me understand the level of inventory your Keller carrying on the balance sheet, maybe help me understand.
Which segments comprise the inventory.
Well the increase in inventories as we have said is mostly linked to haul declined volumes and mostly decline volumes in silicon metal so theres been.
Significant increase or.
Up.
Inventories on the silicon metal finished products.
Our total finished product.
Inventories are somewhere around half of all the totaled.
Inventory numbers and.
And that and all.
All the increase between Q on Q1 and Q2 in terms of inventory has come from our completed from finished products.
On the other half like.
60% is raw materials inventory those are more or less stable all the trend from the beginning of the year is over a reduction in on those ones, but but you always have ups and downs on the on the raw materials linked to bulk.
Oh shipments so manganese lower shipments come in for 2000 vessels for 2000 tonnes vessels. So of course when you have a.
One of those cargoes.
Your inventory just naturally goes up so.
The trend in raw materials is so for those to go down the rest of inventories our spare parts and work in progress again goes off being stable in the past. So again, we have we nowhere where the inventory increase has been there is also 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 our overall or planned.
Coming out at the end of the quarter over the beginning of the quarter. So there is some thousand tons over a magnet is all those inventories increased 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 are seeing for your own order book here in the second half.
Would you be able to convert inventory to cash or or do you anticipate further buildup help and help us understand that.
Well, we hope I mean, we are working and then but is that is already happening as we speak in the past weeks or reduction in silicon metal inventory and that is what we're working on is a reduction there.
Paul sales volume.
And I would say demand out there in the silicon metal industry as a whole is stabilizing.
And.
On our view is that.
Towards the end of the year and demand should come back and we could have potentially even an increase on silicon metal sales, but that still to be seen.
We are working under the assumption I would say that our 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 the ferrous silicon can you kind of help us understand what you've been seeing out in the industry.
Has that been happening and is that what's pressuring prices or is it.
More so a demand issue help us understand that.
But we haven't seen for a while I would say oh any silicon metal producer of course significant silicon metal producers switching to to silicon those.
Frankly, given were pursued it comprises our right now we don't see the 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 than factual, but there hasn't been a lot.
Today, the economics for using.
For silicon burst versus silicon metal is not necessarily a favorable.
Got it and just switching gears to the.
Divestiture of the.
Hydro assets.
Hydro assets.
So that's closed when do you get the cash on your balance sheet.
It is already there.
Hi, Phil.
So black Friday.
Got it and with regards to about call. It the 60 million or so in capital lease repayment, that's already been satisfied as well.
Yes, yes, so all the moves that you see there on on slide what number of site is it 18 of sources and uses of funds those are already.
Those were done on Friday.
There is so much there is I think some oh.
A final adjustments zone on working capital.
Potentially but those would be very minor by nature.
Thank you that's all for me.
Thank you.
This does conclude today's question and answer session I would now like to turn the call back over to Pedro for closing remarks.
Well that concludes our second quarter earnings call them. Thanks.
Again for your participation we look forward to hearing from you and have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program and you may all disconnect everyone have a wonderful day.