Eramet : An attractive story

Monday 20 March 2017 - - - - - Bonds - Eramet 4.50% 06/11/20 € 525m - Eramet 5.29% 22/04/2026 € 50 m - Eramet 5.10% 28/05/2026 € 50 m - ODIRNAN 4.00% perpetual € 100m - Share data - Market cap.: € 1.1bn - Price at 17/03/2017: € 44.1 - Share price 1-year perf.: +83% - - Ownership structure (at 31/12/2016) - - The Duval family* - 37.05% - Agence des Participations de l'Etat - 25.65% - STCPI** - 4.03% - BRGM*** - 1.34% - Other - 31.93% - - * SORAME+CEIR - ** Société Territoriale Calédonienne de Participation Industrielle - *** Bureau de Recherches Géologiques Minières - Eramet has been under the majority control of a declared concert party of shareholders - (shareholder agreement renewed on 31/12/16 and expires on 31/12/17), comprising: - 1/ a concert sub-group comprising SORAME and CEIR, controlled by the Duval family - 2/ l’Agence des participations de l’Etat. - - / - 28/04/2017: Q1 2017 sales - - - - In our latest credit report ('Patience is a Virtue, 07/04/16), we recommended to buy the bonds and hold them to maturity based on their yield (12.1%). Despite the expected weakness in the H1 2016 results given the depressed environment on the nickel and manganese market, we were confident in the support of the French government which is a 25.7% shareholder in the group, and management’s ability to face the situation (strict financial policy, cost reduction, asset disposals, etc.). The situation has considerably improved today: the base metal markets have recovered, the loss-making SLN has secured financing for its activities for the next two years and Eramet has negotiated a two-year extension of its syndicated loan, thus strengthening liquidity. - Factoring in these element, the 4.50% 06/11/20 bonds posted an impressive rally, currently trading above par (vs. a 50% low in January 2016), with a 4.1% yield at maturity, which has become less attractive compared to other names with similar rating. This has prompted us to update our Buy & Hold recommendation to Neutral, although we are still confident in the group's ability to repay the 2020 paper. - - >Support factors - ( Eramet is a leading world player in the mining industry (mineral extraction and refining). The group has world class ore reserves, and strong technological skillset in its lines of businesses. ( Strong and longstanding presence (for 40 years) of the French state (second largest shareholder behind the Duval family, with a 25.7% interest through l’Agence des Participations de l’Etat) in Eramet. Its support was illustrated through a loan of € 200m granted in May 2016 to the loss-making Caledonian subsidiary Société Le Nickel and then, in September 2016, through the subscription to the placement of a € 100m ODIRNAN issued by Eramet. Finally, the state is planning to give a guarantee of € 320m for the construction of a new power plant in New Caledonia. This project will be run by a public entity and will not weigh on Eramet’s balance sheet. ( To improve its profitability, the group launched a restructuring programme targeting annual cost-savings of € 360m until the end of the scheduled period (2014-17) compared with 2013. In 2016, the group beat its savings target (€ 129m in 2016 and a cumulative € 306m since 2014) and revised up the target to a cumulated € 400m by the end of 2017. ( Management adjusted its financial strategy to the depressed base metals market (reduction in capex to strictly maintenance/security and dividend cuts) to limit cash burn. In 2016, it lowered its manganese ore production and halted the production of nickel mattes (refocusing on the more profitable ferronickel). In recent months, the group sold three assets for a total amount of € 205m (the majority of its asset disposal programme) ( Liquidity was bolstered (extending the syndicated loan’s maturity by two years on 16/01/2017). ( Despite an overall negative price effect (strong increase in manganese prices but lower nickel prices on average in 2016), EBITDA rebounded strongly in 2016 (€ 375m including joint ventures vs. € 92m in 2015), on the back of productivity and savings efforts. This allowed for an improvement in credit metrics and, in particular, the adjusted net debt/EBITDA ratio which was reduced to 2.7x at end-2016 (vs. 9.9x at end-2015). Points to watch - ( Strong volatility in nickel and manganese prices that have a direct impact on EBITDA generation. Based on an exchange rate of 1.1 USD/EUR, a 1 USD/lb change in the LME nickel price results in a variation of around € 110m in Eramet's annual operating profit. Similarly, a 1 USD/dmtu change in the manganese ore price (CRU CIF China 44%) has an impact of around € 95m. ( Negative free cash flow of -€ 114m in 2016 (vs. -€ 262m in 2015).