Ferroglobe PLC (GSM) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen, and welcome to Ferroglobe's Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference call may be recorded. I would now like to turn the call over to Beatriz García-Cos, Ferroglobe's Chief Financial Officer. You may begin.
Beatriz García-Cos: Good morning, everyone, and thank you for joining Ferroglobe's Third Quarter 2021 earnings conference call. Joining me today are Marco Levi, our Chief Executive Officer; Benoit Olivier, Ferroglobe's Chief Operating Officer and Deputy Chief Executive Officer; Gaurav Mehta, our Transformation Director and EVP of Strategy and Investor Relations; and Jorge Lavin, Group Controller. Before we get started with some prepared remarks, I am going to read a brief statement. Please now turn to Slide 2. The statements raised by management during this conference call that are forward-looking are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Ferroglobe's most recent SEC filings and exhibits to those filings, which are available on our webpage www.ferroglobe.com. In addition, this discussion includes reference to EBITDA, adjusted EBITDA, gross debt, net debt and adjusted diluted earnings per share, which are non-IFRS measures. Reconciliation of these non-IFRS measures may be found in our most recent SEC filings. Next slide please. During today's call, we will first review the highlights for the third quarter as well as our business and operating environment. Then I will provide some additional details on our financial performance and key drivers behind our results. And finally, we will provide an update on the execution of our strategic plan. At this time, I would now like to turn the call over to Marco Levi, our Chief Executive Officer. Next slide, please.
Marco Levi: Thank you, Beatriz, and welcome to our third quarter 2021 earnings call. I hope that my voice supports me during this call. Otherwise, I will hand over part of my presentation to Mr. Mehta. This is certainly a unique time for our company and for the broader industry. The sharp and unexpected recovery in demand across our end markets, we started in the fourth quarter 2020 continued throughout this year. In fact, global demand is a base supply driving the index to unprecedented levels in products such as silicon metal, and reach multi-year high levels across our alloys. For example, the latest index pricing for European silicon metal has been at all time high at €8,100 per ton last week, up from around €1,700 per ton years, just one year ago, an increase all 375% approximately. I am pleased to report that we are seeing fundamentals remain extremely favorable for sustained pricing environment throughout 2022. On the demand side, our customers across the chemical, aluminum and steel sectors are signaling healthy demand into next year. On the supply side, we expected tightness particular in silicon metal to continue. The trend on lower net exports out of China continues to benefit Western producers. As a result, we announced at start of our Selma, Alabama facility in the United States, which is strategically located to benefit from the growth in the region. Current market dynamics set the stage for a significant improvement in our earnings. At the beginning of 2022, however, our Q3 performance remained constraint due to the position of our order book, which is heavily weighted towards the fixed price contracts. Nonetheless, the limited price increase realized across the portfolio compared to the movement in the index was enough to offset drastically higher energy in Spain, higher input costs, operational and supply chain disruptions. We're also pushing it vigorously on the strategic in our plan, which is helping to offset some of the inflationary pressures and also helping to create the foundation for a stronger Ferroglobe. Overall, we are now surprised by the factors impacting our cost. The energy situation in Spain was an issue last quarter, and we've continued to have any impact for the year end. What surprising us is the pace and the level at which the market price for energy in Spain has shut up. To provide some perspective, the market food price in Spain averaged €45 but make about power in Q1, €72 in Q2, €118 in Q3. Once again, these are the average quarterly prices and do not fully highlight the peak inter-quarter pricing, which was one that €189 in Q3. We are currently pushing seven alternatives to mitigate this problem. We are reviewing terms sheets for PPA with strategic and financial counter parties, covering a portion of our 2022 energy needs in Spain. We're also working on solutions with our customers to better with these costs in the wake of this unprecedented situation. As we are rebound from the dept where this company has recently been, we're engaging in straitening our relationship with customers. As cash generation accelerates, we have focused on reinvesting in our asset base to ensure efficiency and competitiveness. Additionally, we need to recognize the efforts of our workforce for a challenging period. The changes we are driving throughout company are an important part of the new Ferroglobe. My first objective continues to be the strengthening of the Company, and I think we are making progress. At this page, it it's great to go that we fully capitalize on the near-term opportunities, and we must not compromise on the excursion of our turnaround plan in order to ensure a cost competitiveness in a sustainable manner. I can confirm that at the stage where we are recovering market share from key customers, and we are focused on our ability to convert this opportunity into faster cash generation, higher margins, and where attractive trying to negotiate longer term contract. I will touch a bit more about the current negotiation season is shaking up, but the let's first review the third quarter results. Moving to Slide 6 please. Our third quarter results were impacted by several factors. Some of which were one-off limiting our ability to benefit from the strong market conditions this quarter. Index prices continued to increase across the product portfolio during Q3 on the use of strong demand. On the production side, we faced some outages and logistics issues, cost training shipments. Total sales increased 3% over the period of quarter to $429 million. On the cost side, energy had the single largest impact costing us an increment of $19 million during the quarter with inputs such as coal and coke facing inflationary pressures. Furthermore, we faced some one-off issues at the few facilities, which constrained our production. Operation challenges coupled with some inbound supply chain and outbound logistics bottlenecks adversity impacted costs during the quarter. Our adjusted EBITDA increased 10% over the prior quarter to $37.6 million. For the quarter, we had a net loss of $97.6 million, primarily due to a non-recurring accounting impact. This accounting charge relates to the refinancing costs specific to the senior notes resulting in a financial expense of $90.8 million. This charge relates to the accounting of the aggregate fees, expenses and equity, which were issued as part of the overall costs. They are free to elaborate a little bit more on that. During the quarter, we consumed some cash ending the quarter with a cash balance of $95 million. Operating cash flow in particularly was negative by $35 million as a result of an investment in working capital to support our strong near-term demand. As we think about Q4, we expect the revenues to increase driven by the recovery in volumes and continued improvement in selling prices. And while some cost pressures will continue, the top line growth is expected to outweigh for these costs, resulting in continued the recovery of our EBITDA and margin expansions. The acceleration of cash generation originally expected for 2021 will be limited due to increasing costs. As we get the benefit of the new prices, at the beginning of January, we expect operating cash generation to improve. With regard to 2022, the order book is shaping up favorably. To date, we have approximately 35% of our overall sales contracted. We are currently negotiating a number of other sizeable contracts which we anticipate to close shortly. With this contract approximately 70% of our order book will be booked. In 2021, we had higher waiting towards fixed prices, which constrained our upside. In 2022, we will have more market exposure due to a higher waiting towards index-based contract. Additionally, we are building more protections into our contracts in this cycle. Next slide please. Turning first to silicon metal on Slide 7. On the volume side, we had 8% decrease in silicon metal shipments to approximately 61,700 metric tons, somewhat back to the levels realized in Q1. Earlier this year, we announced plans to restart the furnace at the Sabón facility in Spain and another furnace at our manganese facility in France, as the demand picture strengthened. With the start these two furnaces, our production volumes in Q2 increased relatively to Q1. During Q3, we decided to idle the same furnace at Sabón due to the sharp rise in energy prices. These resulted in lower total silicon production during the quarter. Outside of Spain, we had planned maintenance outages at alloy West Virginia facility, which further limited our production. The maintenance work has since been completed and this facility is fully operational. As a result of these developments, we expect volume in silicon metal to increase in Q4 as well as a continuous step up in prices. We have recently signed a very attractive contract supporting the decision to once again restart the furnace at Sabón. On the pricing side, however, realized pricing increased to $2,467 per metric ton in Q3, up 5% from the prior quarter. During the quarter, approximately two-thirds of silicon metal sales excluding the joint venture volumes were contracted. Of this contracted portion, 90% were under fixed price contracts. And our average realized prices do not reflect the same pace of movement reflected in the index. The index prices in the United States and Europe on the top left of the slide show a parabolic movement in prices toward quarter and that has continued in the fourth quarter. The current spot prices are over $9,500 per ton in the U.S. and €8,100 in Europe. EBITDA from our silicon business declined from 13.7 million in Q2 to 11.4 millions in Q3. On the cost side when compared to a few challenges, which contributed to a negative impact of 8.3 million. The most significant driver was higher energy cost in Spain, which adversely impacted Q3 by 4 million. Beyond energy, there've been some cost inflation and sourcing challenges in other materials, such as coal forcing us to seek for alternatives. In the absence of optimal raw material mix, we have seen a negative impact on our overall operational efficiencies driving an increase in production costs. Regarding the Selma facility to restart, our current plan is for one furnace to be restarted by year end and the second furnace to restart in late Q1 2022. End market demand remains strong. Currently, we're in negotiation season for 2022 contracts. In silicon metal, we have close to having approximately 80% of our volumes contracted. All the contracted volumes approximately 30% is at fixed price. Next slide, please. Turning to silicon-based alloys on Slide 8. During the quarter, our average selling price increased by 9% to approximately $1,990 per metric ton, up from $1,850 per metric ton in the second quarter. Our silicon based volumes were about 14% to just under 55,900 tons. The approximately 9,000 tons decrease across the silicon based portfolio is primarily attributable to ferrosilicon and foundry to a lesser extent. We missed approximately 5,000 tons due to operational and logistical issues. In South Africa, there were shipments delays. There were results of congestion at the Port of Durban in South Africa, and also and logistical challenges in procuring large container basis. Additional, at our Bridgeport Alabama facility, we had to plan downtime for maintenance plus unexpected operational issues, which kept the plant down for severe extra days. Similarly, at our eMalahleni facility in South Africa and other planned maintenance outage took longer back there. In addition to the operational disturbances, we had approximately 2,000 tons that customers asked to delay into the fourth quarter as there is also some seasonal slowdown during this summer period. EBITDA for our silicon based alloys business was positively impacted by prices, but offset by volumes and higher cost. Resulting adjusted EBITDA was 8.4 million in Q3, down from 11.4 millions in Q2. In terms of that 10.5 million cost impact approximately 6 million is attributable to higher energy cost in Spain. Cost inflation in coal and charcoal resulting 1 million in wire cost and also impacted during the performance, which another 1 billion. And lastly, with the operation of disruptions at Bridgeport eMalahleni, we had the fixed cost assumption impacting the results by $2.5 million. Looking ahead to Q4, we feel despite of our portfolio is personally strong recovery relative to Q3, first, their volumes which customers pushed from Q3 to Q4 as well as the incremental volume contribution from the furnaces which had operational issues. On the pricing side, keeping in mind that ferrosilicon is generally is either one or three months pricing index. Ferrosilicon index in U.S. and Europe are up 40% and 55% respectively since the end of Q3. Overall, steel demands remains robust and we are just getting back to pre-COVID level. Keep in mind that the steel produced is managed their order books is very fluid. So why might be some slow down from time to time therefore the metal has not changed. In fact, many of our larger customers have been looking at multiyear deals in light of the current environment. With regard to calcium silicon, the trade case in Europe was favorable concluded in early October. There are now antidumping duties against Chinese producers up to 50.6%. At the moment, these trade protections are in place until April 2020. With regard to ferrosilicon taking into account the size of our contracts, which we anticipate to close soon, 55% of our expected for production for 2022 would be contracted. On this portion to about 20% our contracted volume at fixed pricing. Next slide, overall, manganese based alloys was the strongest part of our portfolio in the third quarter. Despite the strong increasing EBITDA this quarter, this segment was impacted by the same seasonal slowdown in steel demand as well as curtailments in Spain due to energy costs. Volumes increased 12% to approximately 76,500 tons, with the increment production from furnace restart at Mo I Rana in Norway. In an effort to optimize our energy cost, we shifted from our contracted tons from Spain to Norway during this quarter. Additionally, we were able to capitalize opportunities as competitors faced operational and logistical challenges on their end mainly in Southeast Asia. During the quarter, the average selling price increased by 11% to approximately $1,575 per metric ton on advantage basis. EBITDA from this business was up over 40% contributing 22.5 million in Q3 versus 15.7 million in the second quarter. The increase in pricing more than offset the cost pressure from energy and iron ore costs. We've realized further improvement to our spread, which is the delta between the alloy and steel price. We expect the price to continue into the fourth quarter as the index for silicon ferrous manganese, have increased. The end market demand for manganese and alloys remain solid, particularly on the construction and machinery end-market. Given the near-term demand outlook for Q4, we decided to replenish and build some inventories in manganese and alloys during Q3. For the manganese business, we are targeting to have approximately 60% of our volumes contracted, as we finalize the current arm of negotiation for 2022. Today, the majority of the competitive volume and index based pricing. I would now like to turn the call over to Beatriz to review the financial results in more details. Beatriz?
Beatriz García-Cos: Thank you, Marco. Beginning with Slide 11, I'll touch on a few specific line items on our income statement. Sales of $429 million during Q3 were 3% higher than the $418 million of sales in the prior quarter, due to higher pricing across our portfolio of products. During the product category review, Marco highlighted several underlying things related to energy and inflationary pressures impacting the quarterly results. These factors contribute to higher cost of sales adversely impacting our gross margin during the quarter to 31% in Q3, down from 36% in the prior quarter. The decrease in other operating income and other operating expense this quarter is primarily attributable to the accounting treatment related to the CO2 emissions rise. In Q2, we had the impact of the mark-to-market adjustment for the CO2 rights we were repurchasing in the open market. As a reminder, these repurchases conclude in Q2. In Q3, we had a decrease in the mark-to-market adjustments by $10 million related to the 2021 allocation for CO2 credits. These credits are booked at a fair value at a grant date with zero net impact in our P&L. During the quarter, we are approved $3.2 million for the CO2 volume which we would need to put chase to address our deficit for 2021, with the cash impact in 2022. With regards sub-cost, the Q3 results were impacted by $10 million for the partial release of the restructuring provision based on the latest discussions in Europe. Reported EBITDA was $35.2 million in Q3, a 10% increase versus the $31.9 million in Q2. When accounting for the one-time costs relating to the implementation of the strategic plan, the adjusted EBITDA was $37.6 million. And lastly, with the completion of the refinancing during the quarter, there was several one timing items that we account for relating to the senior notes. Since the exchange of the senior notes is considered that extinguishment from an accounting perspective, our one-off financial expense of $90.8 million was booked in Q3. This includes 31.7 million in advisory fees, 40.6 million which was a value for the equity even to the bond holders, 11 million in underwriting fee pacing of stock and 7.5 million of accounting related charges. The net impact of this is reflected in this quarter P&L. Including these one-time expenses results in a net loss of $97.6 million for the quarter. Slide 12 please. Adjusted EBITDA increased 10.3% over the prior quarter, as a result of higher prices, partially offset by lower volumes and higher costs. The $22.7 million impact from costs is attributable to several factors primarily energy. During the quarter, we saw a significant ramp up in energy prices, particular in Spain. This course consists of factors that are one time in nature, as well as that will linger in coming quarters. The commodity impact of energy cost in Q3 was $19 million of which $15 million was attributable the Spain. As Marco commented earlier, we anticipate energy prices in the Spain to be a lingering headwind in Q4. The key is to mitigate this risk with some combination of PPNA as cost plus operations with customers. We are pursuing both alternatives. The energy business has been impacted by inflationary pressures on selected inputs such as coal, charcoals, and costs. Collectively, this input cost increased accounts for $2.6 million or the cost impact. At the moment, we are seeking ways to mitigate the best going forward. For example, in the case of coal, we are evaluating the ramp up of our coal mine in the United States for potential export to our European facilities. And lastly, we have an adverse impact of $4.5 million, resulting from lower fixed cost absorption. This is the collective result of the impact of operational maintenance downturn both planned and unplanned. Next slide please. Turning now to Slide 13, I will reveal our balance sheet in greater detail. At the end of the quarter, our cash and restricted cash balance was $95 million down from $106 million in Q2. Total available cash decreased to $89 million in Q3 from 100 million in Q2. The consumption of cash during the quarter is primarily attributable to an increase of 62 million in working capital this is driven primarily by a 44.7 million increase in inventories given low level of the stock through the quarter at all four quarter outlook. We decide to invest in replenishing our stock level. The growth rate at quarter end was $499 million up from $464 million. During the quarter, we raced the remaining 30 millions of the new super senior secured financing. Additionally, we have the impact of the interest accrual of both the senior and super senior notes. Net debt increased to $404 million up to $658 million in Q2. Next slide please. Given the investment in working capital, our operating cash flows turned negative for the quarter resulting in a total cash flow of the approximately $34.7 million. Cash from investing activities was $8.2 million and is primarily attributable to the capital expenditures during the quarter. And finally cash flow from investing and some financing was positive $32.0 million due to the incremental proceeds from the equity and super senior debt additions. Overall, our net cash flow during the quarter was negative 10.9 million with free cash flow of negative 42.9 million. Next slide please. On October 6, 2021, we entered into an Equity Distribution Agreement, enabling the Company to issue up to $100 million through at-the-aftermarket offering it total through June 2024. For the sake of clarity, we are not obliged to issue any share under this program should we elect not to. As we just reviewed our available cash procedures at the end of Q3 was at the low end of the cash required to run our operations. If the business is expected to generate cash in the near-term, we would not typically raise cash as before. However, in the intermediate term, there are a number of positive developments, which could potentially yield the need for cash. On the other hand, we have attractive growth opportunities in our investing and working capital as the restart of Selma. As such, we need to ensure sufficient capital for these types of opportunities, while maintaining a cash base level to run the business. And on the other hand, we have some lingering uncertainties, such as the power costs in Spain, which has been consuming significant cash the past few quarters. I will rational for putting this program in place is to quickly asset capital if and when is absolutely needed. Since the inception of the program, we have all the issue of total 186,000 shares for the net proceeds of approximately $1.4 million. Our intent was to raise approximately $10 million. However, we were able to free up and generate cash through our operations through a few successful measures to satisfy our needs. At this time, I would turn the call over to Marco to comment on our strategic plan.
Marco Levi: Thank you, Beatriz. Now turning to Slide 17 please. One of the broader market sentiment and pricing environment tends to be a major focus these days. I want to start the importance of our execution of the strategic plan. This is the foundation on which we would turn around the Company and position it to deliver strong result for the cycle. We're pushing forward on initiatives touching a very fact of the Company, challenging the norm, and seeking to adopt the best practices. This contract business as underpinning the importance of the changes we're driving with the Company. For our commercial excellence initiatives, we're better prepared to add constructive engagement with our customers. We continue to incorporate the new products into the pipeline enter our centralized procurement structure including global coordination and negotiation of our energy contracts. On the operational side, our efforts and a new culture excellence on the plant floor are driving improved efficiency and helping offset some inflationary pressure. We had an important development during the quarter in the footprint optimization. On Monday, we signed agreements with the French government relating to the restructuring process. Under the agreement, Ferroglobe at the support from the government and project to strengthen its competitiveness across the five manufacturing sites that would continue to operate in France, specifically, Ferroglobe facility would remain operational with a clear plan to modernize the facilities and improve its cost position. This facility would also benefit from a new commercial agreement with a long standing customer. As planning the initial project proposing March 2021, the Chateau-Feuillet facility would stop production and the custom silicone production capability would be transferred to next level. We are encouraged by this outcome as it would minimize the social impact, while ensuring a stronger operational footprint in France. Overall, during the third quarter, we have achieved 58% of our cost savings targets for 2021. And lastly, on working capital, we have achieved our third cash lease of $49 million. Please keep in mind that this initiative is tracking on a rolling 12 months basis to adjust for seasonal swings. Furthermore, we're tracking working capital as a percentage of sales to access the relative improvement as the business ramps up. Given the development in France, the scope of our footprint optimization works payment exchange. Despite these change, we remained confident to deliver $55 million of EBITDA target for 2021. At this time, I will ask the operator to please open the line for questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. And your first question is from the line of David Rosen from Rubric Capital. Please go ahead.
David Rosen: Hey, guys. Can I have a few questions? So, the first one is on this ATM usage. So, you mentioned that you were looking to raise $10 million, but you've actually found that capital. So do you intend on accessing this ATM?
Marco Levi: Thank you for the question, David. Let me give you a little bit of color around that. First of all, the Board and the management team of Ferroglobe put this equity program in places as a flexible option and to be prudent in life of the difficult stretch for the Company as recently we've gone from the financial side. For sure, we did not intend to use this tool right away, but during the quarter, we had a number of positive developments, following discussions with our customers, who were looking for product in Q4 and in 2022, and I would say, even after 2022. As a result, we decided to invest in working capital. We restarted one furnace in Mo I Rana for manganese alloy. We decided to restart some in U.S. which clearly require cash, and we have restarted the furnace that we had shut down in Sabón like I mentioned during my speech, on the back of the new profitable contract. So, we're convinced that we have to capitalize on this opportunity and found the working capital to restart Selma. And we wanted to make sure that, we had a comfortable level of cash to run our company. Our intent, when we made the decision David was to raise about $10 million, but we were successful in freeing up cash in the business through pass-through of cost to customers and by some collaboration always these customers to share some of the startup up costs. As a result of these measures, we have minimized the ATM impact to 1.4 million. Just to be clear and answer your question at the moment, we do not intend to use the equity program of ATM given our current view on the cash flows of the Company.
David Rosen: Okay, well, I'm going to make a statement. So, we are very big believers in the Company and we actually are very big believers in the strategic change and the fundamental change in the markets that you operate in. And we have -- we're big investors in the Company, and we'd be happy to provide capital when you need it, $10 million you just give us a call, and we'll provide the capital. So, you should have no fear of not having access. And I agree with you, you should not be using this ATM. So next time you need 10 million bucks, give me a call.
Marco Levi: I appreciate that. The problem is that we are in a situation where we couldn't wait, and we decided to act fast, but what do you say, I hear you and I highly appreciate it. Thank you.
David Rosen: Okay. The second thing I want to talk through Spain and some of the mitigation. And so, can you just walk us through the mitigating items? I know you now have a contract with Sabón, which sounds like it's a very -- it sounds like a good contract for the incremental furnace. Can you walk us through kind of that process to actually get to get pass-throughs and kind of where you think you're go from maybe this quarter to where you should be in the first quarter of '22?
Marco Levi: Yes, let me take it from this point. Energy in Spain has gone up much quicker than expected and it does reach unprecedented levels, right? Prices have been going up far above €200 per megawatt, €300 megawatt, today to €225 per megawatt. This means four or five times the price level of the first quarter of this year. And this year, we had quite a lot of contracts committed with customers where we could have most surprised. And as a consequence, we did two things. One, we try to reallocate production outside those things to supply the same customers. Two, we enter the negotiation with customers to implement some price temporary others in order to share the thing with this customer. And in some cases, we have been successful in other cases we have not. But for sure, we have fostered these uncertainties for the new agreements in 2022. So, overall, in Q4 based on the elements that I have, the assets in Spain are going to be profitable, while in Q3 that will not profitable. So our measures at least have corrected the profitability of the Spanish footprint.
David Rosen: You said you're going to be profitable in Q4 in Spain versus you said not profitable in Q4.
Marco Levi: Yes, profitable, slightly profitable. I mean, I'm not but it's compared to the negative result of Q3 is I think significant change.
David Rosen: How much and what kind of losses did you generate in Spain in the third quarter?
Marco Levi: Well, we not prepared to share this number.
David Rosen: So, it was a meaningful number,
Marco Levi: It is a meaningful number and the key correcting factor for Q4 is the new contract with the new customers in Sabón for silicon. This is the key factor because energy impacts much more silicon production than the alloys production. I was mentioning just to stress for 2022. First, we are exploring the opportunities to enter in long-term contracts for energy supply. Second, we are discussing with customers within the new contract negotiations about energy cost pass-through or at least having some hardship clauses in our contract that basically allow us to get back to the negotiating table to the customer and decide we continue to supply and negotiate that conditions or pull out of a disagreement.
David Rosen: So, when you talk -- and that is going to be my third question. So when you talk about protections, the protections will be around your input costs, but it is also just -- would you think about putting floors into your contracts? Like, maybe you can talk about -- when in a strong marketplace where there is less Chinese competition, I presume, there should be some amount of flexibility that should benefit you. And I'm just wondering, kind of what other things you're doing.
Marco Levi: You are right, David. Customers are looking mainly for supply security particularly in silicon. As a consequence, we have -- we are negotiating different contract firms where we move away from fixed yearly pricing and we link the price more to the index. At the same time, we make sure that we are protected in case the market turned, which is something that we don't foresee in the next few months, but due to the cyclicality lower basement one day when I go back to certain levels. So we are using these favorable moment of demand to change our compact structure. And just to give you an idea, while they see here, we had about 70% of our silicon volumes at the fixed yearly price, next year, the amount of volume at fixed price as different level by the way will be only 25% to 50%.
Operator: Your next question is from the line of Brian DiRubbio from Baird. Please go ahead.
Brian DiRubbio: Good afternoon, Marco and Beatriz. Just help me understand with all the work that you're doing with Selma, what your CapEx budget would be is looking like for 2022?
Marco Levi: What we are doing? Sorry, if I was not clear with my coughing. We start Selma in December. By the end of December, we start the first furnace and we start the second furnace by March 2022. The cost to restart Selma when you consider CapEx and working capital is around $50 million.
Brian DiRubbio: Okay. And that's for both furnaces starting back up, correct?
Marco Levi: For both furnaces, yes.
Brian DiRubbio: Okay. And just for total CapEx spending in 2022, have you put a budget on the round that yet?
Marco Levi: Yes, we are discussing that. Like I mentioned in my speech, we need more CapEx than the amount of CapEx that we have spent for sure in the last two years. I don't have a fix figure in mind what we might see. But I think that is not going to be different from what we mentioned in the past. So, we need around $75 million per year of CapEx.
Brian DiRubbio: Understood. You mentioned in your scripted remarks that you are looking to enter into longer-term contracts with customers. Do you anticipate those to be more index based versus fixed price?
Marco Levi: Definitely. Well, the key changes for silicon metal because for alloys we have already index priced in our contract. And then depending on the products, prices get adjusted either monthly or quarterly or every two months. But in silicon, we have moved more toward market prices, yes. And there is pricing interest from a lot of customers to move to two to three year's contract.
Brian DiRubbio: Okay, great. I guess just the final question is that, as I think about your global footprint, how is the current freight and logistics situation impacting your ability to move production from one plant into a different market, that becoming more challenging? And are you getting paid for that?
Marco Levi: You ask a very good question. And this has been -- this question has been keeping us very busy in the first quarter. I mentioned to you the fact that, we slow down production in Spain. We've slowed down production in Spain at all our facilities in quarter three, whereas this quarter two we have ramped up our assets in France and in Norway. By the way, we have six plants in France, not five like I said in this speech, plus one where we have production. And at the end, for us, the energy costs rise in Spain is being the critical determining factor to decide on relocating volumes to the other facilities in France and Norway, and we have successfully in it to do that? When you look at South Africa, we mentioned the difficulties that we had in supply chain and moving our materials that had negative impact on our ferroalloy sales and was also a big gap on our sales in Europe and in Asia too. In the U.S., the situation is much more -- in the America, I would say the situation is much more stable for us from these points of view.
Brian DiRubbio: Got it, I appreciate the additional color. Thank you.
Operator: And your next question is from . Please go ahead.
Unidentified Analyst: Hi. Thanks for taking the question. Marco, can you give us a breakdown of the silicon metal production by region in the third quarter? Like how much of production is from Spain and how much is from say North America?
Macro Levi: Yes, I can give you. Let me look for the numbers. Give me some time. I have it somewhere. Thank you. So if you look at the -- are you asking me for capacity or production?
Unidentified Analyst: The production silicon metal.
Macro Levi: Yes. Silicon metal stain was about 10% of total volume.
Unidentified Analyst: Okay, just 10%. So if the Spanish power price given what just happened with Nordstrom with our Algeria pipeline, et cetera, et cetera, if the Spanish power price stays at this elevated levels for 2022, when you run top the Selma, would you be willing to shut the production down in Spain? Or do you have to maintain certain level of activity there?
Macro Levi: Well, I don't think that Selma is a good option to supply our customer mix in Europe. Selma is pretty much going to be pretty much devoted to satisfy the additional demand in the U.S. Clearly, we are watching the situation by the day because the energy pricing is being extremely fluid. The outlook that we have about energies that is the energy pricing in Spain would be on the high side, let's say, about of €200 per megawatt in the rest of Q4 and Q1, but then the futures shows energy price around €110, €120 per megawatt in Spain. And at this level, the business that's we're booked for next year is covering us. The other option that we can always exploit particularly for silicon metal is to repeat what I have done already in quarter three, slow down production of silicon in Sabón and produce more other silicon plants that we have. The situation is less stressed for alloys but due to our footprint in Dunkirk and Mo I Rana represented a very good alternative to the asset in Spain. So, we evaluate this personally three times per week, my team every day. And we need to be pretty flexible in switching our production sites.
Unidentified Analyst: And then talk about the 2022 contracting and the 25% to 35% fixed volume, is that a -- did you guys strategically take that level? Or is that because the spot market is so high that there's maybe customers are willing to accept this kind of a spot price? And therefore everybody's just like let's go index?
Macro Levi: The volume at fixed price has to be either at pretty high price level. I mean, let's say index price or today or should be limited in time. We have a lot of -- we're going to have a lot of fixed prices in silicone just for the first quarter. My key message is that we are -- again, we move way from yearly fixed price.
Unidentified Analyst: Right, I'm looking at on Bloomberg €6,300 for silicon and a $1.95 per pound for the U.S. price. If you were to go to customers and sign a fixed price contract, would you be able to do at a spot level or do you have to give a backward dated discount?
Macro Levi: Well, the spot level is an indication then it depends on the purchasing power of the customer and it depends on our all strategic this customer use for us a lot of considerations, but the index become a solid reference in a period of a lack of supply of silicon. And I've just add, we also find that the Bloomberg index isn't necessarily as accurate as what the industry uses. So just as a reference, we get the question a lot, and it's a good indication, the relative movement, but it's certainly not as precise as your.
Unidentified Analyst: Is that index higher or lower than the actual?
Macro Levi: If I look at the numbers that you have mentioned is lower.
Unidentified Analyst: It's lower. Okay, got you. And on this power, could you guys try to manage the power price? What is the threshold for you to say, all right, customer you need to help us absorb this power price, is that the €120 Spanish power price?
Macro Levi: Well, there are too many moving parts here. It depends on the price that we can get from the customer. And so, the evaluation is running on the specific customer project combination. And then, in a broader way, we look at the customer makes by furnace and then we make our call. But it's a moving target because if you refer to Spain, there are big swings within the same week on energy prize and same is happening on the margin price of silicon.
Unidentified Analyst: Right, right. Yes, so, final question on silicon. So, are you guys making progress in terms of improving product mix to sell more into the higher end of the solar industry or perhaps even with Tesla making the use of 4,680 batteries to sell into the battery market?
Macro Levi: Well, on the -- as you know the polysilicon business in the long time may go to Asia. On the short-term due to the reduced availability of silicon from China, we have seen some opportunities, interesting opportunities in Asia to supply polysilicon players. The other trend is that particularly in the U.S. is a lot of pressure to bring back some polysilicon for solar production in the United States, outside of China. This is the plan that we are watching. And I'm talking about batteries we are working on this project. I do not foresee significant sales before two years from now.
Unidentified Analyst: Okay, got you. Well, thank you very much.
Beatriz García-Cos: Yes, again this is Beatriz. Let me make just a remark on the point regarding Spain. So, we expect the closure to breakeven in Q4 because of the new contract that Macro mentioned. But I don't want to give the impression that there is a drastic change overnight and return to profitability in Spain providing the current electricity cycle to caveat to that point.
Operator: There are no further questions at this time. Please continue.
Marco Levi: Thank you for joining today's third quarter call. As you will see shortly, we are hosting an Investor Day in New York on November 30. Sorry, given the growing interest amongst the investment community and others the quarter around the Ferroglobe story, we wanted to conduct this event to provide a more comprehensive overview of the Company. The changes were driving to turn this company around our views on the market amongst other important topics. Investors who are new to the Ferroglobe story will particularly benefit from the overview, but I encourage everyone, who can come out two hours to join us on November 30. Please just keep an eye out for a press release and register for the event in advance. Thank you again for joining today and have a great day. Thank you.
Operator: That concludes the presentation for today. Thank you for participating. You may disconnect.
