Ferroglobe PLC

Good morning ladies and gentlemen and welcome to Ferraglobe's third quarter 2022 earnings call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. As a reminder this conference call is being recorded. I would now like to turn the call over to Anish Bharadwala, Ferraglobe's Vice President of investor relations and corporate strategy. You may begin.

Thank you. Good morning, everyone, and thank you for joining FederalGlobe's third quarter 2022 conference call. Joining me today here is Javier Lopez-Matriz, our executive chairman, Beatriz Garcia-Coss, our chief financial officer, Benjamin Crespi, our chief operating officer, Benoit Olivier, our Chief Technology and Innovation Officer and Deputy CEO, and Craig Arnold, our Chief Commercial Officer. Marco Levy, our Chief Executive Officer, is on the call but will not be speaking as he has laryngitis. Before we get started with some prepared remarks, I'm going to read a brief statement. Please turn to slide two at this time. Statements made by management during this conference call that are forward-looking are based on current expectations. Risk factors that would 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 webpage, ferroglobe.com. In addition, this discussion includes references to EBITDA, adjusted EBITDA, adjusted EBITDA margin, working capital, adjusted gross debt, net debt, adjusted net profit, 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. At this time, I would now like to turn the call over to Javier Lopez-Madrid, our Executive Chairman.

Good morning, or good afternoon, everyone. After a record second quarter, we reported solid results in Q3, despite a challenging market environment. During the third quarter, market prices for each of our product groups declined from record levels in the previous quarter. Higher and volatile energy costs in Europe continue to persist. During the third quarter, we actively managed our global asset footprint by reducing operations in higher cost regions like Spain and reallocating volumes to other geographies. Higher raw material costs negatively affected our margins too. Last month, in line with our new strategy, we announced the restart of our Polokwane plant in South Africa, which will start up in November and is ramping up according to plan and on budget. This facility will provide up to 50,000 tons of high-quality and cost-competitive silicon metal capacity on an annualized basis, out of which 35,000 tons will be produced in 2023 and give us the flexibility to supply it globally. During the third quarter, we continue to execute on our primary financial objective by delivering the balance sheet. During the quarter, we redeem our 60 million 9% super senior secure notes due 2025. We continue to progress on our transformation plan with our incremental EBITDA run rate objective of 225 million, which we expect to achieve by 2024, enabling us to be a stronger and more resilient company. Specific to the third quarter, our revenues declined 29% from record levels in Q2 to $593 million and our adjusted EBITDA declined by 39% to $185 million. Our adjusted EBITDA margin was 31% in Q3 compared to record margin of 36% in the prior quarter. Our adjusted EBITDA was the third highest in the company's history and our EBITDA margin was significantly higher than in any prior years. This is a direct result of successfully implementing our strategic plan over the last two years. Our earnings per share was $0.52 compared with $0.90 per share that we delivered last quarter. Our cash balance at the end of the third quarter was $237 million, down from $307 million last quarter. The decline in cash was primarily driven by the repayment of the referred $60 million. $60 million super senior notes. Our total cash balance combined with our own drone facilities provides total liquidity of $337 million, giving us ample flexibility to execute our business plan. Our net debt of $194 million was flat versus the prior quarter, which is the lowest level in the company's recent history. Overall, the third quarter highlights our ability to perform in a very volatile and challenging market environment. In addition, as part of our corporate update, we will provide details on specific actions being taken to actively manage our operational footprint. Moving ahead to slide five, please. Silicon Metro revenues was $264 million in Q3, down 26% from the prior quarter. Our silicon metal business was down as a result of challenging market environment, primarily impacting volume, which declined to 50,545 metric tons, down 20% from the prior quarter. This had a negative impact on our EBITDA of approximately 43 million. During the third quarter, we have seen European aluminum producers curtailing production by 50% due to unsustainable energy prices causing a decline in demand for silicon metal and negatively impacting our market price. The aluminum sector continues to be adversely impacted by weaker auto demand. In contrast, silicon specialty grades continue to be the strongest contributor to our portfolio. The average realized price of our silicon metal sale was down 7.6% over the prior quarter, resulting in a negative impact to EBITDA of 11.1 million. Excluding GB shipments, average prices were down 4.7%. It's important to note that we outperformed the market, where index prices in the US and Europe were down 18% and 22% respectively over the prior quarter. Index prices in Q3 in the EU have stabilized over 3,600 euros per metric ton, while US spot prices declined to 7,000 US dollars per metric ton. Since the end of Q3, U.S. index prices have pulled a decline to $6,700 per metric ton, while EU index have held at the referred 3,600 euros per metric ton. While adjusted EBITDA contribution for silicon metal of $130 million was down from last quarter record level, it remains strong compared to prior years. Adjusted EBITDA margins for this segment were robust at 43%. To put this in perspective, silicon metal adjusted EBITDA margins for 2019 and 2020, before we began to implement our plan, were in the single digits. Costs from silicon metal negatively impacted adjusted EBITDA by $8 million, driven by high Higher raw material costs, particularly coal and energy, which impacted costs by $6.4 and $1.4 million respectively. Slide 6, please. Silicon-based alloys revenue was $170 million in Q3, down 24% over the prior quarter. Adjusted EBITDA for Q3 was $60 million, down 39% from the second quarter. Sales volume declined 15% over the prior quarter, negatively impacted EBITDA by 10 million, while average realized pricing was down 11% over the same period, negatively impacting EBITDA by 26 million. Costs had a slight negative impact of 1.3 million, driven by higher coal price in Europe. Adjusted EBITDA margin for silicon-based alloys was 33% in Q3, while down From prior two quarters, Q3 was the third highest in the company history and significantly higher than 2021 level. Lower demand for silicon-based alloys was driven by the summer slowdown as well as weakness in end markets, particularly construction. In addition, as a result of higher energy prices in Europe, there were capacity closures among various steel producers, driving a decline in demand for silicon-based alloys. Benefiting our margin was our strategy to focus on higher margin specialty and foundry product, which has enabled us to improve margins compared to commodity silicon alloys. Low visibility of steel demand persists and is pushing customers toward depleting inventories. Moving to slide seven, please. On manganese alloys, manganese-based alloys revenues was $98 million in the third quarter, down 49% from the prior quarter. Sales volumes declined 37% over the prior quarter, negatively impacting adjusted EBITDA by $10 million, while average realized pricing was down 20% over the same period, negatively impacting EBITDA by $32 million. This volume decline in the third quarter was partly impacted by a normally high demand in the second quarter as customers focused on securing supply, which enabled us to sell at higher prices. Cost was favorable, primarily due to positive one-off mark-to-market adjustments related to the earn-out provision of $25 million. Late in the second quarter, we purchased manganese oil reacting to a shortage of supply in the market. In response to significant changes in market conditions, including shutdown of European steel producers, we slowed down our production and we expect to hold manganese ore longer and convert manganese-based alloys in line with demand. Overall, our sales for this segment declined 49% from the prior quarter while adjusted a bit declined by 55% and our adjusted dividend margin declined to 51% from 71%. Capacity closure among various steel producers in Europe and weakening end market have negatively impacted demand. We continue to actively monitor this market and manage our production accordingly. I would now like to turn the call over to Beatriz García Cos, our Chief Financial Officer, to review the financial results in more detail.

Thank you, Javier, and good morning or good afternoon, all. Please turn to the income statement on slide nine. Revenue for the third quarter was $593 million, down 29% from the second quarter due to volume declines and lower prices from record levels in the prior quarter across all our product categories. Raw material and energy consumption declined 23% from the second quarter, resulting in the raw materials and energy consumption as a percentage of sales increasing 4% from the prior quarter to 48%. While up from Q2, raw materials and energy consumption as a percentage of sales are down significantly from prior years. Other operating expenses declined 40% versus the prior quarter to 30% of revenues versus 16% in the second quarter. The improvement in other operating expenses was due to lower consulting fees, higher CO2 credits, and the mark-to-market adjustment related to the earn-out provision for the manganese-based alloys product group. Adjusted EBITDA in the third quarter was $185 million, down from a record adjusted EBITDA reported in the prior quarter of $303 million. Adjusted EBITDA margin was 31 percent down from 36 percent in the prior quarter. Our earnings per share was 52 cents in Q3, compared with 98 cents reported in Q2. Next slide, please. Volume and price were the biggest contributors to our adjusted EBITDA. declining from $303 million in the second quarter to $185 million in the third quarter. Lower volumes across all three segments combined with price declines negatively impact adjusted EBITDA by $180 million. Cost was favorable by $50 million, mainly due to the positive impact of $25 million from the earn-out accrual, partially offset by higher raw materials and energy costs of $10 million. During Q3, the overall impact of energy prices in Spain was unfavorable, $2.8 million, quarter over quarter. And our average realized unit cost of energy in Spain increased by approximately 11%. We continue to actively manage our global footprint to cope with volatility on energy prices. Slide 11, please. We end Q3 with a cash balance of $237 million, down from $307 million in the second quarter. If we layer in our new undrawn ABL, the liquidity was over $337 million at quarter end. Cash was used to pay down $60 million in debt, $20 million in interest expenses, and $10 million related to CO2 purchases. The remaining balance was primarily used to reduce our outstanding factoring debt. Our net debt remains at the lowest point in company history at 194 million, flat versus the prior quarter. The gross debt was 431 million at the end of Q3, down from 500 million in the prior quarter. The decline reflects the successful redemption of the 60 million of 9% super senior notes. One of our top priorities continues to be deploying our cash flow to further deliver the balance sheet. Next slide, please. The value of our assets totaled $1.9 billion at the end of Q3, and our equity book value was $700 million. We have set a target for working capital as a percentage of sales at 21%. During the third quarter, we went above this level at 30%. The above working capital was driven by an increase in raw materials and finished goods, which will support our plan over the winter period. We expect progressively decline over time on the coming months. Slide 13, please. During Q3, we generated $5.55 million in operating cash flow. I repeat, $55 million. versus a record level of $165 million in the prior quarter. It is the fourth consecutive quarter of positive cash flow. Our operating cash flow was driven by reversed earnings, partially offset by cash consumption for working capital of around $87 million. During the quarter, we spent $50 million in CAPEX versus $40 million in the prior quarter. At the end of Q3, we have spent $46 million in CAPEX. We continue to expect our CAPEX for the year to be on plan around $75 million. Please keep in mind that the timing of the actual cash flow impact of the CAPEX expense may differ from the balance sheet impact. In the third quarter, our cash balance declined by $69 million, mainly driven by the debt repayment and working capital investment. Free cash flow during the quarter was positive $40 million. Our goal remains to keep working capital around 21% or sales across the cycle. Next slide, please. Slide 14. As we generate strong cash flows and lower our quantum of debt and cost of capital, the credit profile of our company is improving. In August, Moody's upgraded the 9.375 senior notes due in 2025 to B3. This is a testament to the work we are doing and the execution of our plan. During the third quarter, we were able to successfully manage through a demanding quarter, highlighting the structural improvements we have made to the company over the past two years. At this time, I will turn the call back over to Javier Lopez-Magez for a few updates on some noteworthy corporate matters.

Thank you, Beatriz. Now turning to slide 16, please. I want to highlight a positive development relating to our energy costs, specifically in France for 2023. While we have competitive energy prices in France in 2022, we have successfully negotiated for next year a favorable contract to reduce exposure to volatile energy markets. This allows us to get similar energy rates compared to 2022. However, the contract contains higher prices during the first quarter, which will be managed by idling production in France during that quarter and supplying Europe and our clients from lower-cost facilities such as Polo Guane and Becancourt, which have become Ferroglobe Global plants. It's challenging to lower global demand and volatile energy prices in Europe. We're successfully managing our business to maintain high margins and profitability. This is the result of a transformation plan that we have been implementing for the last two years to optimize our revenues and effectively manage our costs, making our business more efficient overall. We continue to manage our business with the focus of using our cash flow to further strengthen our balance sheet by continuing to reduce leverage. Longer term, we'll focus on growing our silicon metal business and expanding even more into specialized high growth markets to drive overall growth for the company. In that respect, we're moving forward each day, capitalizing silicon metal as a critical material to the energy transition. We're taking advantage of our technological expertise developing solar and advanced application materials during the last 15 years, and we believe we are ahead of the pack. As a direct result, we're now ramping up industrial scale production of 3N and 4N purity liquid silicon in our Puerto Llano facility in Spain. Our high purity silicon will supply advanced technology solutions, and in particular, engineering materials for the fast-growing lithium-ion battery market. Moreover, we're in advanced discussion with leading silicon-carbon composite producers, and we're entering into joint development agreements across the EV value chain. Silicon metal is expected to be key to green energy transition, driven by growth in electric vehicle demand, energy storage, solutions, and solar. for providing us with exponential growth opportunities. Once again, a tremendous number of things going on that causes us to get excited about the future. We have said from the beginning that it was going to be a slow, steady, and purposeful journey focused on transformation, value recovery, and value creation. Today's solid earnings should be viewed as a firm validation of our team and our plan. There is a lot more There is a lot more work that is left to be done and we remain committed to reaching our goals while navigating a period of uncertainty as the macro picture evolves. At this time, I'll ask the operator to please open the line for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Your first question comes from the line of Lucas Pipes from B Reilly Securities. Please ask your question.

Thank you very much, operator. Good morning. Good afternoon, everyone. Thanks for taking my question. My first question is on the on the inventory built during the third quarter. You touched on it a little bit in the prepared remarks. It sounds like there were some tactical reasons to build inventory here ahead of the winter. I would like you to maybe elaborate on that and then also is this a sign of potentially declining margins in in in q4 and q1 with with higher costs flowing through the pnl uh if you could comment on that as well would appreciate all that color thank you very much lucas lucas thank you uh thank you lucas for your question this is a beatrice um yes it is true that working capital consumption uh has been increasing the main

reasons are as follows. So on the manganese soil side, we built up inventory due to changes on the macro environment, in particular on the European steel producers' shutdown. And on the other side, as well, in response to the curtail of our Spanish operations. As well, in response to our France winter stoppage, as you mentioned, right, We had to build some inventories in silicon and ferro-silicon to account for the winter shutdown. And as a result as well of this volatile environment from Russia and Ukraine, we have hedged our position in electrodes and coal. And as well, please remember that we are ramping up our plant in Polokoane, and this has been as well taking some of the working capital consumptions.

That's very helpful. So in terms of returning the ratio of inventory to sales that you mentioned, Beatrice, what's the timing of that? Should we expect a sizable release already in Q4, or do you think that that ratio will normalize into Q1 2023? Thank you. Thank you very much.

No, thank you, Martin. I think for the reasons that we mentioned, particularly the winter stoppage, naturally our inventory is going to be depleting because of that. So we expect to go back to normalized levels in the coming months.

Yes, that's helpful. Thank you very much for that, Carlo. And then two quick... Let me intervene.

Lucas, and I'm going to use Javier here. As you say, it was tactical reasons. On manganese, we reacted to market demand. And yes, we have an excess of manganese ore that will be used, will be manufactured over the coming months depending on demand. So there is like two sources, finished products and tactical supply of coal and electrodes and the manganese oil that will be transformed into manganese alloys over the coming month, depending on demand. Because as we mentioned in the call, we stop our production in Spain.

Got it. Thank you for that additional color. Excellent. On the board approval of the new strategy, can you maybe shed a little bit more color on what the strategy entails? I assume it's mostly about the silicon metal powders and high-end product and pursuing that market in a measured way, but would really appreciate additional color on that board-approved plan. Thank you very much.

Lucas, thank you very much. Obviously, yeah, silicon metal is our core business and a great deal of our strategic plan relies on going deep into speciality and high added value product. Together with us is Benoit, which is our chief technology officer. And maybe he can add a bit of color of what we're trying, what we're doing, what we're currently doing in that respect, which I think would add a bit of color to what I just mentioned. Benoit.

Hello. Thank you. Hello. So our strategy in terms of growth is focused on the development of high-purity silicon for advanced application, including batteries. And this... When we look at it, the silicon for advanced application and batteries is anticipated to have a cumulated annual growth rate of 30% per annum. And this will have an increased and significant step that will take place in 2025 when the Gigafactory is currently being built in the US and in Europe as well as Canada. will be producing at capacity requiring significant quantities of raw materials. Per our roadmap, we continue to invest in our technology to radiate ourselves for this exponential market ramp-up. One attractive side we have is that we leverage all the technology we have developed for the last 15 years in solar, and we believe that our metallurgical route technology has three main advantages against any other silicon alternative for batteries. It is low cost, low capex intensity and modularity, and much faster ramp-up dynamics.

Very helpful. Very exciting. Good work during the quarter, and I appreciate all the color in response to my questions. Continue. Best of luck.

Lucas, thank you.

Thank you. We will take our next question. The question comes from the line of Martin Englert from Seaport Research Partners. Please ask your question.

Hi. Good day, everyone.

Hey, good day. Good day, Martin. How are you?

Good. Thank you very much. Hope all is well with everyone. I wanted to touch on the French power contracts and maybe we can Specifically the sequence here and how to think about volumes moving through next year. So it seems like maybe they asked from the government was don't produce on the French assets or significantly reduce production during the winter months or 1 to 23. And then you're free to ramp based on wherever market demand is in the remaining quarters of 2023. And if you kind of follow that framework, they'll keep you comparable on your fixed energy price with your go forward contract in 2023 versus the legacy one. Is that the way to think about it or does something differ?

It's slightly different. because it's a fixed agreement that we have reached with EDF, but maybe, Benjamin, you can add the specifics to Martin.

Yeah, thank you, Martinello. It's Benjamin speaking. So I think, generally speaking, it looks like... So we entered into a three-year contract agreement, right, with an energy provider, and this is from 2023. For 2023 specifically, I mean, yes, we are taking action during winter in France, and by modulating during winter, we will achieve energy costs in 2023 similar to the one we have in 2022. So this is beneficial to our competitiveness, right? That said, I think when talking about volume, I think it's too early to talk about 2023 volumes overall. given that we are presently in our contracting period and performing our forecasting and budgeting exercise for 2023. And what we should keep in mind is that we will shift our annual plant maintenance shutdown into Q1. And that's only one way of mitigating the impact on volume, as we already mentioned that we will use our global platform, in particular, Polo Kwané and Vécancourt, to balance production and demand.

So no sense, I mean, With the South Africa restart, and I think that we're supposed to add, what, 30,000, 35,000 tons for next year, but no sense on, I guess, if we think about before the restart was announced and then after, what the net volume gain all till constant might be from that, given that there'll be some downtime during the winter months.

Maybe Craig.

Yeah, maybe just to support what Benjamin was saying, with the anticipated modulating of the assets and bringing forward some of the maintenance, plant maintenance since quarter one, well-timed with the start-up of the Polo Kwan Air asset in South Africa and how it's going to serve as the global franchise, on a net effect, on a year-over-year basis, it'll be roughly the same. Because as you highlight a little bit later, earlier in your comments there or your question, was as we begin to operate throughout the remainder of the year, so post-French winter, we will be able to actually push the entire franchise a little bit harder in France.

Understood. So kind of comparable from a volume perspective, year on year, remainder of the year, that's when we'll see more opportunity for net gains of constant, you know, based on the demand environment. Okay. And essentially thinking about the, you know, cost per megawatt going into the French assets, a comparable level as to what it was with the legacy contract. Yeah. That's correct. Okay, understood. We discussed the South Africa restart maybe in a little bit more detail and where the volumes are going to be going, you know, maybe a split between the Middle East and North American market and the Euro market. And I imagine based on modulating the production in France, that'll probably evolve a bit as we move through 23.

I think it's Benjamin. I might start on commenting that Polo Kone is maybe our most flexible asset in the platform. It can serve any market. And so I think as the market evolves and as the opportunity comes, we will manage the volume and where we allocate them. But I will let Craig comment on the market aspect. But Polo Kone is really a flexible platform that can go to most of the geography in the world.

Yeah, Martin, as we look at how we plan to go to market with the Poliquana asset, as has been highlighted, it is a global asset originally designed around the high-performance polysilicon area targeting Asia Pacific. But since it has been planned to be restarted during the course of the coming quarters, the idea is to service a variety of regions. and looking at Asia, looking at the Middle East, and of course looking at Europe and the U.S. I can't give too much detail on the level of those contracts, but certainly as we scale up the three furnace operations over the coming quarters, we will certainly be able to give a little bit more highlight and update on the performance of that asset in those particular target markets.

Okay, understood. That's helpful. And when we think about where it sits on the cost curve, you know, accounting for contracts and everything else, I think historically this has been a bit of a lower cost production facility. Is that kind of where it will remain once it gets restarted?

Yes, that's correct.

Understood. Just for modeling purposes and given the South Africa restart and maybe taking a step back and looking at Coming from 2021 to 2022, there was a pivot within the company away from, and this is specifically for silicon metal that I'm discussing, not the other business lines, but a pivot away from fixed annual contract prices where it's a fairly de minimis amount of the contract structure in 2022. Is that expected to remain so in 2023, or is there anything changing that we should expect a larger mix of fixed annual price silicon metal contracts in 2023 versus 2022?

Yeah, thanks, Martin. Thanks for the question. Fixed price contracts are almost a thing of the past at the moment, so we hardly have any fixed price contracts. Certainly, It would not be wise to be in a fixed price contract mechanism during today's volatility because going out there and trying to embed all that volatility in one single fixed price at a high price is not something that a consumer would lock itself into. The strategies we've chosen right now are multi-year strategies and have a combination between market-related and other related aspects into that. So yes, we're very happy to have retired all of our fixed price contracts.

Okay, that's helpful. Thanks for reconfirming that. I'm going to circle back on the working capital question, and the 21% target was notably exceeded. You had discussed in another follow-up question the component as to why, and I understand that. What's the timing of, you know, when can we expect to achieve that 21% of sales, I believe, is the target? Is this something that happens, you know, after 1Q results are reported or 2Q or 3Q?

Yeah, thank you, Martin, for the question. Let me take one step back. Going back to the reasons that cause this increase in our percentage, as you know and we mentioned, in one side we have the manganese salt buildup due to the change in the macro environment, and as well all the European steel producers shutting down operations. And in response to that, of course, we curtail our Spanish operations, right? Then the second point to bear in mind is the French winter stoppage, as you mentioned. And then the third point is, of course, as a result of the volatility for the conflict between Russia and Ukraine, we buy some additional electrodes and coal, yeah, And on top, of course, we are ramping up , as we are speaking. So we invest working capital on that. So being said that, and provided the winter season is starting very soon, we see this level of working capital coming progressively on the next coming months, if this answers your question.

I'm sorry, could you just repeat the very last part that you said, kind of you expected this level of working capital to... Yeah, sorry, on the next coming months. Next coming months. So something within, in my mind, I think that's a three-month or less framework, or am I wrong in thinking that?

Yeah, maybe. We're going to be hitting the target, yeah, on maybe... between Q1 and Q2 for sure.

Okay, let me pivot. I wanted to get your thoughts on the recent Greenfield project that broke ground since the last quarter in the U.S. for silicon metal and that you called out in the press release, you know, targeting growth for your silicon metal business. It looks like there may be a new entrant pushing forward in the U.S. But, yeah, any high-level thoughts from your perspective there?

Yeah, Martin, thank you very much for the question. Well, the Greenfield, I guess you're referring to the Greenfield project of Sinova and others that have been announced. Well, I think we have a first a positive reaction because I think it validates a bullish case for silicon metal going forward. I think we have expressed a new market dynamics reshoring energy transitionally positively impacts silicon demand in the Western world in the coming years. And we should expect high growth in that sector. And as a result of that, there are announcements of production being made, which would take some years. So on that side, very positive. We were a bit surprised, but we don't know the numbers. But we were positively surprised about the It was a sizable investment of around 300 to 400 million. Again, I don't know the numbers, but from what we heard, of what we read, it's 300 to 400 million for 60,000 tons capacity, or phase one of 60-ton capacity. Just to give you a perspective, in Ferroglobe, we have global silicon metal capacity in excess of 300,000 tons. with a flexible global asset footprint, which should certainly add perspective to our own valuation potential. But maybe, Benjamin, maybe you can give a bit of perspective on Greenfield, Brownfield project and managing assets, which might add a bit of color to what I just said.

Yes, Javier, and thank you, Martin, for the question. Silicon supply can be expanded through multiple routes, right? And the capex intensity of those options is very different. If you talk about swingable capacity, furnace conversion, plant reactivation, brownfield or greenfield, the capex intensity of all those options are very different. And I think as an integrated company, we are able to add quickly capacity by reactivating assets, and the cost of that is maybe 50 times less the cost of a greenfield. And that's what we have been doing. That's what we are doing now in Polokwane, and that's what we've been doing earlier this year in Selma. I think on top of that, if our global footprint is a source of competitive advantage, providing a securely integrated supply of critical inputs like quartz, coal, and electrodes, and I think that's significant. When you are nuclear, access to those critical inputs is not that easy. And I think another advantage is the proximity to markets.

Okay, thank you for that. That's helpful. And I guess probably worth highlighting that. There has been some, you know, over the last cycle or 10 years or so, there has been some notable capacity reductions within the North American market that you had one facility that exited, Dow had a facility that exited and I believe remains down. So, net-net, maybe things are wildly different even with a greenfield expansion. Can you touch on maybe any more details to share about the high purity silicon that you're ramping in Spain? Any comments on Leveraging the prior know-how that you gained from an upgraded metallurgical product that you were previously trying to take to market, and then as the market turned down, that kind of went away, but it seems like you're leveraging some of that today.

Absolutely. Benoit, maybe you can add.

I can add a bit. The high-purity silicon we're targeting is of slightly lower purity than on solar, which makes the cost extremely efficient because it's the first process steps that we are basically adapting into the plants mostly. So the production of high-purity silicon is integrated into the plants, which is one of our main cost advantage. The second is that we will develop the metallurgical route. As I mentioned earlier, it's the easiest, most efficient route, less capex-intensive route when you want to put silicon into the anodes. We're targeting specifically the silicon carbon composites markets and also the SIO producers. Eventually, we believe this solution can be engineered for the silicon-rich anodes, which are one of the alternatives for the lithium metal anodes in the solid-state batteries.

Sorry, Martin. What is the expected growth, Benoit?

uh for the mark for the market going forward on that type of so so we have had negligible sales in 2022 few hundred few hundred tons uh in advanced technology and battery we expect to triple those sales year on year and with the marked uh with a marked uh step up as soon as the gigafactories will actually start consuming And this is one of the challenges of these developments is to face the huge one-step demand of gigafactories. And that's why we have to ready ourselves now. And we have started readying ourselves for quite some time now to be prepared for that big step.

Okay. So kind of still in the preparation. I mean, you are selling volumes this year and you'll continue to. moving into 2025, but the bigger step change that you're anticipating is 2025 when kind of more Western gigafactories are ramping ramp and producing and consuming more. That's more of the step change anticipated, right?

Correct.

Okay.

We triple every year up till then.

We will triple the volume and the sales after then in 2023 and 2024. What does this do with silicon metal, looking at it from a segment

What does this do to the go-forward margin profile, EBITDA margin profile of that business? I understand that these products are fairly high margin, high value, and I guess any kind of framework that we should think of when we think about kind of legacy silicon metal margins, but what it could look like 2025 forward with more of this in the mix.

Yeah, thanks, Martin. I mean, of course, with a higher proportion mix tilting towards these specialties, you would certainly see an earnings profile transformation. The way I'd see it is typically your aluminum sector will take a bit of a knock with the recyclability and the shift of the general industry going towards EVs, but the chemical sector favoring electronics, photovoltaics, these areas are going to take more of a more of a share mix of our portfolio and the greater silicon metal market. So without a doubt, that earnings profile will change tremendously, as you pointed out. Okay.

All right. Thank you for all the detail and color. Congratulations. I thought that you all did a very nice job. I think it's a tremendously difficult environment in Europe as well as the North American market, maybe to a lesser degree. So congratulations on the results.

Thank you, Martin. Thank you. Thanks, Martin. Thanks, Martin.

Thank you. We will take our next question. And the question comes from the line of Michael Lam from GMX Capital Management. Please ask your question.

Yes, good morning. In terms of when I look at the end use demand that your products go into, I mean, Your auto production has been flat and going higher. Solar, I'm less familiar with how the solar production ramp is, but it looks like, how much of your volume decline in Q3 was customer destocking or you mentioned also increased competition from imports?

Yeah, if I may. Thanks, Michael. In Q3, we saw a number of headwinds coming from a variety of different challenges across the area, whether it had been just the severe global inflationary pressures or actually regional energy situations or just the zero COVID policy. When we looked at how intervention was taking place on the supply side, there was a number of actual supply production coming off that was meeting or matching with the demand balances. In effect, the market was becoming quite balanced, so the liquidity of those sectors had really balanced out. As you pointed out, on the chemical side, we had a number of customers who had expressed concerns around the economic situation, and obviously their consumption started to drop, as they were currently preferring for a decrease towards year-end. to the earlier question marshall was asking we have seen also an increased demand into premium but unfortunately there hasn't been enough to make up for the short term that we had seen in xyloxanes or aluminium industry going forward i mean generally the chemical sector is going to be robust and it is of the growth um in the future starting up in the medium term the demand for and that's what Benoit has been driving into batteries. Aluminium, you were talking about the auto sector. We think there's going to be a little bit of a lengthy slowdown, primarily due to the auto sector. It started off with semiconductor shortages, but we've also additional curtailments in aluminum production because of the very high production cost, primarily energy. And so, but going forward, at least a high growth, a growth of a high base, but at a slower rate expected in the longer term. As I've mentioned earlier, silicon-related, aluminum, will have to go to a transition, a higher uptake in recycling and a general transition to EV.

Mm-hmm. And the last question is, what's the estimated cost of wrapping up Poliquani?

Yeah.

Benjamin. It's Benjamin speaking. So I think we, of course, we cannot be too much precise on that respect. What I think we mentioned, we mentioned some multiple earlier in the previous answer that much cheaper than a green field, and we are talking 50 times less than a green field project. So that's the level of detail we are going to be able to be into. We don't want to be so precise on the prospect.

I mean, very cheap in terms of – I mean, we can – one of the things that we are – and actually, Our global footprint is becoming more and more valuable as the world is de-globalizing a bit. We can restart facilities very quickly and very cheaply. And that's why it allows us to react to market, anticipate market movements in a much more agile way. Coloquane, we did that in Selma in Alabama last year. We've done that in Coloquane. In the reverse, we're stopping production. We've stopped production in Spain, and we're stopping production for three months in France. And that is a tremendous advantage for the world we live in.

Okay, thank you.

We will take our next question. The question comes from the line of Lucas Pipe from B Reilly Securities. Please ask your question.

Thank you very much for taking my follow-up question. I wanted to ask a bit on before we're halfway through the quarter. How are volumes holding up so far? What are your volume expectations for the fourth quarter? in light of the uncertainty on the macro front. Would appreciate your comment there. Thank you.

Yes, thanks, Lucas. As I highlighted a little bit earlier, there's a number of factors that are playing into the marketplace right now, and we see this correction on supply and demand. But in general, most of the market is out of summer slowdown. There is a slight but yet cautious order load coming through in quarter four. We see it still playing favorably out according to our expectations. Now, the real area that we're sitting at right now is looking at how we commit and how we conclude successfully the remaining part of our negotiations for next year, but of course, You know, I cannot comment too much further on that, but that's driving a lot of the current purchasing posture for fourth quarter.

Okay. And for the expectations today, do we expect modest increase in volumes across the three segments? Is that reasonable, or can you elaborate on that?

Well, we've made the curtailments in Spain, so essentially we are operating just with our U.S. assets and part of the Spanish assets, the French assets, our Norwegian assets, and we focus on the successful startup of South Africa. Argentina also continues to be a good provider to that franchise.

Okay, that's helpful. a bigger picture question but the aluminum makers have been western aluminum makers have been lobbying for a ban of Russian aluminum on the LME for example so Russian material continues to come in and what is the impact of that material on GSM do you does that ultimately indirectly compete with you as well? Or do fabricators take Russian aluminum from the LME, for example, your material, and then produce the demanded blends and alloys for the end consumer? Just trying to understand the market dynamics around the aluminum demand side of the equation a little bit better. Thank you very much for your color on that.

Yeah, so your question is specifically around the aluminum sector into the U.S., if I understood your question right?

Not just the U.S., Europe as well.

Yeah.

And the interplay with production in Europe, in the U.S., vis-à-vis inputs of Russian aluminum material. Effectively, if Europe buys Russian aluminum, Do they still buy the alloys from you to make those specified alloys, or does the Russian aluminum come with grades of alloys that already meet customer specifications?

Yeah, so is the imported Russian aluminum that is coming into Europe, if it is coming into Europe, does it replace our demand going into aluminum? No, it doesn't. I mean, where we are currently contracted and where we are currently working with our downstream customers, they have made the necessary adjustments and will operate accordingly. But no, no direct impact for us.

Got it. That's very helpful. I appreciate the color. And again, continued best of luck.

Thank you. Thanks. Thank you, Lucas.

Thank you. We will take our final question. The question comes from the line of Thomas Murphy from Odeon Capital. Please ask your question.

Hello, can you hear me?

Yes, loud and clear.

Great. My question is probably directed towards Beatrice. Well, first of all, congratulations on the quarter. It was a very good quarter. Beatrice, on the Q2, you had made a statement that ideally over time you'd like gross debt to get down to $200 million. Recognizing that the environment's changed a bit since Q2, and still though very strong Q3, is that still a target? And if yes, ideally over what timeframe would you hope to achieve it? That's my question. Thank you for your time and thank you for your questions.

Answering the question. Thank you so much for your question. I think the first part of the answer to your question is yes, we reconfirmed the target of $200 million of gross debt. That's what we said. And it is true that the interest rate and environment is changing. But what we are doing is we are continuing to build cash, as you saw from the results. We're evaluating all the options that we have at the moment to reduce this gross debt, and we continue to think that this could be something that we're going to be doing, I would say, sooner than later to reach these 200 millions of gross debt target. Being said that, let me just to remind, so our target is to keep the cheap debt that we have in our balance sheet, of course. We have, as you know, some government loans that we plan to keep, and we're going to be working to get rid of the expensive debt, right? Well, maybe before it was very expensive. I recognize that maybe now it's not so expensive, right? But we are working on that and could be one of the developments on the next quarter or so.

Great. Thank you. Thank you so much. And again, great quarter.

Thank you. Thank you so much, Thomas.

Thank you. I would like to hand back to the speakers for closing remarks.

Thank you. That concludes our third quarter. Thank you. We demonstrated our ability to manage through challenging markets and still generate positive operating cash flow and maintaining a strong balance sheet. We will continue to focus on improving our operation efficiency and reduce our leverage. We remain focused on growing our profitability and generating strong earnings throughout the cycle. Thanks again for your participation and support and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. Thank you. Bye. Thank you. Thank you.

Good morning, everyone, and thank you for joining FederalGlobe's third quarter 2022 conference call. Joining me today here is Javier Lopez-Matriz, our Executive Chairman, Beatriz Garcia-Cos, our Chief Financial Officer, Benjamin Crespi, our Chief Operating Officer, Benoit Olivier, our Chief Technology and Innovation Officer and Deputy CEO, and Craig Arnold, our Chief Commercial Officer. Marco Levy, our Chief Executive Officer, is on the call but will not be speaking as he has laryngitis. Before we get started with some prepared remarks, I'm going to read a brief statement. Please turn to slide two at this time. Statements made by management during this conference call that are forward-looking are based on current expectations Risk factors that would 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 webpage, ferroglobe.com. In addition, this discussion includes references to EBITDA, adjusted EBITDA, adjusted EBITDA margin, working capital, adjusted gross debt, net debt, adjusted net profit, and adjusted dilute earnings per share, which are non-IFRS measures. Reconciliation of these non-IFRS measures may be found in our most recent SEC filings. At this time, I would now like to turn the call over to Javier Lopez-Madrid, our Executive Chairman. Slide four, please.

Javier Lopez- Good morning, or good afternoon, everyone. After a record second quarter, we reported solid results in Q3, despite the challenging market environment. During the third quarter, market prices for each of our product groups declined from record levels in the previous quarter. Higher and volatile energy costs in Europe continue to persist. During the third quarter, we actively managed our global asset footprint by reducing operations in higher cost regions like Spain and reallocating volumes to other geographies. Higher raw material costs negatively affected our margins, too. Last month, in line with our new strategy, we announced the restart of our Polokwane plant in South Africa, which will start up in November and is ramping up according to plan and on budget. This facility will provide up to 50,000 tons of high-quality and cost-competitive silicon metal capacity on an annualized basis. out of which 35,000 tons will be produced in 2023 and give us the flexibility to supply it globally. During the third quarter, we continue to execute on our primary financial objective by delivering the balance sheet. During the quarter, we redeemed our 60 million 9% super senior secure notes due 2025. We continue to progress on our transformation plan with our incremental EBITDA run rate objective of 225 million, which we expect to achieve by 2024, enabling us to be a stronger and more resilient company. Specific to the third quarter, our revenues declined 29% from record levels in Q2 to $593 million, and our adjusted EBITDA declined by 39% to 185 million. Our adjusted EBITDA margin was 31% in Q3 compared to record margin of 36% in the prior quarter. Our adjusted EBITDA was the third highest in the company's history, and our EBITDA margin was significantly higher than in any prior years. This is a direct result of successfully implementing our strategic plan over the last two years. Our earnings per share was 52 cents compared with 90 cents per share that we delivered last quarter. Our cash balance at the end of the third quarter was $237 million, down from $307 million last quarter. The decline in cash was primarily driven by the repayment of the referred $60 million super senior notes. Our total cash balance, combined with our own drawn facilities, provides total liquidity of $337 million, giving us ample flexibility to execute our business plan. Our net debt of $194 million was flat versus the prior quarter, which is the lowest level in the company's recent history. Overall, the third quarter highlights our ability to perform in a very volatile and challenging market environment. As part of our corporate update, we will provide details on specific actions being taken to actively manage our operational footprint. Moving ahead to slide five, please. Silicon metal revenues was $264 million in Q3, down 26% from the prior quarter. Our silicon metal business was down as a result of challenging market environment, primarily impacting volume, which declined to 50,545 metric tons, down 20% from the prior quarter. This had a negative impact on our EBITDA of approximately 43 million. During the third quarter, we have seen European aluminium producers curtailing production by 50% due to unsustainable energy prices, causing a decline in demand for silicon metal and negatively impacting our market pricing. the aluminum sector continues to be adversely impacted by weaker auto demand. In contrast, silicon specialty grades continue to be the strongest contributor to our portfolio. The average realized price of our silicon metal sale was down 7.6% over the prior quarter, resulting in a negative impact to EBITDA of $11.1 million. Excluding GB shipments, average prices were down 4.7%. It's important to note that we outperformed the market where index prices in the U.S. and Europe were down 18% and 22% respectively over the prior quarter. Index prices in Q3 in the EU have stabilized over 3,600 euros per metric ton, while U.S. spot prices declined to 7,000 U.S. dollars per metric ton. Since the end of Q3, U.S. index prices have pulled a decline to 6,700 U.S. dollars per metric ton, while EU index have held at the referred 3,600 euros per metric ton. While adjusted EBITDA contribution for silicon metal of 130 million was down from last quarter record level, it remains strong compared to prior years. Adjusted EBITDA margins for this segment were robust at 43%. To put this in perspective, silicon metal adjusted EBITDA margins for 2019 and 2020 and 2020, before we began to implement our plan, were in the single digits. Costs from silicon metal negatively impacted adjusted beta by $8 million, driven by higher raw material costs, particularly coal and energy, which impacted costs by $6.4 and $1.4 million, respectively. Slide six, please. Silicon-based alloys revenue was $170 million in Q3, down 24% over the prior quarter. Adjusted EBITDA for Q3 was $60 million, down 39% from the second quarter. Sales volume declined 15% over the prior quarter, negatively impacted EBITDA by $10 million, while average realized pricing was down 11% over the same period, negatively impacting EBITDA by $26 million. Costs had a slight negative impact of 1.3 million, driven by higher coal price in Europe. Adjusted EBITDA margin for silicon-based alloys was 33% in Q3, while down from prior two quarters, Q3 was the third highest in the company history and significantly higher than 2021 level. Lower demand for silicon-based alloys was driven by the summer slowdown, as well as weakness in end markets, particularly construction. In addition, as a result of higher energy prices in Europe, there were capacity closures among various steel producers, driving a decline in demand for silicon-based alloys. Benefiting our margin was our strategy to focus on higher margin specialty and foundry product, which has enabled us to improve margins compared to commodity silicon alloys. Low visibility of steel demand persists, and is pushing customers toward depleting inventories. Moving to slide seven, please, on manganese alloys. Manganese-based alloys revenues was $98 million in the third quarter, down 49% from the prior quarter. Sales volumes declined 37% over the prior quarter, negatively impacting adjusted EBITDA by 10 million, while average Realized pricing was down 20% over the same period, negatively impacting EBITDA by $32 million. This volume decline in the third quarter was partially impacted by a normally high demand in the second quarter as customers focused on securing supply, which enabled us to sell at higher prices. Cost was favorable, primarily due to positive one-off mark-to-market adjustments related to the earn-out provision of $25 million. Late in the second quarter, we purchased manganese ore reacting to a shortage of supply in the market. In response to significant changes in market conditions, including shutdown of European steel producers, we slowed down our production and we expect to hold manganese ore longer and convert manganese-based alloys in line with demand. Our sales for this segment declined 49% from the prior quarter, while adjusted EBITDA declined by 55%. And our adjusted EBITDA margin declined to 51% from 71%. Capacity closure among various steel producers in Europe and weakening end market have negatively impacted demand. We continue to actively monitor this market and manage our production accordingly. I would now like to turn the call over to Beatriz García-Cos, our Chief Financial Officer, to review the financial results in more detail.

Beatriz García- Thank you, Javier, and good morning or good afternoon all. Please turn to the income statement on slide nine. Revenue for the third quarter was $593 million, down 29 percent from the second quarter. due to volume declines and lower prices from record levels in the prior quarter across all our product categories. Raw material and energy consumption declined 23% from the second quarter, resulting in the raw materials and energy consumption as a percentage of sales increasing 4% from the prior quarter to 48%. while up from Q2, raw materials and energy consumption as a percentage of sales are down significantly from prior years. Other operating expenses declined 40% versus the prior quarter to 30% of revenues versus 16% in the second quarter. The improvement in other operating expenses was due to lower consulting fees, higher CO2 credits, and the mark-to-market adjustment related to the earn-out provision for the manganese-based alloys product group. Adjusted EBITDA in the third quarter was $185 million, down from a record adjusted EBITDA reported in the prior quarter of $303 million. Adjusted EBITDA margin was 31% down from 36% in the prior quarter. Our earnings per share was 52 cents in Q3. compared with 98 cents reported in Q2. Next slide, please. Volume and price were the biggest contributors to our adjusted EBITDA, declining from $303 million in the second quarter to $185 million in the third quarter. Lower volumes across all three segments combined with price declines negatively impact adjusted EBITDA by $180 million. Cost was favorable. by $50 million, mainly due to the positive impact of $25 million from the earn-out accrual, partially offset by higher raw materials and energy costs of $10 million. During Q3, the overall impact of energy prices in Spain was unfavorable, $2.8 million quarter over quarter, and our average realized unit cost of energy in Spain increased by approximately 11%. We continue to actively manage our global footprint to cope with volatility on energy prices. Slide 11, please. We end Q3 with a cash balance of $237 million, down from $307 million in the second quarter. If we layer in our new undrawn ABL, the liquidity was over $337 million at quarter end. Cash was used to pay down 60 million in debt, 20 million in interest expenses, and 10 million related to CO2 purchases. The remaining balance was primarily used to reduce our outstanding factoring debt. Our net debt remains at the lowest point in company history at 194 million, flat versus the prior quarter. The gross debt was 431 million at the end of Q3. down from $500 million in the prior quarter. The decline reflects the successful redemption of the $60 million of 9% super senior notes. One of our top priorities continues to be deploying our cash flow to further deliver the balance sheet. Next slide, please. The value of our assets total $1.9 billion at the end of Q3, and our equity book value was $700 million. We have set a target for working capital as a percentage of sales at 21%. During the third quarter, we went above this level at 30%. The above working capital was driven by an increase in raw materials and finished goods, which will support our plan over the winter period. We expect progressively decline over time on the coming months. Next slide, please. During Q3, we generated 55 million in operating cash flow, I repeat, 55 million, versus a record level of 165 million in the prior quarter. It is the fourth consecutive quarter of positive cash flow. Our operating cash flow was driven by reversed earnings, partially offset by cash consumption for working capital of around 87 million. During the quarter, We spent $50 million in CAPEX versus $40 million in the prior quarter. At the end of Q3, we have spent $46 million in CAPEX. We continue to expect our CAPEX for the year to be on plan around $75 million. Please keep in mind that the timing of the actual cash flow impact of the CAPEX expense may differ from the balance sheet impact. In the third quarter, our cash balance declined by $69 million, mainly driven by the debt repayment and working capital investments. Free cash flow during the quarter was positive 40 million. Our goal remains to keep working capital around 21% of sales across the cycle. Next slide, please. Slide 14. As we generate strong cash flows and lower our quantum of debt and cost of capital, the credit profile of our company is improving. In August, Moody's upgraded the 9.375 senior notes due in 2035 to B3. This is a testament to the work we are doing and the execution of our plan. During third quarter, we were able to successfully manage through a demanding quarter, highlighting the structural improvements we have made to the company over the past two years. At this time, I will turn the call back over to Javier Lopez-Magez for a few updates on some noteworthy corporate matters.

Javier Lopez- Thank you, Beatriz. Now turning to slide 16, please. I want to highlight a positive development relating to our energy costs, specifically in France for 2023. While we have competitive energy prices in France in 2022, we have successfully negotiated for next year a favorable contract to reduce exposure to volatile energy markets. This allows us to get similar energy rates compared to 2022. However, the contract contains higher prices during the first quarter, which will be managed by idling production in France during that quarter and supplying Europe and our clients from lower-cost facilities such as Polo Guane and Becancourt, which have become Ferroglobe global plants. It's challenging to lower global demand and volatile energy prices in Europe. We're successfully managing our business to maintain high margins and profitability. This is the result of a transformation plan that we have been implementing for the last two years to optimize our revenues and effectively manage our costs, making our business more efficient overall. We continue to manage our business with the focus of using our cash flow to further strengthen our balance sheet by continuing to reduce leverage. Longer term, we'll focus on growing our silicon metal business and expanding even more into specialized high growth markets to drive overall growth for the company. In that respect, we're moving forward each day capitalizing silicon metal as a critical material to the energy transition. We're taking advantage of our technological expertise developing solar and advanced application materials during the last 15 years, and we believe we are ahead of the pack. As a direct result, we're now ramping up industrial scale production of 3N and 4N purity liquid silicon in our Puerto Llano facility in Spain. Our high purity silicon will supply advanced technology solutions, and in particular, engineering materials for the fast-growing lithium-ion battery market. Moreover, we're in advanced discussion with leading silicon-carbon composite producers, and we're entering into joint development agreements across the EV value chain. Silicon metal is expected to be key to green energy transition, driven by growth in electric vehicle demand, energy storage, solutions, and solar. for providing us with exponential growth opportunities. Once again, a tremendous number of things going on that causes us to get excited about the future. We have said from the beginning that it was going to be a slow, steady, and purposeful journey focused on transformation, value recovery, and value creation. Today's solid earnings should be viewed as a firm validation of our team and our plan. There is a lot more There's a lot more work that is left to be done and we remain committed to reaching our goals while navigating a period of uncertainty as the macro picture evolves. At this time, I'll ask the operator to please open the line for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. Please stand by. please stand by while we compile the Q&A roster. Your first question comes from the line of Lucas Pipes from B Riley Securities. Please ask your question.

Thank you very much, operator. Good morning. Good afternoon, everyone. Thanks for taking my question. My first question is on the inventory bill during the third quarter. You touched on it a little bit in the prepared remarks. It sounds like there were some tactical reasons to build inventory here ahead of the winter. I would like you to maybe elaborate on that. And then also, is this a sign of potentially declining margins in Q4 and Q1 with higher costs flowing through the P&L? If you could comment on that as well, we'd appreciate all that color. Thank you very much.

Lucas, Lucas.

Thank you, Lucas, for your question. This is Beatriz. Yes, it is true that working capital consumption has been increasing. The main reasons are as follows. On the manganese ore side, we built up inventory due to changes on the macro environment, in particular on the European steel producers' shutdown. And on the other side, as well, in response to the curtail of our Spanish operations. As well, in response to our France winter stoppage, as you mentioned, we had to build some inventories in silicon and ferrosilicon to account for the winter shutdown. And as a result, as well, of this volatile environment from Russia and Ukraine, We have hedged our position in electrodes and coal. And as well, please remember that we are ramping up our plant in Polocoane, and this has been as well taking some of the working capital consumption.

That's very helpful. So in terms of returning the ratio of inventory to sales that you mentioned, What's the timing of that? Should we expect a sizable release already in Q4, or do you think that that ratio will normalize into Q1 2023? Thank you. Thank you very much.

Thank you, Martin. I think for the reasons that we mentioned, particularly the winter stoppage, And naturally, our inventory is going to be depleting because of that. So we expect to go back to normalized levels in the coming months.

Yes, that's helpful. Thank you very much for that, Kala. And then two quick questions.

Let me intervene. Lucas and Javier here. As you say, it was tactical reasons. On manganese, we reacted to market demand. And yes, we have an excess of manganese ore that will be used, will be manufactured over the coming months depending on demand. So there is like two sources, finished products and tactical supply of coal and electrodes and the manganese ore that we will be will be transformed into manganese alloys over the coming month, depending on demand. Because as we mentioned in the call, we stop all production in Spain.

Got it. Thank you for that additional color. Excellent. On the board approval of the new strategy, can you maybe shed a little bit more color on what the strategy entails. I assume it's mostly about the silicon metal powders and high-end product and pursuing that market in a measured way, but would really appreciate additional color on that board-approved plan. Thank you very much.

Lucas, thank you very much. Obviously, yeah, silicon metal is our core business and a great deal of our of our strategic plan relies on going deep into specialty and high added value product. Together with us is Benoit, which is our chief technology officer, and maybe he can add a bit of color of what we're trying, what we're doing, what we're currently doing in that respect, which I think would add a bit of color to what I just mentioned. Benoit.

Hello. Thank you. Hello. So our strategy in terms of growth is focused on the development of high purity silicon for advanced application, including batteries. And when we look at it, the silicon for advanced application and batteries is anticipated to have accumulated annual growth rate of 30% per annum. And this will have an increased and significant step that will take place in 2025 when the Gigafactory is currently being built in the US and in Europe, as well as Canada, will be producing at capacity requiring significant quantities of raw materials. Per our roadmap, we continue to invest in our technology to radiate ourselves for this exponential market ramp-up. One attractive side we have is that we leverage all the technology we have developed for the last 15 years in solar, and we believe that our metallurgical route technology has three main advantages against any other silicon alternative for batteries. It is lower cost, lower capex intensity and modularity, and much faster ramp-up dynamics.

Very helpful, very exciting, good work during the quarter, and I appreciate all the color in response to my questions. I continue best of luck.

Lucas, thank you.

Thank you. We will take our next question. The question comes from the line of Martin Englert from Seaport Research Partners. Please ask your question.

Hi. Good day, everyone.

Hey, good day. Good day. Martin, how are you?

Good. Thank you very much. Hope all is well with everyone. I wanted to touch on the French power contracts and maybe we can specifically the sequence here and how to think about volumes moving through next year. So it seems like maybe they asked from the government was don't produce On the French assets or significantly reduced production during the winter months, or 1 to 23. And then you're free to ramp based on wherever market demand is in the remaining quarters of 2023. And if you kind of follow that framework. they'll keep you comparable on your fixed energy price with your go forward contract in 2023 versus the legacy one. Is that the way to think about it or does something differ?

It's slightly different because it's a fixed agreement. It's a fixed agreement that we have reached with EDF, but maybe Benjamin You can add your specifics to Martin.

Yeah, thank you, Martinello. It's Benjamin speaking. So I think generally speaking, it looks like so we entered into a three-year contract agreement, right, with an energy provider, and this is from 2023. For 2023 specifically, I mean, yes, we are taking action during winter in France, and by modulating during winter, we will achieve energy costs in 2023 similar to the one we have in 2022. So this is beneficial to our competitiveness, right? That said, I think when talking about volume, I think it's too early to talk about 2023 volumes overall. given that we are presently in our contracting period and performing our forecasting and budgeting exercise for 2023. And what we should keep in mind is that we will shift our annual plant maintenance shutdown into Q1, and that's only one way of mitigating the impact on volume, as we already mentioned that we will use our global platform, in particular, Polo Kwané and Vécancourt, to balance production and demand.

So no sense, I mean, With the South Africa restart, and I think that was supposed to add, what, 30,000, 35,000 tons for next year, but no sense on, I guess, if we think about before the restart was announced and then after what the net volume gain all till constant might be from that, given that there'll be some downtime during the winter months.

Maybe Craig.

Yeah, maybe just to support what Benjamin was saying, with the anticipated modulating of the assets and bringing forward some of the maintenance, plant maintenance since quarter one, well-timed with the start-up of the Polo Kwan Air asset in South Africa and how it's going to serve as the global franchise, on a net effect, on a year-over-year basis, it'll be roughly the same. Because as you highlighted a little bit later, earlier in your comments there or your question, was as we begin to operate throughout the remainder of the year, so post-French winter, we will be able to actually push the entire franchise a little bit harder in France.

Understood. So kind of comparable from a volume perspective, year on year, remainder of the year, that's when we'll see more opportunity for net gains of constant, you know, based on the demand environment. Okay. And essentially thinking about the, you know, cost per megawatt going into the French assets, a comparable level as to what it was with the legacy contract. Yeah. That's correct. Okay. Understood. Can we discuss the South Africa restart maybe in a little bit more detail and where the volumes are going to be going? You know, maybe a split between the Middle East and North American market and the Euro market. And I imagine based on modulating the production in France, that'll probably evolve a bit as we move through 23.

I think it's Benjamin. I might start on commenting that Polo Kone is maybe our most flexible asset in the platform. It can serve any market. And so I think as the market evolves and as the opportunity comes, we will manage the volume and where we allocate them. But I will let Craig comment on the market aspect. But Polo Kone is really a flexible platform that can go to most of the geography in the world.

Yeah, Martin, as we look at how we plan to go to market with the Poliquana asset, as has been highlighted, it is a global asset originally designed around the high-performance polysilicon area targeting Asia Pacific. But since it has been planned to be restarted during the course of the coming quarters, the idea is to service a variety of regions. and looking at Asia, looking at the Middle East, and of course looking at Europe and the U.S. I can't give too much detail on the level of those contracts, but certainly as we scale up the three furnace operations over the coming quarters, we will certainly be able to give a little bit more highlight and update on the performance of that asset in those particular target markets.

Okay, understood. That's helpful. And when we think about where it sits on the cost curve, you know, accounting for contracts and everything else, I think historically this has been a bit of a lower cost production facility. Is that kind of where it will remain once it gets restarted?

Yes, that's correct.

Understood. Just for modeling purposes and given the South Africa restart and maybe taking a step back and looking at Coming from 2021 to 2022, there was a pivot within the company away from, and this is specifically for silicon metal that I'm discussing, not the other business lines, but a pivot away from fixed annual contract prices where it's a fairly de minimis amount of the contract structure in 2022. Is that expected to remain so in 2023, or is there anything changing that we should expect a larger mix of fixed annual price silicon metal contracts in 2023 versus 2022?

Yeah, thanks, Martin. Thanks for the question. Fixed price contracts are almost a thing of the past at the moment, so we hardly have any fixed price contracts. Certainly, It would not be wise to be in a fixed price contract mechanism during today's volatility because going out there and trying to embed all that volatility in one single fixed price at a high price is not something that a consumer would lock itself into. The strategies we've chosen right now are multi-year strategies and have a combination between market-related and other related aspects into that. So, yes, we're very happy to have retired all of our fixed price contracts.

Okay, that's helpful. Thanks for reconfirming that. I'm going to circle back on the working capital question. And, you know, the 21% target was notably, you know, exceeded. You had, you know, discussed in another follow-up question the component as to why, and I understand that. But What's the timing of, you know, when can we expect to achieve that 21% of sales, I believe, is the target? Is this something that happens, you know, after one Q results are reported or two Q or three Q?

Yeah, thank you, Martin, for the question. Let me take one step back. So, I think Going back to the reasons that cause this increase in our percentage, as you know and we mentioned, in one side we have the manganese salt buildup due to the change in the macro environment, and as well all the European steel producers shutting down operations. And in response to that, of course, we curtail our Spanish operations, right? Then the second point to bear in mind is the French winter stoppage, as you mentioned. And then the third point is, of course, as a result of the volatility for the conflict between Russia and Ukraine, we buy some additional electrodes and coal. And on top, of course, we are ramping up as we are speaking. So we invest working capital on that. So being said that, and provided the winter season is starting very soon, we see this level of working capital coming progressively on the next coming months, if this answers your question.

I'm sorry, could you just repeat the very last part that you said, kind of you expected this level of working capital to... Yeah, sorry, on the next coming months. Next coming months. So something within, in my mind, I think that's a three-month or less framework, or am I wrong in thinking that?

Yeah, maybe. We're going to be hitting the target, yeah, on maybe... between Q1 and Q2 for sure.

Okay. Let me pivot. I wanted to get your thoughts on the recent Greenfield project that broke ground since the last quarter in the U.S. for silicon metal and that you called out in the press release, you know, targeting growth for your silicon metal business. It looks like there may be a new entrant pushing forward in the U.S. But, yeah, any high-level thoughts from your perspective there?

Yeah, Martin, thank you very much for the question. Well, the Greenfield, I guess you're referring to the Greenfield project of Sinova and all those that have been announced. Well, I think we have a first a positive reaction because I think it validates a bullish case for silicon metal going forward. I think we have expressed new market dynamics, reshoring, energy transition positively impacts silicon demand in the Western world in the coming years. And we should expect high growth in that sector. And as a result of that, there are announcements of production being made, which would take some years. So on that side, very positive. I was a bit, we were a bit surprised, but we haven't, we don't know the numbers. But we were positively surprised about the It was a sizable investment of around 300 to 400 million. Again, I don't know the numbers, but from what we heard, of what we read, it's 300 to 400 million for 60,000 tons capacity, or phase one of 60-ton capacity. Just to give you a perspective, in Ferroglobe, we have global silicon metal capacity in excess of 300,000 tons. with a flexible global asset footprint, which could certainly add perspective to our own valuation potential. But maybe, Benjamin, maybe you can give a bit of perspective on Greenfield, Brownfield project and managing assets, which might add a bit of color to what I just said.

Yes, Javier, and thank you, Martin, for the question. Silicon supply can be expanded through multiple routes, right? And the capex intensity of those options is very different. If you talk about swingable capacity, furnace conversion, plant reactivation, brownfield or greenfield, the capex intensity of all those options are very different. And I think as an integrated company, we are able to add quickly capacity by reactivating assets, and the cost of that is maybe 50 times less the cost of a greenfield. And that's what we have been doing. That's what we are doing now in Polokwane, and that's what we've been doing earlier this year in Selma. I think on top of that, if our global footprint is a source of competitive advantage, providing a securely integrated supply of critical inputs like quartz, coal, and electrodes, and I think that's significant. When you are nuclear, access to those critical inputs is not that easy. And I think another advantage is the proximity to markets.

Okay, thank you for that. That's helpful. And I guess probably worth highlighting that there has been some, you know, over the last, cycle or 10 years or so, there has been some notable capacity reductions within the North American market that you had one facility that exited, Dow had a facility that exited and I believe remains down. So net-net, maybe things are wildly different even with a greenfield expansion. Can you touch on maybe any more details to share about the high purity silicon that you're ramping in Spain. You know, any comments on, you know, leveraging the prior know-how that you gained from, you know, an upgraded metallurgical product that you were, you know, previously trying to take to market and then that, you know, as the market turned down, that kind of went away. But it seems like you're leveraging some of that today.

Absolutely. Benoit, maybe you can add.

I can add a bit. The high-purity silicon we're targeting is of slightly lower purity than on solar, which makes the cost extremely efficient because it's the first process steps that we are basically adapting into the plants, mostly. So the production of high-purity silicon is integrated into the plants, which is one of our main cost advantages. The second is that we will develop the metallurgical route. As I mentioned earlier, it's the easiest, most efficient route, less capex-intensive route when you want to put silicon into the anodes. We're targeting specifically the silicon carbon composites markets and also the SIO producers. And eventually, we believe this solution can be engineered for the silicon-rich anodes, which are one of the alternatives for the lithium metal anodes in the solid-state batteries.

Maybe, sorry Martin, just maybe, what is the expected growth, Benoit?

uh for the mark for the market going forward on that type of so so we have had negligible sales in 2022 few hundred few hundred tons uh in advanced technology and battery we expect to triple those sales year on year and with the marked uh with a marked uh step up as soon as the gigafactories will actually start consuming and this is one of the challenge of these developments is to face the huge one-step demand of gigafactories and that's why we have to ready ourselves now and we have started rating ourselves for quite some time now uh to to be prepared for that big step okay so kind of put still in the preparation i mean you are selling volumes this year and you'll continue to

moving into 2025, but the bigger step change that you're anticipating is 2025, when kind of more Western gigafactories are ramping ramp and producing and consuming more. That's more of the step change anticipated, right? Correct. Okay.

We triple every year up till then.

We will triple the volume and the sales up until then in 2023 and 2024.

What does this do with silicon metal, looking at it from a segment what does this do to the go-forward margin profile, EBITDA margin profile of that business? I understand that these products are fairly high margin, high value, and I guess any kind of framework that we should think of when we think about kind of legacy silicon metal margins, but what it could look like 2025 forward with more of this in the mix.

Yeah, thanks, Martin. I mean, of course, with a higher proportion mix tilting towards these specialties, you would certainly see an earnings profile transformation. The way I'd see it is typically your aluminum sector will take a bit of a knock with the recyclability and the shift of the general industry going towards EVs. But the chemical sector favoring electronics, photovoltaics, these areas are going to take more of a more of a share mix of our portfolio and the greater silicon metal market. So without a doubt, that earnings profile will change tremendously, as you pointed out.

Okay. All right. Thank you for all the detail and color. Congratulations. I thought that you all did a very nice job. I think it's a tremendously difficult environment in Europe as well as the North American market, maybe to a lesser degree. So congratulations on the results.

Thank you, Martin. Thank you. Thanks, Martin. Thanks, Martin.

Thank you. We will take our next question. And the question comes from the line of Michael Lam from Gemex Capital Management. Please ask your question.

Yes, good morning. In terms of when I look at the end use demand that your products go into, I mean, Auto production has been flat and going higher. I'm less familiar with how the solar production ramp is, but it looks like how much of your volume decline in Q3 was customer destocking, or you mentioned also increased competition from imports.

Yeah, if I may. Thanks, Michael. In Q3, we saw a number of headwinds coming from a variety of different challenges across the area, whether it had been just the severe global inflationary pressures or actually regional energy situations or just the zero COVID policy. When we looked at how intervention was taking place on the supply side, there was a number of actual supply production coming off that was meeting or matching with the demand balances. In effect, the market was becoming quite balanced, so the liquidity of those sectors had really balanced out. As you pointed out, on the chemical side, we had a number of customers who had expressed concerns around the economic situation, and obviously their consumption started to drop as they were currently preparing for a decent towards year-end. to the earlier question martin was asking we have seen also an increased demand into premium but unfortunately there hasn't been enough to make up for the short term that we had seen in xyloxanes or aluminium industry going forward i mean generally the chemical sector is going to be robust and it is of the growth um in the future starting up in the medium term the demand for and that's what Benoit has been describing into batteries. Aluminium, you were talking around the auto sector. We think there's going to be a little bit of a lengthy slowdown, primarily due to the auto sector. It started off with semiconductor shortages, but we will see additional curtailments in aluminum production because of the very high production cost, primarily energy. And so, but going forward, at least a high growth, a growth of a high base, but at a slower rate expected in the longer term. As I've mentioned earlier, silicon-related aluminum will have to go to a transition, a higher uptake in recycling and a general transition to EVs. Mm-hmm.

And the last question is, what's the estimated cost of wrapping up Poliquani?

Yeah.

Benjamin. It's Benjamin speaking. So I think we, of course, we cannot be too much precise on that respect. What I think we mentioned, we mentioned some earlier in the previous answer that much cheaper than a green field, and we are talking 50 times less than a green field project. So that's the level of detail we are going to be able to be into. We don't want to be so precise on the prospect.

I mean, very cheap. One of the things that we are – and actually Our global footprint is becoming more and more valuable as the world is de-globalizing a bit. We can restart facilities very quickly and very cheaply. And that's why it allows us to react to market, anticipate market movements in a much more agile way. Coloquane, we did that in Selma, in Alabama last year. We've done that in Coloquane. In the reverse, we're stopping production. We've stopped production in Spain, and we're stopping production for three months in France. And that is a tremendous advantage for the world we live in.

Okay, thank you.

Thanks.

We will take our next question. The question comes from the line of Lucas Pipe from B Reilly Securities. Please ask your question.

Thank you very much for taking my follow-up question. I wanted to ask a bit on before we're halfway through the quarter. How are volumes holding up so far? What are your volume expectations for the fourth quarter? in light of the uncertainty on the macro front. Would appreciate your comment there. Thank you.

Yes, thanks, Lucas. As I highlighted a little bit earlier, there's a number of factors that are playing into the marketplace right now, and we see this correction on supply and demand. But in general, most of the market is out of summer slowdown. There is a slight but yet cautious order load coming through in quarter four. We see it still playing favorably out according to our expectations. Now, the real area that we're sitting at right now is looking at how we commit and how we conclude successfully the remaining part of our negotiations for next year, but of course You know, I cannot comment too much further on that, but that's driving a lot of the current purchasing posture for fourth quarter.

Okay. And for the expectations today, do we expect modest increase in volumes across the three segments? Is that reasonable, or can you elaborate on that?

Well, we've made the curtailments in Spain, so essentially we are operating just with our U.S. assets and part of the Spanish assets, the French assets, our Norwegian assets, and we focus on the successful startup of South Africa. Argentina also continues to be a good provider to that franchise.

Okay, that's helpful. A bigger picture question, but the aluminum makers have been, Western aluminum makers have been lobbying for a ban of Russian aluminum on the LME, for example. So Russian material continues to come in. And what is the impact of that material on GSM? Does that ultimately... indirectly compete with you as well? Or do fabricators take Russian aluminum from the LME, for example, your material, and then produce the demanded blends and alloys for the end consumer? Just trying to understand the market dynamics around the aluminum demand side of the equation a little bit better. Thank you very much for your color on that.

Yeah, so your question is specifically around the aluminum sector into the U.S., if I understood your question right?

Not just the U.S., Europe as well.

Yeah.

And the interplay with production in Europe, in the U.S., vis-à-vis imports of Russian aluminum material. Effectively, if Europe buys Russian aluminum, Do they still buy the alloys from you to make those specified alloys, or does the Russian aluminum come with grades of alloys that already meet customer specifications?

Yeah, so is the imported Russian aluminum that is coming into Europe, if it is coming into Europe, does it replace our demand going into aluminum? No, it doesn't. I mean, where we are currently contracted and where we are currently working with our downstream customers, they have made the necessary adjustments and will operate accordingly. But no, no direct impact for us.

Got it. That's very helpful. I appreciate the comment. Again, continued best of luck.

Thank you. Thanks. Thank you, Lucas.

Thank you. We will take our final question. The question comes from the line of Thomas Murphy from Odeon Capital. Please ask your question.

Hello, can you hear me?

Yes, loud and clear.

Great. My question is probably directed towards Beatrice. Well, first of all, congratulations on the quarter. It was a very good quarter. Beatrice, on the Q2, you had made a statement that ideally over time you'd like gross debt to get down to $200 million. Recognizing that the environment's changed a bit since Q2, and still though very strong Q3, is that still a target? And if yes, ideally over what timeframe would you hope to achieve it? That's my question. Thank you for your time and thank you for your questions.

Answering the question. Thank you so much for your question. I think the first part of the answer to your question is yes, we reconfirmed the target of $200 million of gross debt. That's what we said. And it is true that the interest rate and environment is changing. But what we are doing is we are continuing to build cash, as you saw from the results. We're evaluating all the options that we have at the moment to reduce this gross debt, and we continue to think that this could be something that we're going to be doing, I would say, sooner than later to reach these $200 million of gross debt target. Being said that, let me just to remind, so our target is to keep the cheap debt that we have in our balance sheet, of course. We have, as you know, some government loans that we plan to keep, and we're going to be working to get rid of the expensive debt, right? Well, maybe before it was very expensive. I recognize that maybe now it's not so expensive, right? But we are working on that, and it could be one of the developments in the next quarter or so.

Great. Thank you. Thank you so much. And again, great quarter.

Thank you. Thank you so much, Thomas. Thank you. I would like to hand back to the speakers for closing remarks.

Thank you. That concludes our third quarter. Thank you. We demonstrated our ability to manage through challenging markets and still generate positive operating cash flow and maintaining a strong balance sheet. We will continue to focus on improving our operation efficiency and reduce our leverage. We remain focused on growing our profitability and generating strong earnings throughout the cycle. Thanks again for your participation and support, and have a great day.