KME - All tolling?
All,
Please find our updated analysis here.
The decision to use asset sale proceeds to tender for bonds rather than buy copper had us puzzled, but the money has been committed, so we look forward. Copper prices remain elevated with no concrete signs of relief and for KME liquidity remains at a premium. So how would this financing of inventory work? For the first time, there is a noticeable shift on the balance sheet that could back up management’s previous allusions to shifting the burden onwards, but the evidence is still patchy.
Drop-in Receivables is encouraging:
- KME worked its capital hard, with receivables falling €42m sequentially to €89m providing much-needed finance for the company with the cash recycled into inventory. Effectively, by paying early clients have provided the money KME needed to maintain the stocks its clients want and need. This kind of financing is a positive, but it is still just the first swallow of Spring. Alternatively, it is possible that some (or most even) of the €42m is down to further drawings on Factoring lines. We have asked management to clarify and await a response.
- Clients picking up the bill by shortening their payment terms to KME helps explain the use of proceeds from the sale of the Specials division to pay down bondholders.
- KME still needs a further €40m - €50m of funding to finance its working capital and this is before the consolidation of the Aurubis assets (expected in Q3) which have €67m of working capital. Management expects the Aurubis working capital to be “externally provided”.
- Overall working capital contributed €24m to operating cash flow (we model for 45kt of Inventory on hand) of €52m.
Tolling Agreements:
- On the call management referred to 50% - 55% of the copper business now being via tolling arrangements (up from 40% in 2021). The fall in Receivables points to KME having some agreements with clients, but the published accounts show that KME is still fully consolidating client sales.
- In a full tolling agreement with KME acting as an agent, Inventory and Payables would be lower as the metal left the balance sheet, whilst revenue would drop as only the processing fee would be accounted for. KME’s processing fee would equate to what is currently Net Added Value. Revenue would have fallen more significantly over 2021 (unless volumes have exploded, which we do not believe to be the case).
Bond tender:
- The final tranche of the €190m bond redemption is due to be completed on the 22nd of April. This will consume most of the €200m net cash received from the sale of the Specials stake. After the partial redemption, there will be €110m of the Feb-23 bonds outstanding.
Liquidity:
- Year-end cash was €81m (vs our modelling of €55m). Post the €200m proceeds of the Specials sale, the €20m from the sale of Ecowire and the €190m of bond redemptions pro forma liquidity will be €91mm.
- KME also expects to close the acquisition of flat-rolled assets from Aurubis in Q322, the equity cost is €8m, with €67m of “external” finance for the working capital of the business. Unless KME is expecting to significantly reduce volumes or to try and shift financing responsibility to its customers, this will likely need to come from an extension of the LC facility. The SACE facility is now fully drawn, this facility was needed to replace the €75m reduction in the LC facility (from €395m to €320m) in February this year.
Investment Considerations:
- We closed our short for 5% NAV at the end of February when the partial bond redemption was announced.
- To date, we have not been convinced about management’s ability to move to an all-tolling model. Failure to achieve this would compel KME to shrink volumes further until the copper price falls. Again, the drop in receivables may turn out to support management claims.
- KME will need to refinance its remaining bonds and LC facility in the next 6-months, we are unsure of what shape that will take, and we are not convinced the banks will lend to pay out bondholders.
As always, I look forward to discussing this with you all.
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055