KME - a shelf full of ambition.
All,
Please find our unchanged analysis here.
KME (Aengus) – Having completed the purchase of flat-rolled products from Aurubis. KME continues to accumulate copper assets. Does KME see a shift in business focus facilitating it's staying in the game? KME has €110m of bonds and a fully drawn €320m borrowing base facility to refinance in the next 6 months, how will it get leverage over bondholders to roll their exposure or additional security to offer the banks? We look at the changing nature of the business and the balance sheet moves for evidence that the risk is moving. However, as there is only a stub of bonds left outstanding, the ability to participate in the name is very limited for now.
KME cannot finance its working capital:
- KME has persistently sacrificed volumes due to funding pressures and little has changed in the last three months. The company depends on clients paying earlier to facilitate recycling cash into inventory.
- Our analysis of the recently completed Auribis acquisition shows KME paying €75m for ~€77m of assets (if we ignore provisions in Aurubis’ books). The fixed assets in the business were only €10m. Most of the rest comprised €63m of working capital financing repaid by KME. Given that KME's borrowing base facility is already fully drawn, and its banks have refused to roll beyond November, the finance must be from some form of vendor financing from Aurubis.
Tolling would shift risk, but can it come quick enough?
- Tolling would shift the inventory financing risk onto the end customer but would also require a shift in customer capitalization. KME claims that >50% of the copper business is already via tolling arrangements (up from 40%). However, as KME is still fully consolidating these sales we are not certain if KME is acting as an agent only and if there are truly tolling agreements.
- Vanilla copper products will allow KME to increase the shift to tolling and management would expect to see significant reductions in working capital if risk shifts to clients.
Is the copper price going to collapse?
- The short answer is no. But their inexorable rise above $10k per ton has stopped.
- Copper prices have eased since the Ukrainian conflict began falling from >$9,500pt to a low of $7,000, but the last month has seen the levels creep back up to near $8,000k. KME may have been able to finance additional volumes in Q2, and Q3 should also be a little easier.
Investment Considerations:
- We closed our short for 5% NAV at the end of February when the partial bond redemption was announced.
- We are still sceptical about management’s ability to move to an all-tolling model. More early repayment of receivables by concerned customers may support management but for how long?
-KME will have had some relief in the last quarter as the copper price fell but that price is rising again.
- The bank lines and the bond stub need refinancing in the next 6 months leaving KME potentially stuck between a rock and a hard place. We are not convinced the banks will lend to pay out bondholders.
- For now, at least until the launch of a refinancing/restructuring we will be shelving the name. The €110m stub outstanding is simply too small. However, if clients would rather we continue our coverage, please reach out.
As always, I look forward to discussing this with you.
Regards
Aengus
KME closed the acquisition of Zutphen from Aurubis
E: amcmahon@sarria.co.uk
T: +44 203 744 7055