424B3
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-209595

PROSPECTUS

106,810,523 Ordinary Shares

 

LOGO

Ferroglobe PLC

 

 

This prospectus relates to the resale of up to 106,810,523 of our ordinary shares, nominal value $7.50 per share (the “Ordinary Shares”), which may be offered for sale from time to time by the selling shareholders named in this prospectus. The Ordinary Shares were issued by us to the selling shareholders in connection with a business combination (the “Business Combination”) of Globe Specialty Metals, Inc. (“Globe”) with Grupo FerroAtlántica, S.A.U. (“FerroAtlántica”), a wholly owned subsidiary of Grupo Villar Mir, S.A.U. (“Grupo VM”). We are a public limited company incorporated under the laws of England (originally incorporated as VeloNewco Limited, a private limited company), and are the holding company for the combined businesses of Globe and FerroAtlántica, as more fully described in this prospectus.

The selling shareholders may from time to time sell, transfer or otherwise dispose of any or all of the Ordinary Shares in a number of different ways and at varying prices. See “Plan of Distribution” beginning on page 180 of this prospectus for more information.

The Ordinary Shares, nominal value $7.50 per share, are currently traded on the NASDAQ Global Select Market (the “NASDAQ”) under the symbol “GSM”. On March 31, 2016, the closing price for the Ordinary Shares on the NASDAQ was $8.81 per Ordinary Share.

We may amend or supplement this prospectus from time to time by filing amendments or supplements as required.

You should read this entire prospectus and any amendments or supplements carefully before you make your investment decision.

 

 

Investing in our Ordinary Shares involves risks. See “Risk Factors” beginning on page 9 of this prospectus.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Prospectus dated March 31, 2016.


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     5   

RISK FACTORS

     9   

USE OF PROCEEDS

     32   

DIVIDEND POLICY

     33   

MARKET PRICE OF ORDINARY SHARES

     34   

CAPITALIZATION

     36   

CURRENCY AND EXCHANGE RATES

     37   

SELECTED HISTORICAL FINANCIAL INFORMATION OF FERROGLOBE

     38   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF GLOBE

     40   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF FERROATLÁNTICA

     43   

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION OF FERROGLOBE

     45   

GLOBE MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     47   

FERROATLÁNTICA MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     71   

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF FERROGLOBE

     102   

BUSINESS

     126   

DIRECTORS, MANAGEMENT AND CORPORATE GOVERNANCE

     164   

PRINCIPAL SHAREHOLDERS

     171   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     173   

SELLING SHAREHOLDERS

     178   

PLAN OF DISTRIBUTION

     180   

DESCRIPTION OF SHARE CAPITAL

     182   

SHARES ELIGIBLE FOR FUTURE SALE

     201   

TAX CONSIDERATIONS

     203   

EXPENSES RELATED TO THE OFFERING

     209   

SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES

     210   

LEGAL MATTERS

     212   

EXPERTS

     213   

AVAILABLE INFORMATION

     214   

INDEX TO FINANCIAL STATEMENTS OF FERROGLOBE PLC

     FIN-1   

 

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You should rely only on the information contained in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by or on our behalf. Neither we, nor the selling shareholders, have authorized any other person to provide you with different or additional information. Neither we, nor the selling shareholders, take responsibility for, nor can we provide assurance as to the reliability of, any other information that others may provide. The selling shareholders are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus or such other date stated in this prospectus, and our business, financial condition, results of operations and/or prospects may have changed since those dates.

Except as otherwise set forth in this prospectus, neither we nor the selling shareholders have taken any action to permit a public offering of these securities outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of these securities and the distribution of this prospectus outside the United States.

TERMS USED IN THIS PROSPECTUS

Unless the context otherwise requires, in this prospectus, the term(s) (1) “we,” “us,” “our,” “Company,” “Ferroglobe,” “Ferroglobe group,” and “our business” refer to Ferroglobe PLC (formerly known as VeloNewco Limited), Globe Specialty Metals, Inc. (“Globe”) and its consolidated subsidiaries and Grupo FerroAtlántica, S.A.U. (“FerroAtlántica”) and its consolidated subsidiaries, (2) “Globe” refers solely to Globe Specialty Metals, Inc. and its consolidated subsidiaries and (3) “FerroAtlántica” or the “FerroAtlántica Group” refers solely to FerroAtlántica and its consolidated subsidiaries. All references in this prospectus to the “Predecessor” refer to FerroAtlántica for all periods prior to the business combination of Globe and FerroAtlántica as our wholly owned subsidiaries, on December 23, 2015 (“Business Combination”) and all references to the “Successor” refer to us for all periods after the Business Combination.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this prospectus, references to “Euro” and “€” are to the single currency adopted by participating member states of the European Union relating to Economic and Monetary Union, references to “$”, “US$” and “U.S. Dollars” are to the lawful currency of the United States of America, and references to “Pound Sterling” and “£” are to the lawful currency of the United Kingdom.

Historical Financial Information

Following the Business Combination, FerroAtlántica is considered to be our Predecessor under applicable SEC rules and regulations.

The historical financial information presented in this prospectus includes:

 

    audited consolidated financial statements of FerroAtlántica as of and for the years ended December 31, 2014, December 31, 2013 and December 31, 2012;

 

    unaudited condensed consolidated interim financial statements of FerroAtlántica as of and for the six months ended June 30, 2015 and June 30, 2014;

 

    audited consolidated financial statements of Globe as of and for the years ended June 30, 2015 and June 30, 2014 and for the year ended June 30, 2013;

 

    unaudited condensed consolidated interim financial statements of Globe as of and for the three months ended September 30, 2015 and for the three months ended September 30, 2014;

 

    audited statement of financial position of Ferroglobe as of February 5, 2015 and unaudited interim statement of financial position of Ferroglobe as of June 30, 2015; and

 

    unaudited pro forma condensed combined financial statements of the Company as of and for the six months ended June 30, 2015 and for the year ended December 31, 2014.

The historical financial information for the Company and FerroAtlántica have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards

 

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Board (“IASB”) which can differ in certain significant respects from the requirements of accounting principles generally accepted in the United States of America (“U.S. GAAP”). The historical financial information for Globe has been prepared in accordance with U.S. GAAP.

Unless otherwise noted, all financial information for the Company, FerroAtlántica and Globe provided in this prospectus is denominated in United States Dollars.

Unaudited Pro Forma Financial Information

Following the Business Combination, which was consummated on December 23, 2015, FerroAtlántica is considered to be our Predecessor under applicable SEC rules and regulations. As a result, we have included in this prospectus unaudited pro forma financial information based on the historical financial statements of Globe and FerroAtlántica, combined and adjusted to give effect to the Business Combination as of certain dates as more fully described in section, “Unaudited Pro Forma Condensed Combined Financial Statements of Ferroglobe” beginning on page 102 of this prospectus. The unaudited pro forma combined consolidated financial information has been prepared in accordance with the basis of preparation described in “—Notes to Unaudited Pro Forma Condensed Combined Financial Information” beginning on page 107 of this prospectus.

INDUSTRY AND MARKET DATA

We obtained the industry, market and competitive position data throughout this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties, including reports periodically published by a leading metals industry consultant and leading metals industry publications and information centers. Industry surveys and publications generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of the information contained in industry publications is not guaranteed. While we believe that each of these studies and publications is reliable, we have not independently verified market and industry data from third-party sources. While we believe our internal company research is reliable and the definitions of our market and industry are appropriate, neither this research nor these definitions have been verified by any independent source. Further, while we believe the market opportunity information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us. See “Cautionary Note Regarding Forward-Looking Statements.”

TRADEMARKS

We operate under a number of trademarks, including, among others, “Ferroglobe”, “Globe Specialty Metals,” “FerroAtlántica” and “Advancing Material Innovation” (applied for), all of which are registered (or applied for) under applicable intellectual property laws. This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements in this prospectus constitute forward-looking statements that do not directly or exclusively relate to historical facts. You should not place undue reliance on such statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict(s),” “will,” “expect(s),”

 

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“estimate(s),” “project(s),” “positioned,” “strategy,” “outlook” and similar expressions. All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results expressed in the statements. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking statements are the following:

 

    the ability to realize anticipated benefits of the Business Combination;

 

    the outcome of pending or potential litigation;

 

    the possibility that we may be unable to successfully integrate Globe’s and FerroAtlántica’s operations, and that such integration may be more difficult, time-consuming or costly than expected;

 

    operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers) may be greater than expected following the Business Combination;

 

    the retention of certain key employees may be difficult;

 

    the intense competition and expected increased competition in the future;

 

    the ability to adapt services to changes in technology or the marketplace;

 

    the ability to maintain and grow relationships with customers and clients;

 

    the historic cyclicality of the metals industry and the attendant swings in market price and demand;

 

    increases in energy costs and the effect on costs of production;

 

    disruptions in the supply of power;

 

    availability of raw materials or transportation;

 

    cost of raw material inputs and the ability to pass along those costs to customers;

 

    costs associated with labor disputes and stoppages;

 

    the ability to generate sufficient cash to service indebtedness;

 

    integration and development of prior and future acquisitions;

 

    our ability to effectively implement strategic initiatives and actions taken to increase sales growth;

 

    our ability to compete successfully;

 

    availability and cost of maintaining adequate levels of insurance;

 

    the ability to protect trade secrets or maintain their trademarks and other intellectual property;

 

    equipment failures, delays in deliveries or catastrophic loss at any of our manufacturing facilities;

 

    exchange rate fluctuation;

 

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    changes in laws protecting U.S., Canadian and European Union companies from unfair foreign competition or the measures currently in place or expected to be imposed under those laws;

 

    compliance with, potential liability under, and risks related to environmental, health and safety laws and regulations (and changes in such laws and regulations, including their enforcement or interpretation);

 

    risks from international operations, such as foreign exchange, tariff, tax, inflation, increased costs, political risks and their ability to expand in certain international markets;

 

    risks associated with metals manufacturing and smelting activities;

 

    the ability to manage price and operational risks including industrial accidents and natural disasters;

 

    the ability to acquire or renew permits and approvals;

 

    the potential loss due to immediate cancellations of service contracts;

 

    risks associated with potential unionization of employees or work stoppages that could adversely affect our operations;

 

    changes in tax laws (including under applicable tax treaties) and regulations or to the interpretation of such tax laws or regulations by the governmental authorities; and

 

    changes in general economic, business and political conditions, including changes in the financial markets.

These and other factors are more fully discussed in the “Risk Factors” section and elsewhere in this prospectus. These risks could cause actual results to differ materially from those implied by forward-looking statements in this prospectus.

You are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We do not undertake any obligation to update or revise any forward-looking statements after the date of this prospectus, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, you should keep in mind that any event described in a forward-looking statement made in this prospectus or elsewhere might not occur.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in the Ordinary Shares. Before making an investment decision, you should read this entire prospectus carefully, especially “Risk Factors” and the financial statements and related notes thereto, and the other documents to which this prospectus refers. Some of the statements in this prospectus constitute forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for more information.

Our Company

We are a global leader in the fast-growing silicon and specialty metals industry with an expanded geographical reach, building on Globe’s footprint in North America and FerroAtlántica’s footprint in Europe.

On December 23, 2015, we consummated the Business Combination. The Business Combination brought together two entrepreneurial companies, Globe and FerroAtlántica, each as our wholly owned subsidiaries. We expect to benefit from engineering and operational expertise to improve product flows, increase production efficiency, enhance technology and upgrade products quality, thereby enabling lower costs, faster delivery times and enhanced customer service as a result of the Business Combination.

Competitive Strengths and Strategy of Ferroglobe

Leading Producer of Silicon Metal and Silicon Alloys

We believe we are a leading global producer of silicon metal and silicon- and manganese-based alloy, serving key customers in the specialty chemical, aluminum, solar, steel and ductile iron foundry industries. We will leverage our diversified production base across five continents—Africa, Asia, Europe, North America and South America—and our ownership of high quality raw materials to deliver an enhanced product offering on a cost-efficient basis.

Improved, Vertically Integrated Business Model

As a result of our recent Business Combination, we benefit from an improved, vertically integrated business model, owning sources of hydro power generation, specialty coal, high-purity quartz, charcoal, woodchips, gravel and electrodes. We believe this will allow for lower costs and faster deliveries, reducing working capital, improving logistics and creating significant value for our customers and shareholders.

Unique Geographic Reach and Diversification

The operations of FerroAtlántica and Globe are highly complementary. Globe operates 11 production facilities and three mining sites in six countries, with almost 90% of revenues coming from North America. FerroAtlántica operates 20 facilities (15 production plants and five mining sites) in five countries and hydroelectric power assets in Spain and France, with a majority of its revenues coming from Europe. As a result of the Business Combination, we have a more diversified production base and business mix with a reduced portfolio concentration and a greater international reach.

Centralized Location at Global Center of Metals and Mining Industry

We are organized in the United Kingdom and headquartered in London, one of the global centers for the metals and specialized materials industry. London offers us a central location with easy access to our international factories, customers, suppliers and financial markets.

 



 

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Significant Expected Operating and Financial Synergies

As a result of the Business Combination, we expect to realize operating and financial synergies and synergies from more efficient working capital management. Operational synergies include benefits from value chain optimization, including centralized raw materials procurement, materials management and reduced freight costs from improved logistics, as well as savings through the introduction of technological and operational best practices that both business divisions will share and through elimination of overlapping selling, general and administrative expenses and overhead. Financial synergies include potential savings on interest expense in the combined company based on our balance sheet and credit profile, as well as the potential for a reduced effective tax rate through expansion of the international platform of the combined company’s non-U.S. subsidiaries, whether by internal growth or through strategic acquisitions, and through efficient financing structures.

Recent Developments

On December 23, 2015, we completed the Business Combination of Globe and FerroAtlántica, which resulted in each of Globe and FerroAtlántica becoming our wholly owned subsidiaries.

On December 24, 2015, our Ordinary Shares were approved for listing on The NASDAQ Global Market (“NASDAQ”) trading under the symbol “GSM.”

On February 3, 2016, our Board of Directors (“Board”) declared a quarterly dividend of $0.08 per Share payable on March 14, 2016 to shareholders of record at the close of business on February 26, 2016.

On February 10, 2016, in connection with the settlement of the shareholder suit brought on behalf of Globe’s former shareholders challenging the Business Combination, the Court of Chancery of the State of Delaware held a hearing on plaintiffs’ motion to approve the proposed settlement, including final certification of the settlement class, and plaintiffs’ application for an award of attorneys’ fees and expenses. The Court approved the settlement, including final certification of the settlement class, and awarded plaintiffs’ counsel $9,989,376.73 in attorneys’ fees and expenses. Following court approval of the settlement, Globe paid $32.5 million into a settlement fund to be held for the benefit of the settlement class. With respect to the attorneys’ fee and expense award, Globe’s Insurers paid eighty-five percent of the award and Globe paid the remaining fifteen percent of the award. Globe anticipates further discussions with the Insurers toward reaching a final agreement with the Insurers on reimbursement for a portion of the settlement fund and a final allocation of the attorneys’ fee and expense award.

Summary Risk Factors

Investing in the Ordinary Shares entails a high degree of risk as more fully described in the “Risk Factors” section of this prospectus. You should carefully consider such risks before deciding to invest in our Ordinary Shares. These risks include, among others:

 

    we may not realize the cost savings, synergies and other benefits that we expect to achieve from the Business Combination;

 

    decreases in the availability, or increase in the cost, of raw materials or transportation could materially increase our costs;

 

    significant portion of our sales to a limited number of customers, and the loss of those customers or a portion of those customers could have a materially adverse effect on our revenues and profits;

 

    intense competition in our industry and our ability to compete successfully;

 

    changes in laws protecting U.S., Canadian and European Union companies form unfair foreign competition or the measures currently in place or expected to be imposed under those laws;

 

    the risk of union disputes and work stoppages at our facilities, which could have a material adverse effect on our business;

 



 

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    Grupo VM has significant voting power with respect to corporate matters considered by our shareholders;

 

    our international operations and assets may be subject to various economic, social and governmental risks;

 

    the cost or liability associated with compliance with a significant number of laws and regulations in many jurisdictions;

 

    our exposure to foreign currency exchange risk;

 

    our actual financial position and results of operations may differ materially from the unaudited pro forma financial data included in this prospectus; and

 

    the more limited disclosure required of foreign private issuers.

Corporate and Other Information

Our operating headquarters and registered office are located at Legalinx Ltd, One Fetter Lane, London EC4A 1 BR, U.K. and our telephone number is +44-800-9758080. We also have corporate offices in Miami, Florida and Madrid, Spain. We are currently developing a new website at www.ferroglobe.com. We do not incorporate the information contained on, or accessible through, our website into this prospectus, and you should not consider it a part of this prospectus.

 



 

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Summary Terms of the Offering

The summary below describes the principal terms of this offering. The “Description of Share Capital” section of this prospectus contains a more detailed description of the Ordinary Shares.

 

Shares offered for Resale by Selling Shareholders    106,810,523 Ordinary Shares, of which 98,078,163 of such Ordinary Shares will result from the redesignation of 98,078,163 shares of Class A Ordinary Shares (as defined below) held by a selling shareholder upon their transfer, in accordance with the terms of our articles of association (“Articles”)
Shares outstanding    73,759,990 Ordinary Shares (as of March 29, 2016) and 98,078,163 Class A ordinary shares (as of March 29, 2016), nominal value $7.50 per share (“Class A Ordinary Shares,” and together with the Ordinary Shares, collectively, the “Shares”)
Use of Proceeds    The selling shareholders will receive all of the proceeds from the sale of any Ordinary Shares sold by them pursuant to this prospectus. We will not receive any proceeds from these sales. See “Use of Proceeds” in this prospectus.
Voting Rights    Holders of our Shares are entitled to one vote per Share at all shareholder meetings. See “Description of Share Capital.”
Dividend Policy    The Board intends to declare annual (or final) dividends and interim dividends, payable quarterly, to be reviewed each year, but it will depend upon many factors, including the amount of our distributable profits as noted below. On February 3, 2016, the Board declared a quarterly dividend of $0.08 per Share payable on March 14, 2016 to shareholders of record at the close of business on February 26, 2016. Under English law, our shareholders may declare by ordinary resolution that a final dividend be paid to shareholders in accordance with their respective rights and interests in us, provided that the directors have made a recommendation as to its amount. In addition, the directors may declare interim dividends if it appears to them that the profits available for distribution justify the payment. We may only pay dividends if (i) our accumulated realized profits, which have not been previously distributed or capitalized, exceed our accumulated realized losses, so far as such losses have not been previously written off in a reduction or reorganization of capital and (ii) the amount of our net assets is not less than the aggregate amount of our called-up share capital and undistributable reserves and if, and to the extent that, the distribution does not reduce the amount of those assets to less than that aggregate amount. Accordingly, each decision to pay dividends depends on the amount of our distributable profits, financial condition, results of operations, capital requirements, and other factors that our Board deems relevant.
Market for our Ordinary Shares    The Ordinary Shares are currently traded on the NASDAQ under the symbol “GSM”.
Risk Factors    Investing in our Ordinary Shares involves substantial risks. See “Risk Factors” for a description of certain of the risks you should consider before investing in our Ordinary Shares.

 



 

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RISK FACTORS

An investment in our Ordinary Shares carries a significant degree of risk. You should carefully consider the following risks and other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before you decide to purchase our Ordinary Shares. Additional risks and uncertainties of which we are not presently aware or that we currently deem immaterial could also affect our business operations and financial condition. If any of these risks actually occur, our business, financial condition, results of operations or prospects could be materially affected. As a result, the trading price of our Ordinary Shares could decline and you could lose part or all of your investment.

Risks Related to Our Business and Industry

Our operations depend on industries including the steel, aluminum, polysilicon and silicone industries, which in turn rely on several end-markets. A downturn in these industries or end-markets could adversely affect the steel, aluminum and silicone industries and, consequently, our business, results of operations and financial condition.

Because we primarily sell silicon metal, manganese-, polysilicon- and silicon-based alloys and other specialty metals we produce to manufacturers of steel, aluminum, polysilicon and silicones, our results are significantly affected by the economic trends in the steel, aluminum, polysilicon, silicone and solar photovoltaic industries. Primary end users of steel and aluminum that drive demand for steel and aluminum are construction companies, shipbuilders, electric appliance and car manufacturers, and companies operating in the rail and maritime industries. Primary end users of polysilicon and silicones that drive demand for polysilicon and silicones include the automotive, chemical, solar photovoltaic, pharmaceutical, construction and consumer products industries. Demand for steel, aluminum, polysilicon and silicones from these companies is driven primarily by GDP growth and is affected by global economic conditions. Fluctuations in steel and aluminum prices may occur due to sustained price shifts reflecting underlying global economic and geopolitical factors, changes in industry demand and supply balances, the substitution of one product for another in times of scarcity and changes in national tariffs. An easing of demand for steel and aluminum can quickly cause a substantial build-up of steel and aluminum stocks, resulting in a decline in demand for silicon metal, manganese-, polysilicon- and silicon-based alloys and other specialty metals. Polysilicon and silicone producers are subject to fluctuations in crude oil, platinum, methanol and natural gas prices, which could adversely affect their businesses. The solar photovoltaic industry has been growing steadily and strongly in the past years. However, changes in power regulations in different countries, fluctuations in the relative costs of different sources of energy, and supply-demand balances in the different parts of the value chain, among other factors, may significantly affect the growth prospects of the solar photovoltaic industry. A significant and prolonged downturn in the end markets for steel, aluminum, polysilicon, silicone and solar photovoltaic products, could adversely affect these industries, and, in turn, our business, results of operations and financial condition.

The metals industry, including silicon-based metals, is cyclical and has been subject in the past to swings in market price and demand which could lead to volatility in our revenues.

Our business has historically been subject to fluctuations in the price of our products and market demand for them, caused by general and regional economic cycles, raw material and energy price fluctuations, competition and other factors. Historically, our subsidiary, Globe Metallurgical, Inc., has been particularly affected by recessionary conditions in the end-markets for its products, such as automotive and construction. In April 2003, Globe Metallurgical, Inc. sought protection under Chapter 11 of the United States Bankruptcy Code following its inability to restructure or refinance its indebtedness in light of the confluence of several negative economic and other factors, including an influx of low-priced, dumped imports, which caused it to default on then-outstanding indebtedness. A recurrence of such economic factors could have a material adverse effect on our business prospects, condition (financial or otherwise) and results of operations.

In calendar year 2009, the global silicon metal and silicon-based alloys industries suffered from unfavorable market conditions. The weakened economic environment of national and international metals markets that occurred during that time may return; any decline in the global silicon metal and silicon-based alloys industries could have a material adverse effect on our business prospects, condition (financial or otherwise), and results of operations. In addition, our business is directly related to the production levels of our customers, whose businesses are dependent on highly cyclical markets, such as the automotive, residential and nonresidential construction, consumer durables, polysilicon, steel, and chemical markets. In response to unfavorable market conditions, customers may request delays in contract shipment dates or other contract modifications. If we grant modifications, these could adversely affect our anticipated revenues and results of operations. Also, many of our products are internationally traded products with prices that are significantly affected by worldwide supply and demand. Consequently, our financial performance will fluctuate with the general economic cycle, which could have a material adverse effect on our business prospects, condition (financial or otherwise) and results of operations.

 

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Our business is particularly sensitive to increases in energy costs, which could materially increase our cost of production.

The price of energy is determined in the applicable domestic jurisdiction and is influenced both by supply and demand dynamics and by domestic regulations. Changes in local energy policy, increased costs due to scarcity of energy supply, climate conditions and other factors can affect the price of energy supply to our plants and adversely affect its results of operations and financial conditions.

Electricity is one of our largest production cost components. Because energy constitutes such a high percentage of our production costs, we are particularly vulnerable to cost fluctuations in the energy industry. For example, energy prices and supply in South Africa are not stable, and prices have increased at a rate higher than inflation in recent years. Power supply to our South African plants in Polokwane, eMalahleni and New Castle is provided by the public utility company Eskom. Our Spanish, Argentine, South African and Chinese plants have higher prices of energy, and as such production is regulated to reduce the cost of energy in peak hours or seasons with higher energy prices, in order to maintain profitability. Venezuela depends on national hydraulic energy production (rainfall) to have consumption to allow us to produce because the price of energy is normally competitive.

The termination or non-renewal of any of our energy contracts, or an increase in the price of energy could have a material adverse effect on our future earnings and may prevent us from effectively competing in its markets. Also, the level of power consumption of our submerged electric arc furnaces is highly dependent on which products are being produced and typically fall in the following ranges: (i) manganese-based alloys require between 2.0 and 3.8 megawatt hours to produce one MT of product, (ii) silicon-based alloys require between 3.5 and 8 megawatt hours to produce one MT of product and (iii) silicon metal requires approximately 11 megawatt hours to produce one MT of product. Accordingly, consistent access to low cost, reliable sources of electricity is essential to our business.

Electrical power to our U.S. and Canada facilities is supplied mostly by AEP, Alabama Power, Brookfield Power, Hydro Quebec, Tennessee Valley Authority and Niagara Mohawk Power Corporation through dedicated lines. Our Alloy, West Virginia facility obtains approximately 45% of its power needs under a fixed-price contract with a nearby hydroelectric facility. This facility is over 70 years old and any breakdown could result in the Alloy facility having to pay much higher rates for electric power from third parties. Our energy supply for our facilities located in Argentina is supplied through Edemsa facilities located in Mendoza, Argentina, under a month-to-month arrangement. Energy rates in Argentina may be increased on average by 200% from and after March 2016. Because energy constitutes such a high percentage of our production costs, we are particularly vulnerable to cost fluctuations in the energy industry. Accordingly, the termination or non-renewal of any of our energy contracts, or an increase in the price of energy could materially adversely affect our future earnings, if any, and may prevent us from effectively competing in our markets.

Energy prices in Spain are volatile and such volatility could have a material adverse effect on our business, financial condition and results of operations.

Almost all of the revenues from FerroAtlántica’s energy segment are tied, either directly or indirectly, to the wholesale market price for electricity in Spain. Wholesale market prices for electricity are impacted by a number of factors and may decline for many reasons that are not within our control, which may impact our ability to sell electricity. Those factors include the price of fuel that is used to generate other sources of electricity, the management of generation and the amount of excess generating capacity relative to load in a particular market, the cost of controlling emissions of pollution, the structure of the electricity market, changes in demand for electricity, regulatory and governmental actions and weather conditions that impact electrical load. In addition, other power generators may develop new technologies or improvements to traditional technologies to produce power that could increase the supply of electricity and cause a sustained reduction in market prices for electricity. Any such factor could have a material adverse effect on our business prospects, condition and results of operations.

 

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Our energy operations and revenues depend largely on government regulation of the power sector and our business may be adversely affected if such policies are amended or eliminated.

Our energy operations and revenues depend largely on government regulation of the power sector. For example, Spain introduced a new regulatory regime for renewable energies, which, among other things, suspended the pre-existing feed-in tariff support scheme for renewable energy producers that had benefitted us. This had an adverse effect on the profitability of our energy segment in 2014 as compared to 2013, as prices at which we are able to sell our energy are now substantially dependent on wholesale market prices. Additionally, new regulation enacted by the National Assembly and the Government through Laws and Decrees in France allows Ferropem to benefit from reduced access tariffs plus rebates based on interruptibility. If any other of these incentives or tariff structure are adversely amended, reduced, eliminated, subjected to new restrictions, or if public funding for these incentives is reduced, it could have a material adverse effect on the profitability of our energy operations.

Losses caused by disruptions in the supply of power would reduce our profitability.

Our operations are heavily dependent upon a reliable supply of electrical power. We may incur losses due to a temporary or prolonged interruption of the supply of electrical power to our facilities, which can be caused by unusually high demand, blackouts, equipment failure, natural disasters or other catastrophic events, including failure of the hydroelectric facilities that currently provide power under contract to our West Virginia, New York, Quebec and Argentina facilities. Additionally, we have, on occasion, been instructed to suspend operations for several hours by the sole energy supplier in South Africa due to a general power shortage which continues in the country. It is possible that this supplier may instruct us to suspend our operations for a similar or longer amount of time in the future. Large amounts of electricity are used to produce silicon metal, manganese- and silicon-based alloys and other specialty metals, and any interruption or reduction in the supply of electrical power would adversely affect production levels and result in reduced profitability. Our insurance coverage does not cover all events and may not be sufficient to cover any or all losses. Certain of our insurance policies may not cover any losses that may be incurred if our suppliers are unable to provide power during periods of unusually high demand.

Investments in Argentina’s electricity generation and transmission systems have been lower than the increase in demand in recent years. If this trend is not reversed, there could be electricity supply shortages as the result of inadequate generation and transmission capacity. Given the heavy dependence on electricity of our manufacturing operations, any electricity shortages could adversely affect our financial results.

Government regulations of electricity in Argentina give priority access of hydroelectric power to residential users and subject violators of these restrictions to significant penalties. This preference is particularly acute during Argentina’s winter months due to a lack of natural gas. We have previously successfully petitioned the government to exempt us from these restrictions given the demands of our business for continuous supply of electric power. If we are unsuccessful in our petitions or in any action we take to ensure a stable supply of electricity, our production levels may be adversely affected and our profitability reduced.

Any decrease in the availability, or increase in the cost, of raw materials or transportation could materially increase our costs.

Principal components in the production of silicon metal, silicon-based alloys and manganese-based alloys include metallurgical-grade coal, charcoal, carbon electrodes, manganese ore, quartzite, wood chips, steel scrap, and other metals. We buy some raw materials on a spot basis. The availability of these raw materials and the prices at which we purchase them from third-party suppliers may be volatile, as they are dependent on market supply and demand. We are dependent on certain suppliers of these products, their labor union relationships, mining and lumbering regulations and output and general local economic conditions, in order to obtain raw materials in a cost efficient and timely manner.

We make extensive use of shipping by sea, rail and truck to obtain the raw materials used in our production and deliver our products to customers, depending on the geographic region and product or input. These raw materials and products often must be transported over long distances between the mines and other production sites where raw materials are produced and our factories where raw materials are processed and between those sites and our customers. Any severe delay, interruption or other disruption in such transportation, any material damage to raw

 

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materials utilized by us or to our products while being transported, or a sharp rise in transportation prices, could have a material adverse effect on our business, results of operations, financial condition and productivity levels. We may not be able to obtain adequate supplies of raw materials from alternative sources on terms as favorable as our current arrangements or at all. Any increases in the price or shortfall in the production and delivery of raw materials, could materially adversely affect our business prospects, condition (financial or otherwise) or results of operations.

Cost increases in raw material inputs may not be passed on to our customers, which could negatively impact our profitability.

The availability and prices of raw material inputs may be influenced by supply and demand, changes in world politics, unstable governments in exporting nations and inflation. The market prices of our products and raw material inputs are subject to change. We may not be able to pass a significant amount of increased input costs on to our customers. Additionally, we may not be able to obtain lower prices from our suppliers should our sale prices decrease.

Metals manufacturing and mining are inherently dangerous activities and any accident resulting in injury or death of personnel or prolonged production shut downs could adversely affect our business and operations.

Metals manufacturing generally, and smelting in particular, is inherently dangerous and subject to fire, explosion and sudden major equipment failure. Quartz mining is inherently dangerous and subject to hazards associated with collisions, equipment failure, the operation of large open pit mining and rock transportation equipment, dust inhalation, flooding, collapses of open pit walls, the preparation and ignition of large-scale open pit blasting operations and operating in extreme climatic conditions. This can and has resulted in accidents resulting in the serious injury or death of production personnel and prolonged production shutdowns. In January 2015, the death of a subcontractor at our South Africa mine caused a shutdown of production for several days. We have also experienced fatal accidents and equipment malfunctions in our manufacturing facilities in recent years, including a fire at our Bridgeport, Alabama facility in November 2011 and a fatality at our Selma Alabama facility in October 2012, and may experience fatal accidents or equipment malfunctions again, which could have a material adverse effect on our business and operations.

We are heavily dependent on our mining operations, which are subject to risks that are beyond our control and which could result in materially increased expenses and decreased production levels.

We mine quartz at open pit mining operations and coal and quartzite at underground and surface mining operations. We are heavily dependent on these mining operations for our quartz supply. Certain factors beyond our control could disrupt our mining operations, adversely affect production and shipments and increase our operating costs, such as: a major incident at the mine site that causes all or part of the operations of the mine to cease for some period of time; mining, processing and plant equipment failures and unexpected maintenance problems; changes in reclamation costs; the inability to renew mining concessions upon their expiration; the expropriation of territory subject to a valid concession without sufficient compensation; and adverse weather and natural disasters, such as heavy rains or snow, flooding and other natural events affecting operations, transportation or customers. For example, the recent installation of additional capacity at our quartz mine in Alabama took longer and was more costly than expected.

Regulatory agencies have the authority under certain circumstances following significant health and safety incidents, such as fatalities, to order a mine to be temporarily or permanently closed. If this occurred, we may be required to incur capital expenditures to re-open the mine. Environmental regulations could impose costs on our mining operations, and future regulations could increase those costs or add new costs or limit our ability to produce quartz and sell coal. A failure to obtain and renew permits necessary for our mining operations could negatively affect our business. It is also possible that we have extracted or may in the future extract quartz from territory beyond the boundary of our mining concession or mining right, which could result in penalties or other regulatory action or liabilities.

 

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We are subject to environmental, health and safety regulations, including laws that impose substantial costs and the risk of material liabilities.

We are subject to extensive foreign, federal, national, state, provincial and local environmental, health and safety laws and regulations governing, among other things, the generation, discharge, emission, storage, handling, transportation, use, treatment and disposal of hazardous substances; land use, reclamation and remediation; and the health and safety of our employees. We are also required to obtain permits from governmental authorities for certain operations. We may not have been and may not be at all times in complete compliance with such laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be subject to penalties, fines, restrictions on operations or other sanctions. Under these laws, regulations and permits, we could also be held liable for any and all consequences arising out of human exposure to hazardous substances or environmental damage we may cause or that relates to our operations or properties and any such liability could adversely affect our reputation, business, results of operations and financial condition. For example, in the United States, we are subject to federal and state regulations that require payment of benefits related to black lung disease in coal miners, and our exposure may significantly increase if new or additional legislation is enacted at the federal or state level.

Under certain environmental laws, we could be required to remediate or be held responsible for all of the costs relating to any contamination at our or our predecessors’ past or present facilities and at third party waste disposal sites. We could also be held liable under these environmental laws for sending or arranging for hazardous substances to be sent to third party disposal or treatment facilities if such facilities are found to be contaminated. Under these laws we could be held liable even if we did not know of, or were not responsible for, such contamination, or even if we never owned or operated the contaminated disposal or treatment facility.

There are a variety of laws and regulations in place or being considered at the international, federal, regional, state and local levels of government that restrict or are reasonably likely to restrict the emission of carbon dioxide and other greenhouse gases. These legislative and regulatory developments may cause us to incur material costs if we are required to reduce or offset greenhouse gas emissions and may result in a material increase in our energy costs due to additional regulation of power generators.

Environmental laws are complex, change frequently and are likely to become more stringent in the future.

Therefore, our costs of complying with current and future environmental laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances may adversely affect our business, results of operations and financial condition.

Compliance with and changes in environmental laws, including proposed climate change laws and regulations, could adversely affect our performance.

The principal environmental risks associated with our operations are emissions into the air and releases into the soil, surface water, or groundwater. Our operations are subject to extensive foreign, federal, state, provincial and local environmental laws and regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures and greenhouse gas emissions. If we violate or fail to comply with these laws and regulations, we could be fined or otherwise sanctioned. Because environmental laws and regulations are becoming more stringent and new environmental laws and regulations are continuously being enacted or proposed, such as those relating to greenhouse gas emissions and climate change, the level of expenditures required for environmental matters could increase in the future. Future legislative action and regulatory initiatives could result in changes to operating permits, additional remedial actions, material changes in operations, increased capital expenditures and operating costs, increased costs of the goods we sell, and decreased demand for our products that cannot be assessed with certainty at this time.

Some of the proposed federal cap-and-trade legislation would require businesses that emit greenhouse gases to buy emission credits from the government, other businesses, or through an auction process. As a result of such a program, we may be required to purchase emission credits for greenhouse gas emissions resulting from our operations. Although it is not possible at this time to predict the final form of a cap-and-trade bill (or whether such a bill will be passed), any new restrictions on greenhouse gas emissions—including a cap-and-trade program—could result in material increased compliance costs, additional operating restrictions for our business, and an increase in the cost of the products we produce, which could have a material adverse effect on our financial position, results of operations, and liquidity.

 

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Under current European Union legislation, all industrial sites are subject to cap-and-trade programs, by which every facility with carbon emissions is required to purchase in the market emission rights for volumes of emission that exceed a certain allocated level. So far, and until 2020, the allocated level of emissions is such that the potential requirements of emissions rights purchases will have a limited impact on our business. After 2020, however, new regulations may require significant purchases of emissions rights in the market. Also, several Canadian provinces have implemented cap-and-trade programs. As such, our facilities in Canada and in the European Union may be required to purchase emission credits in the future (85% of the cost which may be exempted in the European Union). The requirement to purchase emissions rights in the market could result in material increased compliance costs, additional operating restrictions for our business, and an increase in the cost of the products we produce, which could have a material adverse effect on our financial position, results of operations, and liquidity.

We make a significant portion of our sales to a limited number of customers, and the loss of a portion of the sales to these customers could have a material adverse effect on our revenues and profits.

In the year ended June 30, 2015, Globe made approximately 53% of its consolidated net sales to its top ten customers and approximately 31% to its two top customers (14%, excluding sales made under joint venture agreements with Dow Corning). For the twelve months ended December 31, 2014, FerroAtlántica’s ten largest customers accounted for approximately 43% of its consolidated revenue. We expect that we will continue to derive a significant portion of our business from sales to these customers. If we were to experience a significant reduction in the amount of sales we make to some or all of these customers and could not replace these sales with sales to other customers, it could have a material adverse effect on our revenues and profits.

Some of the contracts with our customers do not provide commitments from our customers to purchase specified or minimum volumes of products for terms longer than one month to one year. Accordingly, with respect to these contracts, we do not benefit from any contractual protection mechanism in case of unexpected reduced demand for our products from such customers as a result of, for instance, downturns in the industries in which these customers operate or any other factor affecting their business, and this could have a material adverse effect on our revenues and profits. If we were to experience a significant reduction in the amount of sales it makes to some or all of these customers and could not replace these sales with sales to other customers, this could have a material adverse effect on our revenues and profits.

Our business benefits from antidumping duties and laws that protect our products by taxing unfairly traded imports from certain countries. If these duties or laws change, certain foreign competitors might be able to compete more effectively.

Antidumping orders prevent suppliers in countries with excess capacity from selling their product at improperly subsidized prices. As a result, antidumping orders normally benefit local suppliers, and non-affected foreign suppliers. Antidumping duties are currently in place in the European Union covering silicon metal imports from China and Korea and ferrosilicon imports from China and Russia. In the United States, antidumping duties are in place covering silicon metal from China and Russia. In Canada, there are anti-dumping duties in place covering silicon metal from China.

In the United States, rates of duty can change as a result of “administrative reviews” of antidumping orders. These orders can also be revoked as a result of periodic “sunset reviews,” which determine whether the orders will continue to apply to imports from particular countries. In 2015 and 2016, the European Union will review antidumping duties covering silicon metal imports from China, which have been in place for the last five years, and may reduce or eliminate these duties. Antidumping and countervailing duties in Canada also are subject to periodic reviews. Sunset reviews of the U.S. orders covering silicon metal imports from China and Russia completed in 2012 and 2014, respectively, resulted in those orders remaining in place for an additional five years. However, the current orders may not remain in effect and continue to be enforced from year to year, the goods and countries now covered by antidumping and countervailing duty orders may no longer be covered, and duties may not continue to be assessed at the same rates. Changes in any of these factors could adversely affect our business and profitability. Finally, at times, in filing trade actions, we find ourselves acting against the interests of our customers. Some of our customers may not continue to do business with us because of our having filed a trade action.

 

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Products we manufacture may be subject to unfair import competition that may affect our profitability.

A number of the products we manufacture, including silicon metal and ferrosilicon, are globally traded commodities that are sold primarily on the basis of price. As a result, our sales volumes and prices may be adversely affected by influxes of imports of these products that are dumped (sold at unfairly low prices) or are subsidized by foreign governments. Our silicon metal and ferrosilicon operations have been injured by such unfair import competition in the past. The antidumping and countervailing duty laws provide a remedy for unfairly traded imports in the form of special duties imposed to offset the unfairly low pricing or subsidization. However, the process for obtaining such relief is complex and uncertain. As a result, while we have sought and obtained such relief in the past, in some cases we have not been successful. Thus, there is no assurance that such relief will be obtained, and if it is not, unfair import competition could have a material adverse effect on our business, financial condition and results of operations.

Competitive pressure from Chinese steel and silicone producers may adversely affect the business of our customers, reducing demand for our products. Our customers may relocate to China, where they are unlikely to continue purchasing from us.

China’s aluminum and steel producing capacity exceeds local demand and has made China an increasingly larger net exporter of aluminum and steel, and the Chinese silicone manufacturing industry is growing. Chinese aluminum, steel and silicone producers, who are unlikely to purchase silicon metal, manganese- and silicon-based alloys and other specialty metals from us due to the ample availability of domestic Chinese production, may gain global market share at the expense of our customers. An increase in Chinese aluminum, steel and silicone industry market share could adversely affect the production volumes and ultimately the business of our customers, resulting in lower sales for us, and in turn have a material adverse effect on our business prospects and results of operations.

Moreover, our customers in Europe might seek to relocate or refocus their operations to China or other countries with lower labor costs and higher growth rates. If they do so, these customers might choose to purchase from other suppliers of silicon metal, manganese- and silicon-based alloys and other specialty metals, and this could have a material adverse effect on our business, results of operations and financial condition.

We are subject to the risk of union disputes and work stoppages at our facilities, which could have a material adverse effect on our business.

A majority of our employees are members of labor unions. In the future, we may experience lengthy consultations with labor unions or strikes, work stoppages or other industrial actions. Strikes called by employees or unions could disrupt our operations. In 2014, there was a strike at our South African subsidiary that required us to reduce production for seven days. We have also experienced strikes by our employees in France from time to time.

Our hourly employees at our Selma, Alabama facility are covered by a collective bargaining agreement with the Industrial Division of the Communications Workers of America, under a contract running through April 2, 2017. Our hourly employees at our Alloy, West Virginia, Niagara Falls, New York and Bridgeport, Alabama facilities are covered by collective bargaining agreements with The United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union under contracts running through April 27, 2017, July 30, 2017, and March 3, 2018, respectively. Our union employees in Argentina are working under a contract running through April 30, 2016. Our union employees in Canada work at the Bécancour, Québec, plant and are covered by a Union Certification held by the Communications, Energy and Paper Workers Union of Canada (“CEP”), Local 184. That collective agreement will run through April 30, 2017.

New labor contracts will have to be negotiated to replace expiring contracts from time to time. It is possible that new collective bargaining agreements could contain terms less favorable than the current agreements. If we are unable to satisfactorily renegotiate those labor contracts on terms acceptable to us or without a strike or work stoppage, the effects on our business could be materially adverse. Any strike or work stoppage could disrupt production schedules and delivery times, adversely affecting sales. In addition, existing labor contracts may not prevent a strike or work stoppage, and any such work stoppage could have a material adverse effect on our business.

 

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We are dependent on key personnel.

Our success depends in part upon the retention of key employees. Competition for qualified personnel can be intense. Current and prospective employees may experience uncertainty about the effect of the Business Combination, which may impair our ability to attract, retain and motivate key management, sales, technical and other personnel prior to and following the Business Combination.

If key employees depart, the integration after the Business Combination may be more difficult and our business may be harmed. Furthermore, we may have to incur significant costs in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent relating to our business, and our ability to realize the anticipated benefits of the Business Combination may be adversely affected. In addition, there could be disruptions to or distractions for the workforce and management associated with activities of labor unions or works councils or integrating employees. Accordingly, no assurance can be given that we will be able to attract or retain key employees to the same extent that we have been able to attract or retain their own employees in the past.

The success of our operations following our recent Business Combination, which was consummated on December 23, 2015, depend to a significant degree on the continued employment of our core senior management team. It is important that we retain the other members of our core senior management team following this change. In particular, we are dependent on the skills, knowledge and experience of Alan Kestenbaum, our Executive Chairman, Javier López Madrid, our Executive Vice-Chairman, Pedro Larrea Paguaga, our Chief Executive Officer, Joseph Ragan, our Chief Financial Officer and Stephen Lebowitz, our Chief Legal Officer. If these employees are unable to continue in their respective roles, or if we are unable to attract and retain other skilled employees, our results of operations and financial condition could be adversely affected. We currently have employment agreements with Messrs. Kestenbaum, Larrea Paguaga, Ragan and Lebowitz. The employment agreements with Messrs. Kestenbaum, Ragan and Lebowitz contain certain non-compete provisions, which may not be enforceable by us. Additionally, we are substantially dependent upon key personnel in our financial and information technology staff that enables us to meet our regulatory, contractual and financial reporting obligations, including reporting requirements under our credit facilities.

In certain circumstances, our Executive Chairman and the members of our Board may have interests that may conflict with yours as a holder of Ordinary Shares.

If our Executive Chairman acquires knowledge of a potential transaction or matter which may be deemed to be a corporate opportunity for us or any of our affiliates, he is not required to communicate or offer such transaction or matter to us, unless such potential transaction or matter:

 

    directly relates to silicon metal, a silicon alloy, a mineral commonly combined with silicon metal to make a silicon alloy, metallurgical coal, another business in which we or any of our affiliates were materially engaged immediately after the consummation of the Business Combination or another business in which we or any of our affiliates have within the preceding year taken substantial, demonstrable steps to become materially engaged; or

 

    is expressly offered to our Executive Chairman solely in his capacity as a director or officer of ours.

Our directors have no duty to us with respect to any information such directors may obtain (i) otherwise than as our directors and (ii) in respect of which directors owe a duty of confidentiality to another person, provided that where a director’s relationship with such other person gives rise to a conflict, such conflict has been authorized by our Board in accordance with our Articles. Our Articles provide that a director shall not be in breach of the general duties directors owe to us pursuant to the U.K. Companies Act 2006 because such director:

 

    fails to disclose any such information to our Board, directors or officers; or

 

    fails to use or apply any such information in performing such director’s duties as a director.

In such circumstances, certain interests of our Executive Chairman and/or the members of our Board may not be aligned with your interests as a holder of Ordinary Shares, and our Executive Chairman and/or the members of our Board may engage in certain business and other transactions without any accountability or obligation to us.

Shortages of skilled labor could adversely affect our operations.

We depend on skilled labor for the operation of our silicon furnaces and other facilities. Some of our facilities are located in areas where demand for skilled laborers often exceeds supply. Shortages of skilled furnace technicians and other skilled laborers could restrict our ability to maintain or increase production rates, lead to production inefficiencies and increase our labor costs.

We may not realize the cost savings, synergies and other benefits that we expect to achieve from our recent Business Combination.

The combination of two independent companies is a complex, costly and time-consuming process. As a result, we are required to devote significant management attention and resources to integrating our business practices and operations. The integration process may disrupt our business and, if implemented ineffectively, could preclude realization of the full benefits expected. Failure to meet the challenges involved in successfully integrating our operations or otherwise to realize the anticipated benefits of the Business Combination could cause an interruption of our activities and could seriously harm our results of operations. In addition, the overall integration of the two companies may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of client relationships, and diversion of management’s attention, and may cause our stock price to decline. The difficulties of combining the operations of the companies include, among others:

 

    managing a significantly larger company;

 

    coordinating geographically separate organizations;

 

    the potential diversion of management focus and resources from other strategic opportunities and from operational matters;

 

    retaining existing customers and attracting new customers;

 

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    maintaining employee morale and retaining key management and other employees;

 

    integrating two unique business cultures, which may prove to be incompatible;

 

    the possibility of faulty assumptions underlying expectations regarding the integration process;

 

    issues in achieving anticipated operating efficiencies, business opportunities and growth prospects;

 

    consolidating corporate and administrative infrastructures and eliminating duplicative operations;

 

    issues in integrating information technology, communications and other systems;

 

    changes in applicable laws and regulations;

 

    changes in tax laws (including under applicable tax treaties) and regulations or to the interpretation of such tax laws or regulations by the governmental authorities; and

 

    managing tax costs or inefficiencies associated with integrating our operations.

Many of these factors will be outside of our control and any one of them could result in increased costs, decreased revenues and diversion of management’s time and energy, which could materially impact our businesses, financial condition and results of operations. In addition, even if the operations are integrated successfully, we may not realize the full benefits of the Business Combination, including the synergies, cost savings or sales or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all. As a result, we cannot assure our shareholders that the Business Combination will result in the realization of the full benefits anticipated.

The R&W Policy may not adequately compensate holders of Ordinary Shares for losses attributable to breaches of representations and warranties made by Grupo VM and FerroAtlántica in the Business Combination Agreement.

We purchased a Representations and Warranties insurance policy (the “R&W Policy”) in connection with the Business Combination to insure us against breaches of certain representations and warranties made by Grupo VM and FerroAtlántica in the Business Combination Agreement (as defined below). The R&W Policy has a face amount equal to $50,000,000 and is subject to an initial retention amount of $10,000,000, as well as other limitations and conditions. As a result of Grupo VM’s ownership of the Company following completion of the Business Combination, the R&W Policy only provides insurance to the extent of approximately 43% of insurable losses incurred by us. Accordingly, the proceeds of the R&W Policy will not be sufficient to fully compensate for losses attributable to breaches of representations and warranties made by Grupo VM and FerroAtlántica. In addition, we will not be able to recover losses attributable to breaches of representations and warranties that are excluded from the R&W Policy (including, for example, any purchase price, net worth or similar adjustment provisions of the Business Combination Agreement, transfer pricing, environmental or pollution matters, the intended tax treatment of the business combination, etc.), or losses that would result in payments under the R&W Policy in excess of the $50,000,000 face amount of the R&W Policy. Under the Articles, we are required to distribute the aggregate net proceeds under the R&W Policy, if any, to the holders of our Ordinary Shares. We are not permitted to retain the net proceeds, if any, under the R&W Policy. Accordingly, if we suffer a loss that is otherwise recoverable under the R&W Policy, but use the net proceeds of the R&W Policy to fund the required distribution to the holders of our Ordinary Shares, we will be required to use our existing cash on hand or draws under our credit facility to fund the actual loss incurred. Losses attributable to breaches of representations and warranties by Grupo VM or FerroAtlántica could have a material adverse effect on our business, financial condition and results of operations.

In addition, under English law, we may only pay dividends out of profits available for that purpose, as determined by reference to accounts that are deemed to be our relevant accounts pursuant to the U.K. Companies Act 2006. If we recover proceeds under the R&W Policy, but do not have sufficient profits available for distribution, we will not be permitted under English law to make the distribution to the holders of our Ordinary Shares contemplated by the Articles. Further, a U.K. public company may only make a distribution if the amount of its net assets is not less than the aggregate of its called-up share capital and undistributable reserves, and if, and to the extent that, the distribution does not reduce the amount of those assets to less than that aggregate. In these circumstances, holders of our Ordinary Shares may not receive any distribution of the net proceeds under the R&W Policy, or may only receive a partial distribution, or may suffer substantial delay before any distribution can be made under English law.

 

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Our inability to integrate recently acquired businesses or to successfully complete future acquisitions could limit our future growth or otherwise be disruptive to our ongoing business.

From time to time, we expect to pursue acquisitions in support of our strategic goals. In connection with any such acquisitions, we could face significant challenges in managing and integrating our expanded or combined operations, including acquired assets, operations and personnel. There can be no assurance that acquisition opportunities will be available on acceptable terms or at all or that we will be able to obtain necessary financing or regulatory approvals to complete potential acquisitions. Our ability to succeed in implementing our strategy will depend to some degree upon the ability of our management to identify, complete and successfully integrate commercially viable acquisitions. Acquisition transactions may disrupt our ongoing business and distract management from other responsibilities.

Grupo VM has significant voting power with respect to corporate matters considered by our shareholders.

Prior to the consummation of this offering, Grupo VM owns Shares representing approximately 57% of the aggregate voting power of our capital stock. By virtue of Grupo VM’s voting power, as well as Grupo VM’s representation on the Board, Grupo VM will have significant influence over the outcome of any corporate transaction or other matters submitted to our shareholders for approval. Grupo VM will be able to block any such matter, including ordinary resolutions, which, under English law, requires approval by a majority of holders of outstanding Shares. Grupo VM will also be able to block any special resolutions, which under English law requires approval by the holders of at least 75% of the outstanding Shares entitled to vote, voting on the resolution, such as an amendment of the Articles or the exclusion of preemptive rights.

Grupo VM, who owns approximately 57% of our outstanding Shares, has pledged depositary receipts representing rights in respect of 98,078,161 of its Class A Ordinary Shares to secure its obligations to Crédit Agricole Corporate and Investment Bank, Banco Santander and HSBC; if Grupo VM defaults on the underlying loan, we could experience a change in control.

Grupo VM guaranteed its obligations pursuant to a credit agreement (“Credit Agreement”) with Crédit Agricole Corporate and Investment Bank, Banco Santander and HSBC (the “Lenders”) that matures in March 2017 under which Grupo VM may borrow up to Euro 415 million (“Loan”). On December 23, 2015, Grupo VM entered into a Pledge Agreement (the “Pledge Agreement”), with Crédit Agricole Corporate and Investment Bank as security agent under the Credit Agreement (the “Security Agent”), pursuant to which Grupo VM agreed to pledge depositary receipts representing rights in respect of 98,078,161 of our Class A Ordinary Shares beneficially owned by Grupo VM to secure the outstanding Loan. In the event Grupo VM defaults under the Credit Agreement, the Security Agent may foreclose on the depositary receipts subject to the pledge. In such case, we could experience a change of control.

We are exposed to significant risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs.

Doing business on a worldwide basis requires us to comply with the laws and regulations of various jurisdictions. In particular, our international operations are subject to anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”), the United Kingdom Bribery Act of 2010 (the “Bribery Act”) and economic sanctions programs, including those administered by the UN, EU and OFAC and regulations set forth under the Comprehensive Iran Accountability Divestment Act. The FCPA prohibits providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. We may deal with both governments and state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA. The provisions of the Bribery Act extend beyond bribery of foreign public officials and are more onerous than the FCPA in a number of other respects, including jurisdiction, non-exemption of facilitation payments and penalties. Economic sanctions programs restrict our business dealings with certain sanctioned countries.

As a result of doing business in foreign countries, we are exposed to a risk of violating anti-corruption laws and sanctions regulations applicable in those countries where we, our partners or our agents operate. Some of the international locations in which we operate lack a developed legal system and have high levels of corruption. Our

 

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continued expansion and worldwide operations, including in developing countries, our development of joint venture relationships worldwide and the employment of local agents in the countries in which we operate increases the risk of violations of anti-corruption laws, OFAC or similar laws. Violations of anti-corruption laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts (and termination of existing contracts) and revocations or restrictions of licenses, as well as criminal fines and imprisonment. In addition, any major violations could have a significant impact on our reputation and consequently on our ability to win future business.

We will seek to build and continuously improve our systems of internal controls and to remedy any weaknesses identified. There can be no assurance, however, that the policies and procedures will be followed at all times or effectively detect and prevent violations of the applicable laws by one or more of our employees, consultants, agents or partners and, as a result, we could be subject to penalties and material adverse consequences on our business, financial condition or results of operations.

We operate in a highly competitive industry.

The silicon metal market and the silicon-based and manganese-based alloys markets are global, capital intensive and highly competitive. Our competitors may have greater financial resources, as well as other strategic advantages, to maintain, improve and possibly expand their facilities, and as a result, they may be better positioned to adapt to changes in the industry or the global economy. The advantages that our competitors have over us could have a material adverse effect on our business. In addition, new entrants may increase competition in our industry, which could have a material adverse effect on our business. An increase in the use of substitutes for certain of our products also could have a material adverse effect on our financial condition and operations.

Though we are not currently operating at full capacity, we have historically operated at near the maximum capacity of our operating facilities. Because the cost of increasing capacity may be prohibitively expensive, we may have difficulty increasing our production and profits.

Our facilities are able to manufacture, collectively, approximately 420,000 MT of silicon metal (excluding Dow Corning’s portion of the capacity of our Alloy, West Virginia and Becancour, Quebec plants), 480,000 MT of silicon-based alloys and 465,000 manganese-based alloys on an annual basis. Our ability to increase production and revenues will depend on expanding existing facilities or opening new ones. Increasing capacity is difficult because:

 

    adding new production capacity to an existing silicon plant to produce approximately 30,000 MT of metallurgical grade silicon would cost approximately $120,000,000 and take at least 12 to 18 months to complete once permits are obtained, which could take more than a year;

 

    a greenfield development project would take at least three to five years to complete and would require significant capital expenditure and environmental compliance costs; and

 

    obtaining sufficient and dependable power at competitive rates near areas with the required natural resources is difficult to accomplish.

Additionally, new regulations enacted by the National Assembly and the Government through Laws and Decrees in France allows Ferropem to benefit from reduced access tariffs plus rebates based on interruptibility, which could allow our French plants to work near-to-maximum capacity.

We may not have sufficient funds to expand existing facilities or open new ones and may be required to incur significant debt to do so, which could have a material adverse effect on our business.

Our actual financial position and results of operations may differ materially from the unaudited pro forma financial data included in this prospectus.

The unaudited pro forma financial information contained in this prospectus is presented for illustrative purposes only and may not be an accurate indication of our financial position or results of operations if the Business Combination was completed on the dates indicated. The unaudited pro forma financial information has been derived

 

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from the audited and unaudited historical financial statements of Globe and FerroAtlántica and certain adjustments and assumptions have been made regarding us after giving effect to the Business Combination. The assets and liabilities of Globe have been measured at fair value based on various preliminary estimates based on certain assumptions regarding Globe after giving effect to the Business Combination. The process for estimating the fair value of acquired assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. These estimates may be revised as additional information becomes available and as additional analyses are performed. Differences between preliminary estimates in the unaudited pro forma financial information and the final acquisition accounting will occur and could have a material impact on the unaudited pro forma financial information and our financial position and future results of operations.

In addition, the assumptions used in preparing the unaudited pro forma condensed combined financial information may not prove to be accurate, and other factors may affect our financial condition or results of operations following the completion of the Business Combination. Any potential decline in our financial condition or results of operations may cause significant variations in the price of our Ordinary Shares. See “Unaudited Pro Forma Condensed Combined Financial Statements of Ferroglobe” beginning on page 102 of this prospectus.

We are subject to restrictive covenants under our credit facilities. These covenants could significantly affect the way in which we conduct our business. Our failure to comply with these covenants could lead to an acceleration of our debt.

We entered into credit facilities that contain covenants that at certain levels, among other things, restrict our ability to sell assets; incur, repay or refinance indebtedness; create liens; make investments; engage in mergers or acquisitions; pay dividends, including to us; repurchase stock; or make capital expenditures. These credit facilities also require compliance with specified financial covenants, including minimum interest coverage and maximum leverage ratios. We cannot borrow under the credit facilities if the additional borrowings would cause a breach to the financial covenants. Further, a significant portion of our assets are pledged to secure the indebtedness. For example, the real property assets of one of our South Africa subsidiary are pledged to secure some indebtedness.

Our ability to comply with the applicable covenants may be affected by events beyond our control. In the last three years, one of our Chinese subsidiaries breached the covenants under its credit facility several times and had to seek, and ultimately obtained, waivers from its lenders. The breach of any of the covenants contained in the credit facilities, unless waived, would be a default. This would permit the lenders to terminate their commitments to extend credit under, and accelerate the maturity of, the facility. The acceleration of debt could have a material adverse effect on our financial condition and liquidity. If we were unable to repay our debt to the lenders and holders or otherwise obtain a waiver from the lenders and holders, the lenders and holders could proceed against the collateral securing the credit facilities and exercise all other rights available to them. We may not have sufficient funds to make these accelerated payments and may not be able to obtain any such waiver on acceptable terms or at all.

Our insurance costs may increase, and we may experience additional exclusions and limitations on coverage in the future.

We have maintained various forms of insurance, including insurance covering claims related to our properties and risks associated with our operations. Our existing property and liability insurance coverage contains exclusions and limitations on coverage. From time-to-time, in connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage, larger self-insured retentions and deductibles and significantly higher premiums. For example, as a result of the fire at our facility in Bridgeport, Alabama, our business interruption insurance premium has increased significantly. As a result, in the future, our insurance coverage may not cover claims to the extent that it has in the past and the costs that we incur to procure insurance may increase significantly, either of which could have an adverse effect on our results of operations.

 

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We have operations and assets in the U.S., Argentina, Spain, France, Canada, China, South Africa, Poland and Venezuela, and may have operations and assets in other countries in the future. Our international operations and assets may be subject to various economic, social and governmental risks.

Our international operations and sales will expose us to risks that are more significant in developing markets than in developed markets and which could negatively impact our future sales or profitability. Our operations may not develop in the same way or at the same rate as might be expected in a country with an economy similar to western countries. The additional risks that we may be exposed to in these cases include, but are not limited to:

 

    tariffs and trade barriers;

 

    recessionary trends, inflation or instability of financial markets;

 

    currency fluctuations, which could decrease our revenues or increase our costs in U.S. dollars;

 

    regulations related to customs and import/export matters;

 

    tax issues, such as tax law changes, changes in tax treaties and variations in tax laws;

 

    limited access to qualified staff;

 

    inadequate infrastructure;

 

    cultural and language differences;

 

    inadequate banking systems;

 

    different and/or more stringent environmental laws and regulations;

 

    restrictions on the repatriation of profits or payment of dividends;

 

    crime, strikes, riots, civil disturbances, terrorist attacks or wars;

 

    nationalization or expropriation of property;

 

    law enforcement authorities and courts that are weak or inexperienced in commercial matters; and

 

    deterioration of political relations among countries.

Globe’s competitive strength as a low-cost silicon metal producer is partly tied to the value of the currency where they operate compared to other currencies. Currencies have fluctuated significantly especially in recent years.

Exchange controls and restrictions on transfers abroad and capital inflow restrictions have limited, and can be expected to continue to limit, the availability of international credit. For example, the results of FerroAtlántica’s Venezuelan subsidiary have been adversely affected by changes to exchange rate policies and while Argentina recently lifted its restrictions limiting the ability of companies to buy foreign currency and to make dividend payments abroad, it devalued the peso, which is likely to fuel inflation and increase operating costs.

 

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The critical social, political and economic conditions in Venezuela have adversely affected, and may continue to adversely affect, our results of operations.

In 2013, the Venezuelan government devaluated the Bolívar from 4.3 VEF to one U.S. Dollar to 6.3 VEF to one U.S. dollar and in 2014, further devalued it up to 50 VEF to one U.S. dollar, depending on the product. This has led to a shortage of basic materials and parts, difficulties importing raw materials, 58.2% inflation in December 2013 and, consequently, higher operating costs. The combination of these factors has adversely affected our production and the results of operations of our Venezuelan subsidiary, FerroVen, resulting in a loss of $23.1 million in 2013 and $38.3 million in 2014. In 2014, inflation in Venezuela reached 68.5% and the critical state of the economy caused a shortage of raw materials, a general deterioration of operating conditions and new currency regulations announced in March 2015. In 2016, the Venezuelan government announced a new exchange rate for export companies of 199 VEF to one U.S. Dollar. If the critical social, political and economic conditions in Venezuela continue or worsen, our business, results of operations and financial condition could be adversely affected.

We are exposed to foreign currency exchange risk and our business and results of operations may be negatively affected by the appreciation of the Euro.

We transact business in numerous countries around the world and expect that a significant portion of our business will continue to take place in international markets. We prepared our consolidated financial statements in U.S. Dollars in connection with the registration statement of which this prospectus forms a part, while the financial statements of each of our subsidiaries will be prepared in the functional currency of that entity. Accordingly, fluctuations in the exchange rates will impact our results of operations and financial condition. As such, it is expected that our revenues and earnings will continue to be exposed to the risks that may arise from fluctuations in foreign currency exchange rates, which could have a material adverse effect on our business, results of operations or financial condition.

Our sales made in U.S. dollars exceed the amount of our purchases made in U.S. dollars. The appreciation of the euro against the U.S. dollar would have an adverse effect on our margins and results of operations. Additionally, sales made by our Chinese competitors into Europe are denominated in U.S. dollars, whereas our sales into Europe and the majority of our production costs at our European plants are denominated in Euros. If the Euro appreciates against the U.S. dollar, the prices of our products in the European market may no longer be competitive with the prices of our Chinese competitors’ products. As a result, our sales could decline and we may lose market share to these competitors, which could have a material adverse effect on our business and results of operation.

We depend on a limited number of third party suppliers for some of our required raw materials. The loss of one of these suppliers or the failure of one of these suppliers to supply raw materials in compliance with our contractual obligations could have a material adverse effect on our business.

Colombia and the United States are among the preferred sources for the coal required for the production of silicon alloys and the vast majority of the industry is supplied from these two countries. In 2014, 95% of the coal purchased by FerroAtlántica came from Carbones del Cerrejón Norte mine in Colombia. Additionally, in 2014, the vast majority of manganese ore purchased by FerroAtlántica came from suppliers located in South Africa and Gabon. BHP Billiton and Eramet supplied approximately 82% of the manganese ore utilized by FerroAtlántica in 2014. We do not control these third party suppliers, and rely on them to provide their products and perform their services in accordance with the terms of their contracts, which increases our vulnerability to problems with the products and services they provide. If these suppliers fail to provide us with the required raw material in a timely manner or at all, or if the quantity or quality of the raw material provided is lower than that contractually agreed, we may not be successful in procuring adequate supplies of raw materials from alternative sources on terms as favorable. Such events could have a material adverse effect on our reputation, business, results of operations and financial condition. Additionally, any economic, social, political or other factor adversely affecting the economies of Colombia, South Africa and Gabon might adversely affect the ability of suppliers from those countries to provide their products to us, in which case we might not be able to procure the required raw materials from other sources in a timely manner, at comparable costs or at all, which could have a material adverse effect on our reputation, business, results of operations and financial condition.

 

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We may be unable to successfully develop our planned investments in the construction of new capacity or in the expansion and improvement of existing facilities and this could have a material adverse effect on our business prospects, financial condition and results of operations.

We are, or may be, engaged in significant capital improvements to our existing metallurgical and hydroelectric facilities, or in the addition of capacity to our hydroelectric operations in Spain and France. We are also engaged in development and/or construction of new facilities. Should any such efforts be unsuccessful or not completed in a timely manner, we could be subject to additional costs or impairments which could have a material adverse effect on its business prospects, financial condition and results of operations.

If hydrology conditions at our hydropower facilities are unfavorable or below our estimates, our electricity production, and therefore our revenue, may be substantially below our expectations.

The revenues generated by our hydroelectric operations are proportional to the amount of electricity generated, which in turn is entirely dependent upon available water flows. Operating results for our plants may vary significantly from period to period depending on the water flows during the periods in question. Hydrology conditions have natural variations from season to season and from year to year and may also change permanently because of climate change or other factors.

Hydroelectric power generation is dependent on the amount of rainfall and river flows in the regions in which our hydropower projects are located, which may vary considerably from quarter to quarter and from year to year. Any reduction in seasonal rainfall, could cause our hydropower plants to run at a reduced capacity and therefore produce less electricity, impacting our profitability. A sustained decline in water flow or shutdown at our hydropower plants could lead to a material adverse change in the volume of electricity generated, which could have a material adverse effect on our results of operations.

Conversely, if hydrological conditions are such that too much rainfall occurs at any one time, water may flow too quickly and at volumes in excess of a particular hydropower plant’s designated flood levels, which may result in the forced dumping of reservoir water. A natural disaster or severe weather conditions, including flooding, lightning strikes, earthquakes, severe storms, wildfires, and other unfavorable weather conditions (including those from climate change), could impact water flows of the rivers on which our hydropower plants depend and require us to shut down our turbines or related equipment and facilities, impeding our ability to maintain and operate our projects and decreasing electricity production levels and revenues.

Any delay or failure to procure, renew or maintain necessary governmental permits, including environmental permits, and concessions to operate our hydropower plants would adversely affect our results of operation.

The operation of our hydropower plants is highly regulated, requires various governmental permits, including environmental permits, and concessions, and may be subject to the imposition of conditions by government authorities. We cannot predict whether the conditions prescribed in the permits and concessions will be achievable. The denial of a permit essential to a hydropower plant or the imposition of impractical conditions would impair our ability to operate such plant. If we fail to satisfy the conditions or comply with the restrictions imposed by governmental permits or concessions, or the restrictions imposed by any statutory or regulatory requirements, we may become subject to regulatory enforcement action and the operation of our hydropower plants could be adversely affected or be subject to fines, penalties or additional costs or revocation of such permits or concessions. Any failure to procure, renew or maintain necessary permits and concessions would adversely affect continuing operation of our hydropower plants.

Equipment failures may lead to production curtailments or shutdowns and repairing any failure could require us to expend significant amounts of capital and other resources, which could adversely affect our business and results of operations.

Many of our business activities are characterized by substantial investments in complex production facilities and manufacturing equipment. Because of the complex nature of our production facilities, any interruption in manufacturing resulting from fire, explosion, industrial accidents, natural disaster, equipment failures or otherwise could cause significant losses in operational capacity and could materially and adversely affect our business and operations.

 

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Our hydropower generation assets and other equipment may not continue to perform as they have in the past or as they are expected. Any equipment failure due to wear and tear, latent defect, design error or operator error, early obsolescence, natural disaster or other force majeure event, could cause significant losses in operational capacity and repairing such failures could require us to expend significant amounts of capital and other resources, which could have a material adverse effect on our business and operations. Such failures could result in damage to the environment or damages and harm to third parties or the public, which could expose us to significant liability.

We depend on proprietary manufacturing processes and software. These processes may not yield the cost savings that we anticipate and our proprietary technology may be challenged.

We rely on proprietary technologies and technical capabilities in order to compete effectively and produce high quality silicon metal and silicon-based alloys. Some of these proprietary technologies that we rely on are:

 

    computerized technology that monitors and controls production furnaces;

 

    electrode technology and operational know-how;

 

    metallurgical process for the production of solar-grade silicon metal;

 

    production software that monitors the introduction of additives to alloys, allowing the precise formulation of the chemical composition of products; and

 

    flowcaster equipment, which maintains certain characteristics of silicon-based alloys as they are cast.

We are subject to a risk that:

 

    we may not have sufficient funds to develop new technology and to implement effectively our technologies as competitors improve their processes;

 

    if implemented, our technologies may not work as planned; and

 

    our proprietary technologies may be challenged and we may not be able to protect our rights to these technologies.

Patent or other intellectual property infringement claims may be asserted against us by a competitor or others. Our intellectual property may not be enforceable, and it may not prevent others from developing and marketing competitive products or methods. An infringement action against us may require the diversion of substantial funds from our operations and may require management to expend efforts that might otherwise be devoted to operations. A successful challenge to the validity of any of our proprietary intellectual property may subject us to a significant award of damages, or we may be enjoined from using our proprietary intellectual property, which could have a material adverse effect on our operations.

We also rely on trade secrets, know-how and continuing technological advancement to maintain our competitive position. We may not be able to effectively protect our rights to unpatented trade secrets and know-how.

We are a holding company whose principal source of operating cash is the income received from our subsidiaries.

We are dependent on the income generated by our subsidiaries, including Globe and FerroAtlántica, in order to make distributions and dividends on our Shares. The amount of distributions and dividends, if any, which may be paid to us from any operating subsidiary will depend on many factors, including such subsidiary’s results of operations and financial condition, limits on dividends under applicable law, its constitutional documents, documents governing any indebtedness, applicability of tax treaties and other factors which may be outside our control. If our operating subsidiaries do not generate sufficient cash flow, we may be unable to make distributions and dividends on our Shares.

 

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The BCA Special Committee may not be able to effectively enforce our rights under the Grupo VM indemnity in the Business Combination Agreement, and the operation of the BCA Special Committee could have an adverse impact on relationships with Grupo VM if it seeks to take enforcement action.

At the closing of the Business Combination, our Board formed a three-member standing committee, composed of two independent Globe directors and one independent Grupo VM director (the “BCA Special Committee”). The BCA Special Committee takes action by majority vote. The functions of the BCA Special Committee include responsibility for, among other things, the evaluation of potential claims for losses and enforcement of the indemnification rights under the Business Combination Agreement. The BCA Special Committee performs its duties on behalf of and in the best interests of us and our shareholders but excluding Grupo VM. Grupo VM deals exclusively with the BCA Special Committee on all indemnity matters under the Business Combination Agreement. It is uncertain whether the BCA Special Committee will be able to effectively perform its duties as contemplated by the Business Combination Agreement or whether the BCA Special Committee will have the appropriate authority to implement the actions it wishes to take. Further, if the BCA Special Committee decides to pursue enforcement action against Grupo VM or under the R&W Policy, such action could negatively impact our and the BCA Special Committee members’ relationships with Grupo VM and the members of our Board designated by Grupo VM, which could impact the effective functioning of our Board and have an adverse impact on our business.

Our business relationships may be subject to disruption due to uncertainty associated with the Business Combination.

Parties with which we do business may experience uncertainty associated with the Business Combination, including with respect to current or future business relationships. Our business relationships may be subject to disruption as customers, distributors, suppliers, vendors and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us. These disruptions could have an adverse effect on the businesses, financial condition, results of operations or prospects, including an adverse effect on our ability to realize the anticipated benefits of the Business Combination.

Our business operations may be impacted by various types of claims, lawsuits, and other contingent obligations.

We are involved in various legal and regulatory proceedings including those that arise in the ordinary course of our business. We estimate such potential claims and contingent liabilities and, where appropriate, record provisions to address these contingent liabilities. The ultimate outcome of the legal matters pending against us is uncertain, and although such claims, lawsuits and other legal matters are not expected individually to have a material adverse effect on our financial condition or results of operations, such matters could have, in the aggregate, a material adverse effect on our financial condition or results of operations. Furthermore, we could, in the future, be subject to judgments or enter into settlements of lawsuits and claims that could have a material adverse effect on our results of operations in any particular period. While we maintain insurance coverage with respect to certain claims, we may not be able to obtain such insurance on acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against any such claims. See “Globe Management’s Discussion & Analysis of Financial Condition and Results of Operation—Litigation and Contingencies” and “Business—The FerroAtlántica Division—Legal Proceedings” included elsewhere in this prospectus for additional information regarding legal proceedings to which we are subject.

Risks Related to this Offering and our Ordinary Shares

Our share price may be volatile, and purchasers of our Ordinary Shares could incur substantial losses.

Our share price may be volatile. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your Ordinary Shares at or above the price at which you purchase our Ordinary Shares. The market price for our Ordinary Shares may be influenced by many factors, including:

 

    the success of competitive products or technologies;

 

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    regulatory developments in the United States and foreign countries;

 

    developments or disputes concerning patents or other proprietary rights;

 

    the recruitment or departure of key personnel;

 

    quarterly or annual variations in our financial results or those of companies that are perceived to be similar to us;

 

    market conditions in the industries in which we compete and issuance of new or changed securities analysts’ reports or recommendations;

 

    the failure of securities analysts to cover our Ordinary Shares or changes in financial estimates by analysts;

 

    the inability to meet the financial estimates of analysts who follow our Ordinary Shares;

 

    investor perception of our Company and of the industry in which we compete; and

 

    general economic, political and market conditions.

If securities or industry analysts do not publish or cease publishing research reports about us, if they adversely change their recommendations regarding our Ordinary Shares or if our operating results do not meet their expectations, the price of our Ordinary Shares could decline.

The trading market for our Ordinary Shares will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. Securities and industry analysts currently publish limited research on us. If there is limited or no securities or industry analyst coverage of us, the market price and trading volume of our Ordinary Shares would likely be negatively impacted. Moreover, if any of the analysts who may cover us downgrade our Ordinary Shares, provide more favorable relative recommendations about our competitors or if our operating results or prospects do not meet their expectations, the market price of our Ordinary Shares could decline. If any of the analysts who may cover us were to cease coverage or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.

We will incur increased costs as a result of becoming a public company in the United States.

In addition to the expenses we incur as a public company in the United Kingdom, we will also incur significant legal, accounting, insurance and other expenses, including costs associated with U.S. public company reporting requirements, as a public company listed on the NASDAQ and regulated by the U.S. securities laws. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 and the Dodd Frank Wall Street Reform and Consumer Protection Act and related rules implemented by the SEC and NASDAQ.

We are a public limited company organized under the laws of England and Wales, and our Ordinary Shares have rights different from the shares of common stock of a corporation organized in the United States.

The rights of our shareholders are governed by the Articles and by the laws of England and Wales. These rights are different from the rights applicable to holders of shares of common stock of a corporation organized in the United States. We were incorporated as a private limited company with the legal name VeloNewco Limited under the laws of England and Wales on February 5, 2015 with an issued share capital of $1.00, which consisted of one registered share and one class of ordinary shares. Prior to the consummation of the Business Combination, our share capital was increased to meet the minimum sterling share capital requirement for an English public limited company of £50,000, by the issue of 50,000 non-voting redeemable preference shares of £1.00 each to Grupo VM. Following such issue, we were re-registered as a public limited company under the laws of England and Wales and changed our name to Ferroglobe PLC. In October 2015, we also issued 14 ordinary shares of $1.00 each for a total amount of $14.00. Subsequently on the same date, the 15 ordinary shares of $1.00 each were consolidated into two shares of $7.50 each, for a total amount of $15.00.

In connection with the Stock Exchange (as defined below) and the closing of the Business Combination, we allotted and issued 98,078,161 Class A Ordinary Shares to Grupo VM in consideration for our acquisition of all of the issued and outstanding ordinary shares in FerroAtlántica. Immediately following the Stock Exchange, the non-voting redeemable preference shares were redeemed by the Company out of distributable reserves, and we are in the process of finalizing the documentation in connection with such redemption. In connection with the Globe Merger (as defined below) and the closing of the Business Combination and following the redemption of the nonvoting redeemable preference shares, we allotted and issued 73,759,990 Ordinary Shares to the holders of Globe’s common stock in return for 73,759,990 shares of Globe’s existing common stock being cancelled pursuant to the Globe Merger.

For a description of the rights applicable to holders of our Ordinary Shares, see “Description of Share Capital” beginning on page 182 of this prospectus.

As a foreign private issuer and “controlled company” within the meaning of the rules of NASDAQ, we are subject to different U.S. securities laws and NASDAQ governance standards than domestic U.S. issuers. This may afford less protection to holders of our Ordinary Shares, and you may not receive corporate and company information and disclosure that you are accustomed to receiving or in a manner in which you are accustomed to receiving it.

As a foreign private issuer, the rules governing the information that we disclose differ from those governing U.S. corporations pursuant to the United States Securities Exchange Act of 1934, as amended (“Exchange Act”). Although we intend to report periodic financial results and certain material events, we are not required to file quarterly reports on Form 10-Q or provide current reports on Form 8-K disclosing significant events within four days of their occurrence. In addition, we are exempt from the SEC’s proxy rules, and proxy statements that we distribute will not be subject to review by the SEC. Our exemption from Section 16 rules regarding sales of Ordinary

 

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Shares by insiders means that you will have less data in this regard than shareholders of U.S. companies that are subject to this part of the Exchange Act. As a result, you may not have all the data that you are accustomed to having when making investment decisions with respect to domestic U.S. public companies.

As a “controlled company” within the meaning of the corporate governance standards of NASDAQ, we may elect not to comply with certain corporate governance requirements, including:

 

    the requirement that a majority of our Board consist of independent directors;

 

    the requirement that our Board have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    the requirements that director nominees are selected, or recommended for selection by our Board, either by (1) independent directors constituting a majority of our Board’s independent directors in a vote in which only independent directors participate, or (2) a nominations committee comprised solely of independent directors, and that a formal written charter or board resolution, as applicable, addressing the nominations process is adopted.

We may utilize these exemptions for as long as we continue to qualify as a “controlled company.” While exempt, we will not be required to have a majority of independent directors, our nominating and compensation committees will not be required to consist entirely of independent directors and such committees will not be subject to annual performance evaluations.

Furthermore, NASDAQ Rule 5615(a)(3) provides that a foreign private issuer, such as we, may rely on home country corporate governance practices in lieu of certain of the rules in the NASDAQ Rule 5600 Series and Rule 5250(d), provided that we nevertheless comply with NASDAQ’s Notification of Noncompliance requirement (Rule 5625), the Voting Rights requirement (Rule 5640) and that we have an audit committee that satisfies Rule 5605(c)(3), consisting of committee members that meet the independence requirements of Rule 5605(c)(2)(A)(ii). Although we are permitted to follow certain corporate governance rules that conform to U.K. requirements in lieu of many of the NASDAQ corporate governance rules, we intend to comply with the NASDAQ corporate governance rules applicable to foreign private issuers. Accordingly, our shareholders will not have the same protections afforded to stockholders of U.S. companies that are subject to all of the corporate governance requirements of NASDAQ. For additional information, see “Directors, Management and Corporate Governance—Foreign Private Issuer Exemption”, beginning on page 167 of this prospectus.

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

We could cease to be a foreign private issuer if a majority of our outstanding voting securities are directly or indirectly held of record by U.S. residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to us under U.S. securities laws under such event may be significantly higher than costs we incur as a foreign private issuer, which could have a material adverse effect on our business and financial results.

If Grupo VM’s share ownership falls below 50%, we may no longer be considered a “controlled company” within the meaning of the rules of NASDAQ upon completion of this offering.

There can be no assurance that the selling shareholders, including Grupo VM, will sell any or all of the Ordinary Shares registered pursuant to this registration statement of which this prospectus forms a part. However, in the event Grupo VM sells some or all of its shares being registered under this registration statement, it could result in Grupo VM owning less than 50% of the total voting power of our Shares. Accordingly, we may no longer be considered a “controlled company” within the meaning of the corporate governance standards of NASDAQ. Under NASDAQ rules, a company that ceases to be a controlled company must comply with the independent board committee requirements as they relate to the nominating and corporate governance and compensation committees on the following phase-in schedule: (1) one independent committee member at the time it ceases to be a controlled company, (2) a majority of independent committee members within 90 days of the date it ceases to be a controlled company and (3) all independent committee members within one year of the date it ceases to be a controlled company. Additionally, NASDAQ rules provide a 12-month phase-in period from the date a company ceases to be a controlled company to comply with the majority independent board requirement. If, within the phase-in periods, we are not able to recruit additional directors who would qualify as independent, or otherwise comply with NASDAQ rules, we may be subject to enforcement actions by NASDAQ. Furthermore, a change in our board of directors and committee membership may result in a change in corporate strategy and operation philosophies, and may result in deviations from our current growth strategy, which could have a material adverse effect on our business and financial results.

As an English public limited company, certain capital structure decisions will require shareholder approval, which may limit our flexibility to manage our capital structure.

                English law provides that a board of directors may only allot shares (or rights to subscribe for or convertible into shares) with the prior authorization of shareholders, such authorization being up to the aggregate nominal amount of shares and for a maximum period of five years, each as specified in the articles of association or relevant shareholder resolution. The Articles authorize the allotment of additional shares for a period of five years from December 23, 2015 (being the date of the adoption of the Articles), which authorization will need to be renewed upon expiration (i.e., at least every five years) but may be sought more frequently for additional five-year terms (or any shorter period).

 

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English law also generally provides shareholders with preemptive rights when new shares are issued for cash. However, it is possible for the articles of association, or for shareholders acting in a general meeting, to exclude preemptive rights. Such an exclusion of preemptive rights may be for a maximum period of up to five years from the date of adoption of the articles of association, if the exclusion is contained in the articles of association, or from the date of the shareholder resolution, if the exclusion is by shareholder resolution. In either case, this exclusion would need to be renewed by our shareholders upon its expiration (i.e., at least every five years). The Articles exclude preemptive rights for a period of five years from December 23, 2015, which exclusion will need to be renewed upon expiration (i.e., at least every five years) to remain effective, but may be sought more frequently for additional five-year terms (or any shorter period).

English law also generally prohibits a public company from repurchasing its own shares without the prior approval of shareholders by ordinary resolution, being a resolution passed by a simple majority of votes cast, and other formalities. Such approval may be for a maximum period of up to five years.

See “Description of Share Capital” beginning on page 182 of this prospectus.

English law requires that we meet certain financial requirements before we declare dividends or repurchases.

Under English law, we may only declare dividends, make distributions or repurchase shares out of distributable reserves of the Company or distributable profits. “Distributable profits” are a company’s accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital duly made. In addition, as a public company, we may only make a distribution if the amount of our net assets is not less than the aggregate amount of our called-up share capital and undistributable reserves and if, and to the extent that, the distribution does not reduce the amount of those assets to less than that aggregate amount. We intend to implement a reduction of that capital in order to create a distributable reserve to support the payment of possible future dividends or future share repurchases. Neither the capitalization nor the reduction of that capital will impact shareholders’ relative interests in our capital. The Articles permit declaration of dividends by ordinary resolution of the shareholders, provided that the directors have made a recommendation as to its amount. The dividend shall not exceed the amount recommended by the directors. The directors may also decide to pay interim dividends if it appears to them that the profits available for distribution justify the payment. When recommending or declaring the payment of a dividend, the directors will be required under English law to comply with their duties, including considering our future financial requirements.

The enforcement of shareholder judgments against us or certain of our directors may be more difficult.

Because we are a public limited company incorporated under English law, and because certain of our directors are resident in Spain, our shareholders could experience more difficulty enforcing judgments obtained against us or our directors in U.S. courts than would currently be the case for U.S. judgments obtained against a U.S. public company or U.S. directors. In addition, it may be more difficult (or impossible) to bring some types of claims against us or our directors in courts in England or against certain of our directors in courts in Spain than it would be to bring similar claims against a U.S. company or its directors in a U.S. court. For a detailed discussion of these differences, see “Description of Share Capital—Comparison of Shareholder Rights,” beginning on page 193 of this prospectus, and “Service of Process and Enforcement of Liabilities,” beginning on page 210 of this prospectus.

Risks Related to Tax Matters

Transfers of our Ordinary Shares may be subject to U.K. stamp duty or U.K. stamp duty reserve tax (“SDRT”).

U.K. stamp duty and/or SDRT is imposed on certain transfers of or agreements to transfer chargeable securities (which include shares in companies incorporated in the U.K.) at a rate of 0.5% of the consideration paid for the transfer. Certain issues or transfers of shares to depositaries or into clearance services are charged at a higher rate of 1.5%.

 

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Our Ordinary Shares are held in one or more clearance systems or depositary systems. Subsequent transfers of such Ordinary Shares within a clearance system, or between clearance systems, should not be subject to U.K. stamp duty or SDRT. Transfers of shares from a clearance system into a depositary system should also not be subject to U.K. stamp duty or SDRT.

A transfer of our Ordinary Shares from within a clearance system or depositary system out of that clearance system or depositary system and any subsequent transfers that occur entirely outside such systems, including the repurchase of our Ordinary Shares by us, will generally be subject to U.K. stamp duty or SDRT at a rate of 0.5% of any consideration, which is payable by the transferee of the Ordinary Shares. If such Ordinary Shares are redeposited into a clearance system or depositary system, the redeposit will also generally be subject to U.K. stamp duty or SDRT at the higher 1.5% rate. The repurchase of our Ordinary Shares by us from within a clearance system or depositary system may also be subject to U.K. stamp duty or SDRT.

The application of Section 7874 of the Code and/or changes in law could affect our status as a foreign corporation for U.S. federal income tax purposes, limit the U.S. tax benefits from us engaging in certain transactions, or impose U.S. withholding tax on certain payments from our affiliates.

We believe that, under current law, we should be treated as a foreign corporation for U.S. federal income tax purposes. However, the Internal Revenue Service (the “IRS”) may assert that we should be treated as a U.S. corporation for U.S. federal tax purposes pursuant to Section 7874 of the Internal Revenue Code of 1986, as amended (the “Code”). Under Section 7874 of the Code, we would be treated as a U.S. corporation for U.S. federal tax purposes if, after the Globe Merger, (i) at least 80% of our Ordinary Shares (by vote or value) were considered to be held by former holders of common stock of Globe by reason of holding such common stock, as calculated for Section 7874 purposes, and (ii) our expanded affiliated group did not have substantial business activities in the United Kingdom (the “80% Test”). (The percentage (by vote and value) of our Ordinary Shares considered to be held by former holders of common stock of Globe immediately after the Globe Merger by reason of their holding common stock of Globe is referred to in this disclosure as the “Section 7874 Percentage.”)

Determining the Section 7874 Percentage is complex and, with respect to the Globe Merger, subject to legal uncertainties. In that regard, the IRS recently announced in Notice 2015-79 (the “Notice”) that it will promulgate new rules under which the Class A Ordinary Shares we issued pursuant to the Globe Merger would be disregarded for purposes of determining whether the 80% Test is met if the Section 7874 Percentage were determined to be at least 60% when such Class A Ordinary Shares are included and certain other conditions were met. While these rules have yet to be published such that their application to the Globe Merger is unclear, they will apply to all transactions occurring on or after November 19, 2015, which will include the Globe Merger. If the Section 7874 Percentage were otherwise determined to be at least 60% and the other conditions ultimately specified in the rules promulgated under the Notice are met such that the Class A Ordinary Shares issued pursuant to the Globe Merger were disregarded for purposes of calculating the Section 7874 Percentage, the 80% Test would be met and we would be treated as a U.S. corporation for U.S. federal tax purposes. While we believe the Section 7874 Percentage is less than 60% such that the rules promulgated with respect to the Notice would not apply to us, we cannot assure you that the IRS will agree with this position and/or would not successfully challenge our status as a foreign corporation. If the IRS successfully challenged our status as a foreign corporation, significant adverse tax consequences would result for us.

In addition to the rules to be promulgated under the Notice, changes to Section 7874 of the Code, the U.S. Treasury Regulations promulgated thereunder, or to other relevant tax laws (including under applicable tax treaties) could adversely affect our status or treatment as a foreign corporation, and the tax consequences to our affiliates, for U.S. federal tax purposes, and any such changes could have prospective or retroactive application. Recent legislative proposals have aimed to expand the scope of U.S. corporate tax residence, including by potentially causing us to be treated as a U.S. corporation if the management and control of us and our affiliates were determined to be located primarily in the United States, or by reducing the Section 7874 Percentage at or above which we would be treated as a U.S. corporation such that it would be lower than threshold imposed under the 80% Test.

Even if the rules promulgated under the Notice do not apply to the Globe Merger and we are treated as a foreign corporation for U.S. federal tax purposes, several limitations could apply to us if the Section 7874

 

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Percentage were to be at least 60%. For example, we and our U.S. affiliates (including Globe) would be prohibited from using our net operating losses, foreign tax credits or other tax attributes to offset the income or gain recognized by reason of the transfer of property to a foreign related person during the 10-year period following the Globe Merger or any income received or accrued during such period by reason of a license of any property by Globe or any of our U.S. affiliates to a foreign related person. The IRS has announced that it will promulgate new rules, which may limit the ability to restructure the non-U.S. members of our group. In addition, other recent legislative proposals would cause us and our affiliates to be subject to certain intercompany financing limitations, including with respect to their ability to use certain interest expense deductions, if the Section 7874 Percentage were to be at least 60%. Furthermore, under certain circumstances, recent treaty proposals by the U.S. Department of the Treasury, if ultimately adopted by the United States and relevant foreign jurisdictions, could reduce the potential tax benefits for us and our affiliates by imposing U.S. withholding taxes on certain payments from our U.S. affiliates to related and unrelated foreign persons. Thus, the rules under Section 7874 and other relevant provisions and tax laws (including under applicable tax treaties) could change on a prospective or retroactive basis in a manner that could adversely affect us and our affiliates.

We intend to operate so as to be treated exclusively as a resident of the U.K. for tax purposes, but the relevant tax authorities may treat us as also being a resident of another jurisdiction for tax purposes.

We are a company incorporated in the U.K. Current U.K. tax law provides that we will be regarded as being U.K. resident for tax purposes from incorporation and shall remain so unless (i) we were concurrently resident of another jurisdiction (applying the tax residence rules of that jurisdiction) that has a double tax treaty with the U.K. and (ii) there is a tiebreaker provision in that tax treaty which allocates exclusive residence to that other jurisdiction.

Based upon our anticipated management and organizational structure, we believe that we should be regarded solely as resident in the U.K. from our incorporation for tax purposes. However, because this analysis is highly factual and may depend on future changes in our management and organizational structure, there can be no assurance regarding the final determination of our tax residence. Should we be treated as resident in a country or jurisdiction other than the U.K., we could be subject to taxation in that country or jurisdiction on our worldwide income and may be required to comply with a number of material and formal tax obligations, including withholding tax and/or reporting obligations provided under the relevant tax law, which could result in additional costs and expenses.

We may not qualify for benefits under the tax treaties entered into between the United Kingdom and other countries.

We intend to operate in a manner such that when relevant, we are eligible for benefits under the tax treaties entered into between the U.K. and other countries. However, our ability to qualify and continue to qualify for such benefits will depend upon the requirements contained within each treaty and the applicable domestic laws, as the case may be, on the facts and circumstances surrounding our operations and management, and on the relevant interpretation of the tax authorities and courts.

Our or our subsidiaries’ failure to qualify for benefits under the tax treaties entered into between the U.K. and other countries could result in adverse tax consequences to us and our subsidiaries and could result in certain tax consequences of owning or disposing of our Shares differing from those discussed below.

Future changes to domestic or international tax laws or to the interpretation of these laws by the governmental authorities could adversely affect us and our subsidiaries.

The U.S. Congress, the U.K. Government, the Organization for Economic Co-operation and Development and other government agencies in jurisdictions where we and our affiliates do business have had an extended focus on issues related to the taxation of multinational corporations. One example is in the area of “base erosion and profit shifting,” in which payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. Thus, the tax laws in the United States, the United Kingdom or other countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such changes could adversely affect us. Furthermore, the interpretation and application of domestic or international tax laws made by us and our subsidiaries could differ from that of the relevant governmental authority, which could result in administrative or judicial procedures, actions or sanctions, which could be material.

 

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We and our subsidiaries are subject to tax laws of numerous jurisdictions, and our interpretation of those laws is subject to challenge by the relevant governmental authorities.

We and our subsidiaries are subject to tax laws and regulations in the United Kingdom, the United States, Spain and the numerous other jurisdictions in which we operate. These laws and regulations are inherently complex and we and our subsidiaries are (and have been) obligated to make judgments and interpretations about the application of these laws and regulations to us and our subsidiaries and their operations and businesses. The interpretation and application of these laws and regulations could be challenged by the relevant governmental authority, which could result in administrative or judicial procedures, actions or sanctions, which could be material.

 

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USE OF PROCEEDS

We will not receive any proceeds from the sale of any Ordinary Shares by the selling shareholders.

The selling shareholders will receive all of the net proceeds from the sale of any Ordinary Shares offered by them under this prospectus. The selling shareholders will pay any underwriting discounts and commissions and expenses incurred by the selling shareholders for brokerage, accounting, tax, legal services or any other expenses incurred by the selling shareholders in disposing of these Ordinary Shares. We will bear all other costs, fees and expenses incurred in effecting the registration of the Ordinary Shares covered by this prospectus.

 

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DIVIDEND POLICY

Our Board intends to declare annual (or final) dividends and interim dividends, payable quarterly, to be reviewed each year, but it will depend upon many factors, including the amount of our distributable profits as noted below. On February 3, 2016, our Board declared a quarterly dividend in the amount of $0.08 per Share payable on March 14, 2016 to shareholders of record at the close of business on February 26, 2016. Pursuant to the Articles, and subject to applicable law, the Company may by ordinary resolution declare dividends (which shall not exceed the amounts recommended by the directors), and the directors may decide to pay interim dividends. The Articles provide that the directors may pay any dividend if it appears to them that the profits available for distribution justify the payment. Under English law, dividends may only be paid out of distributable reserves of the Company or distributable profits, defined as accumulated realized profits not previously utilized by distribution or capitalization less accumulated realized losses to the extent not previously written off in a reduction or reorganization of capital duly made, and not out of share capital, which includes the share premium account. Further, a U.K. public company may only make a distribution if the amount of its net assets is not less than the aggregate of its called-up share capital and undistributable reserves, and if, and to the extent that, the distribution does not reduce the amount of those assets to less than that aggregate. Distributable profits are determined in accordance with generally accepted accounting principles at the time the relevant accounts are prepared. The amount of Ferroglobe’s distributable profits is a cumulative calculation. Ferroglobe may be profitable in a single year but unable to pay a dividend if the profits of that year do not offset all previous year’s accumulated losses. The shareholders of Ferroglobe may by ordinary resolution on the recommendation of the directors decide that the payment of all or any part of a dividend be satisfied by transferring non-cash assets of equivalent value, including shares or securities in any corporation.

The declaration and payment of future dividends to holders of our Shares will be at the discretion of our Board and will depend upon many factors, including our financial condition, earnings, distributable profits, legal requirements, restrictions in our debt agreements and other factors deemed relevant by our board of directors. In addition, as a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their respective jurisdictions of organization, agreements of our subsidiaries or covenants under future indebtedness that we or they may incur.

Furthermore, we are required to distribute any net proceeds of the R&W Policy we purchased in connection with the Business Combination. The R&W Policy insures us, for the benefit of the holders of Ordinary Shares, against certain breaches of certain representations and warranties made by Grupo VM and FerroAtlántica in the Business Combination Agreement, subject to the deductibles, caps and other limitations contained in the R&W Policy. Under the Articles, we would be required to distribute the aggregate net proceeds under the R&W Policy, if any, to the holders of the Ordinary Shares. However, if we do not have sufficient profits available for distribution, we will not be permitted under English law to make the distribution to the holders of our Ordinary Shares contemplated by the Articles. In these circumstances, holders of our Ordinary Shares may not receive any distribution of the net proceeds under the R&W Policy, or may only receive a partial distribution, or may suffer substantial delay before any distribution can be made under English law.

 

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MARKET PRICE OF ORDINARY SHARES

Our Ordinary Shares are currently listed for trading on the NASDAQ in U.S. Dollars under the symbol “GSM”, which was approved for listing on December 24, 2015. Prior to completion of the Business Combination, which occurred on December 23, 2015, shares of Globe’s common stock were registered pursuant to Section 12(b) of the Exchange Act and listed on NASDAQ under the ticker symbol “GSM.” Globe’s common stock was suspended from trading on the NASDAQ prior to the open of trading on December 24, 2015. The following table sets forth the high and low reported sale prices of our Ordinary Shares as of December 24, 2015 and of Globe’s common stock prior to open of trading on December 24, 2015, as reported on the NASDAQ for the periods indicated:

 

     NASDAQ Trading  

Annual

   High      Low  

2015

   $ 21.99       $ 8.88   

2014

   $ 22.00       $ 15.41   

2013

   $ 18.37       $ 10.57   

2012

   $ 17.23       $ 11.41   

2011

   $ 25.67       $ 13.24   

2010

   $ 17.99       $ 9.20   
     NASDAQ Trading  

Quarterly

   High      Low  

January 1, 2016 through March 31, 2016

   $ 11.48       $ 6.90   

October 1, 2015 through December 31, 2015

   $ 14.48       $ 8.88   

July 1, 2015 through September 30, 2015

   $ 18.00       $ 11.86   

April 1, 2015 through June 30, 2015

   $ 21.99       $ 17.41   

January 1 through March 31, 2015

   $ 19.43       $ 15.11   

October 1 through December 31, 2014

   $ 19.01       $ 15.41   

July 1 through September 30, 2014

   $ 21.40       $ 17.84   

April 1 through June 30, 2014

   $ 21.97       $ 18.42   

January 1 through March 31, 2014

   $ 22.00       $ 16.80   

October 1 through December 31, 2013

   $ 18.37       $ 15.21   

July 1 through September 30, 2013

   $ 15.69       $ 10.80   

April 1 through June 30, 2013

   $ 13.97       $ 10.57   

January 1 through March 31, 2013

   $ 15.95       $ 13.85   

October 1 through December 31, 2012

   $ 15.95       $ 13.07   

July 1 through September 30, 2012

   $ 17.23       $ 12.10   
     NASDAQ Trading  

Monthly

   High      Low  

March 2016

   $ 10.37       $ 7.97   

February 2016

   $ 9.23       $ 6.90   

January 2016

   $ 11.48       $ 7.61   

December 2015

   $ 13.17       $ 8.88   

November 2015

   $ 13.00       $ 9.45   

October 2015

   $ 14.48       $ 11.78   

September 2015

   $ 15.30       $ 11.86   

August 2015

   $ 15.55       $ 12.00   

July 2015

   $ 18.00       $ 14.83   

June 2015

   $ 20.00       $ 17.41   

May 2015

   $ 21.74       $ 18.88   

April 2015

   $ 21.99       $ 18.92   

March 2015

   $ 19.43       $ 16.34   

February 2015

   $ 17.18       $ 15.11   

January 2015

   $ 17.49       $ 15.31   

 

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As of March 29, 2016, Ferroglobe had 2 record holders in the United States, holding approximately 99.99% of our outstanding Shares, of which 98,078,161 of such shares are held by a depositary nominee on behalf of Grupo VM.

 

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CAPITALIZATION

The following table sets forth our total capitalization as of June 30, 2015. Our capitalization is presented:

 

    on an actual basis; and

 

    as adjusted for the Business Combination.

You should read the following table in conjunction with “Selected Consolidated Financial Information of Globe,” “Selected Consolidated Financial Information of FerroAtlántica,” “Globe Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “FerroAtlántica Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Combined Financial Information of Ferroglobe” and the consolidated financial statements and the related notes included elsewhere in this prospectus.

 

($ in thousands)    Actual
Basis
     Pro Forma Basis
to Reflect the
Business Combination
 

Total debt

     —           562,818   

Total equity

     (45      1,355,616   
  

 

 

    

 

 

 

Total capitalization

     (45      1,918,434   

 

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CURRENCY AND EXCHANGE RATES

We will transact business in numerous countries around the world and expects that a significant portion of our business will continue to take place in international markets. We prepared our consolidated financial statements in U.S. Dollars in connection with the registration statement of which this prospectus forms a part, while the financial statements of each of our subsidiaries will be prepared in the functional currency of that entity. Globe’s functional currency is the U.S. Dollar while FerroAtlántica’s functional currency is the Euro. Accordingly, fluctuations in the exchange rate of the functional currencies of our foreign currency entities against our functional currency will impact our results of operations and financial condition. As such, it is expected that our revenues and earnings will continue to be exposed to the risks that may arise from fluctuations in foreign currency exchange rates, which could have a material adverse effect on our business, results of operations or financial condition.

The following table sets forth, for the periods and dates indicated, the average and period end foreign exchange reference rates as published by the European Central Bank for $ per €1.00. The average is computed using the daily average during the period indicated. As of March 31, 2016, the foreign exchange rate as published by the European Central Bank was $1.1385 per €1.00.

 

Period

   Average      Period End  

Year ended December 31, 2011

   $ 1.3920       $ 1.2939   

Year ended December 31, 2012

   $ 1.2848       $ 1.3194   

Year ended December 31, 2013

   $ 1.3281       $ 1.3791   

Year ended December 31, 2014

   $ 1.3285       $ 1.2141   

Year ended December 31, 2015

   $ 1.1099       $ 1.0887   

 

Period

   High      Low  

March 2016

   $ 1.1385       $ 1.0856   

February 2016

   $ 1.1347       $ 1.0884   

January 2016

   $ 1.0920       $ 1.0742   

December 2015

   $ 1.0990       $ 1.0600   

November 2015

   $ 1.1032       $ 1.0579   

October 2015

   $ 1.1439       $ 1.0930   

September 2015

   $ 1.1419       $ 1.1138   

August 2015

   $ 1.1506       $ 1.0883   

Our inclusion of these exchange rates and other exchange rates specified elsewhere in this prospectus should not be construed as representations that the Euro amounts actually represent such U.S. Dollar amounts or could have been or could be converted into U.S. Dollars at any particular rate, if at all. These exchange rates may differ from the exchange rate in effect on and as of the date of this prospectus.

 

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SELECTED HISTORICAL FINANCIAL INFORMATION OF FERROGLOBE

The following selected historical financial information is being provided to assist you in your analysis of the financial aspects of the offering. We derived the selected historical financial information as at February 5, 2015 (our date of incorporation) from our audited financial statements. The selected historical financial information for the six-month period ended June 30, 2015 has been derived from our unaudited interim financial statements, which include, in the opinion of our management, all normal and recurring adjustments that are considered necessary to a fair statement of the interim period presented. The information set forth below is only a summary that you should read together with our audited financial statements and the related notes. Historical results for any period are not necessarily indicative of results to be expected for any future period.

Our audited and unaudited financial statements referred to above have been prepared in accordance with the requirements of IFRS.

Statement of Financial Position as of June 30, 2015 and February 5, 2015 (Date of incorporation)

 

U.S. Dollars              
     June 30, 2015      Feb. 5, 2015
US Dollar
 

Non-current assets

     —           —     

Current assets

     9,115         —     
  

 

 

    

 

 

 

TOTAL ASSETS

     9,115         —     

Non-current liabilities

     —           —     

Current liabilities

     54,414         —     
  

 

 

    

 

 

 

TOTAL LIABILITIES

     54,414         —     

Equity

     

Share capital

     1         1   

Uncalled Capital

     (1      (1

Translation differences

     (134   

Loss for the period

     (45,165   
  

 

 

    

 

 

 

TOTAL EQUITY

     (45,299      —     
  

 

 

    

 

 

 

TOTAL EQUITY AND LIABILITIES

     9,115         —     

 

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Income Statement for the period from February 5, 2015 (date of incorporation) to June 30, 2015

 

    

Period ended
June 30, 2015

 
US Dollars       

Other operating income

     —     

Administrative expenses

     —     

Other operating expenses

     (45,165
  

 

 

 

Operating profit / (loss)

     (45,165
  

 

 

 

Other gains and losses

     —     

Finance costs

     —     
  

 

 

 

Profit / (loss) before tax

     (45,165
  

 

 

 

Tax

     —     
  

 

 

 

Profit / (loss) for the period

     (45,165
  

 

 

 

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF GLOBE

The following selected historical consolidated financial information of Globe is being provided to assist you in your analysis of the financial aspects of the offering. Globe derived the selected historical consolidated financial information as of and for the fiscal years ended June 30, 2015, 2014, 2013, 2012 and 2011 from its audited consolidated financial statements. The selected historical consolidated financial information for the three-month period ended September 30, 2015 and 2014 have been derived from Globe’s unaudited condensed consolidated financial statements, which include, in the opinion of Globe’s management, all normal and recurring adjustments that are considered necessary to a fair statement of the interim periods presented. The following information should be read in conjunction with Globe’s historical consolidated financial statements and the notes thereto, as well as the section titled “Globe Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 47 of this prospectus. Historical results for any period are not necessarily indicative of results to be expected for any future period.

 

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The Globe audited and unaudited condensed consolidated financial statements referred to above have been prepared in accordance with the requirements of U.S. GAAP.

 

     Three Months
ended
September 30,
    Three Months
ended
September 30,
    Year Ended June 30,  
     2015     2014     2015     2014     2013     2012     2011  
                 (Dollars in thousands, except per share data)  

Statement of operations data:

          

Net sales

     174,756        206,083        800,773        752,817        757,550        705,544        641,863   

Cost of goods sold

     148,391        168,617        650,677        635,735        657,911        552,873        488,018   

Selling, general and administrative expenses

     17,208        15,565        88,205        92,103        64,663        61,623        54,739   

Research and development

     —          —          —          —         —         127        87   

Contract acquisition cost

     —          —          —          16,000        —         —         —     

Curtailment gain

     —          —          —          (5,831     —         —         —     

Business interruption insurance recovery

     (1,665     —          —          —         (4,594     (450     —     

Goodwill and intangible asset impairment

     —          —          —          —         13,130        —         —     

Impairment of long-lived assets

     —          —          —          —         35,387        —         —     

(Gain) loss on sale of business

     —          —          —          —         —         (54     4,249   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     10,822        21,901        61,891        14,810        (8,947     91,425        94,770   

Bargain purchase gain

     —          —          —         29,538        —         —         —    

Interest and other (expense) income

     (1,186     (1,492     (5,613     (10,737     (8,128     (4,789     (2,056
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     9,636        20,409        56,278        33,611        (17,075     86,636        92,714   

Provision for income taxes

     3,929        7,845        21,651        7,705        2,734        28,760        35,988   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     5,707        12,564        34,627        25,906        (19,809     57,876        56,726   

Income attributable to noncontrolling interest, net of tax

     283        (862     (3,307     (4,203     (1,219     (3,306     (3,918
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Globe Specialty Metals, Inc.

     5,990        11,702      $ 31,320        21,703        (21,028     54,570        52,808   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share – basic

     0.08        0.16      $ 0.42        0.29        (0.28     0.73        0.70   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share – diluted

     0.08        0.16      $ 0.42        0.29        (0.28     0.71        0.69   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

     0.08        0.08      $ 0.31        0.29        0.38        0.20        0.15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     September 30,      June 30,      June 30,      June 30,      June 30,      June 30,  
     2015      2015      2014      2013      2012      2011  
            (Dollars in thousands)  

Balance sheet data:

                 

Cash and cash equivalents

   $ 107,126         115,944         97,792         169,676         178,010         166,208   

Total assets

     800,051         829,361         845,126         871,623         936,747         678,269   

Total debt, including current portion

     101,966         101,048         125,204         139,534         140,703         48,083   

Total stockholders’ equity

     501,701         512,502         520,528         546,080         603,799         515,276   

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF FERROATLÁNTICA

The following selected historical consolidated financial information of FerroAtlántica is being provided to assist you in your analysis of the financial aspects of the offering. FerroAtlántica derived the selected historical consolidated financial information as of and for the fiscal years ended December 31, 2014, 2013, 2012, 2011 and 2010 from its audited consolidated financial statements. The selected historical consolidated financial information for the six-month period ended June 30, 2015 and 2014 have been derived from FerroAtlántica’s unaudited condensed consolidated financial statements, which include, in the opinion of FerroAtlántica’s management, all normal and recurring adjustments that are considered necessary to a fair statement of the interim periods presented. The information set forth below is only a summary that you should read together with the audited consolidated financial statements of FerroAtlántica and the related notes, as well as “FerroAtlántica Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 71 of this prospectus. The selected consolidated historical financial information may not be indicative of the future performance of FerroAtlántica.

The FerroAtlántica audited and unaudited condensed consolidated financial statements referred to above have been prepared in accordance with the requirements of IFRS.

Consolidated Income Statement Data

 

    

Six
Months
ended

June 30,

   

Six
Months
ended

June 30,

    For the years ended December 31,  

($ thousands, except per share amounts)

   2015     2014     2014     2013     2012     2011     2010  

Sales

     697,747        747,829        1,466,304        1,463,878        1,479,606        1,772,324        1,522,623   

Cost of sales

     (428,369     (465,631     (889,561     (910,892     (921,790     (1,007,200     (888,314

Other operating income

     6,674        5,221        6,891        36,904        15,676        6,204        7,952   

Staff costs

     (92,997     (96,279     (218,043     (217,527     (212,427     (235,965     (190,167

Other operating expenses

     (82,973     (92,916     (165,491     (197,670     (199,123     (192,150     (134,451

Depreciation and amortization charge, operating allowances and write-downs

     (32,185     (36,432     (74,752     (79,103     (68,582     (73,417     (53,519
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals of non-current assets and other gains and losses

     67,897        61,792        125,348        95,590        93,360        269,796        264,124   

Net impairment losses

     (870     —         (399     (1,061     (15,663     —         (9,372

Net gains/losses due to change in the value of assets

     —         —         (9,472     6,475        (2,751     (4,354     3,603   

Gains/losses disposal of non-current and financial assets

     —          69        555        448        (13     (50     —    

Other gains/losses

     202        8        (60     (2,802     1,487        1,257        566   

Operating Profit

     67,229        61,869        115,972        98,650        76,420        266,649        258,921   

Finance income

     243        2,284        4,771        2,858        5,123        6,165        5,306   

Finance costs

     (15,025     (19,756     (37,105     (47,225     (45,665     (40,079     (28,445

Exchange differences

     5,575        1,284        7,800        (7,677     81        (1,578     (1,432
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit Before Tax

     58,022        45,681        91,438        46,606        35,959        231,157        234,350   

Income tax

     (25,210     (27,940     (59,707     (24,558     (1,280     (77,258     (59,764
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the Year

     32,812        17,741        31,731        22,048        34,679        153,899        174,586   

(Profit) loss attributable to non-controlling interests

     1,346        2,516        6,706        6,400        509        (1,432     (3,029
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit/(Loss) Attributable to Grupo FerroAtlántica

     34,158        20,257        38,437        28,448        35,188        152,467        171,557   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated profit attributable to the Parent

     34,158        20,257        38,437        28,448        35,188        109,534        171,557   

Average number of shares outstanding

     200,000        200,000        200,000        200,000        200,000        200,000        200,000   
      

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share

     170.79        101.29        192.19        142.24        175.94        547.67        857.79   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit distribution to Parent

     —          —          222,218        40,535        126,453        52,026        26,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividend per share

     —          —          1,111.09        202.68        632.27        260.13        132.93   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Consolidated Statement of Financial Position Data

 

     As of December 31,  
     June 30,                                     

($ thousands)

   2015      2014      2013      2012      2011      2010  

Cash and cash equivalents

     38,952         48,651         62,246         71,631         31,816         57,580   

Total assets

     1,277,521         1,388,158         1,675,975         1,769,524         1,738,353         1,718,853   

Non-current liabilities

     396,600         468,585         477,125         392,393         280,980         347,990   

Current liabilities

     372,929         411,896         414,884         580,557         565,112         524,003   

Equity

     507,992         507,677         783,966         796,574         892,259         846,860   

 

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION OF

FERROGLOBE

The following selected unaudited pro forma condensed combined financial information of Ferroglobe for the six months ended June 30, 2015 and for the year ended December 31, 2014, comprised of selected unaudited pro forma condensed combined income statement data of Ferroglobe and selected unaudited pro forma condensed combined statement of financial position data of Ferroglobe, has been derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial information of Ferroglobe and the historical consolidated financial statements and notes thereto of Ferroglobe, FerroAtlántica and Globe, which are included elsewhere in this prospectus.

Our selected unaudited pro forma condensed combined income statement data gives effect to the Business Combination as if it had been consummated on January 1, 2014, and the selected unaudited pro forma condensed combined statement of financial position data gives effect to the Business Combination as if it had occurred on June 30, 2015. The selected unaudited pro forma condensed combined financial information is not necessarily indicative of what the Company’s consolidated financial position or results of operations actually would have been had the proposed transactions been completed as of the dates indicated. In addition, the selected unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company. The pro forma adjustments are based on the information available at the time of the preparation of this prospectus.

The selected unaudited pro forma condensed combined financial information has been prepared in accordance with IFRS as issued by the International Accounting Standards Board, following FerroAtlántica’s accounting policies and in U.S. Dollars. Ferroglobe adopted FerroAtlántica’s IFRS-based accounting policies post Business Combination (the “Combined Group’s IFRS Accounting Policies”).

The Globe pre-acquisition consolidated income statements and consolidated balance sheets used in the preparation of the selected unaudited pro forma condensed combined financial information differ from the Globe historical financial statements included elsewhere in this prospectus due to the following reasons:

 

  (1) The pre-acquisition financial statements used in the preparation of the pro forma information have been prepared on a basis consistent in all material respects with the Company’s IFRS Accounting Policies. The Globe historical financial statements have been prepared in accordance with U.S. GAAP. Note 2 to the unaudited pro forma condensed combined financial information of Ferroglobe provides further discussion of the reconciliation between IFRS and U.S. GAAP.

 

  (2) Globe’s historical financial statements are based on a fiscal year end of June 30, while Ferroglobe’s fiscal year ends December 31. The pre-acquisition consolidated income statements and consolidated balance sheets used in the preparation of the pro forma financial information were aligned with Ferroglobe’s fiscal year. Note 1 to the unaudited pro forma condensed combined financial information of Ferroglobe provides further discussion of the alignment for fiscal years.

Pro forma adjustments relate mainly to the allocation of the acquisition consideration to the assets acquired and the liabilities assumed by Ferroglobe in the Business Combination, based on a preliminary estimate of fair value of these assets and liabilities.

The information presented below should be read in conjunction with “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”.

The financial statements of Ferroglobe referred to above have been prepared in accordance with the requirements of IFRS.

 

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Unaudited Pro Forma Combined Income Statement Data

(in thousands of U.S. dollars, except per share data)

 

     Ferroglobe Pro Forma  
     Six months
June 30, 2015
     Twelve months
December 31, 2014
 

Sales

     1,094,421       $ 2,271,820   

Operating profit

     102,389         149,618   

Profit before tax

     89,557         117,442   

Profit for the year

     54,458         37,410   

Loss attributable to non-controlling interest

     1,806         9,435   

Profit attributable to the parent

     56,264         46,845   

Basic and diluted earnings per share

     0.33         0.27   

Unaudited Pro Forma Combined Statement of Financial Position Data at June 30, 2015

(in thousands of U.S. dollars)

 

     Ferroglobe Pro
Forma
 

Cash and cash equivalents

   $ 109,550   

Total assets

     2,499,292   

Bank borrowings

     442,596   

Total liabilities

     1,143,676   

Total equity

     1,355,616   

 

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GLOBE MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following is a discussion of Globe’s financial condition and results of operations for the three months ended September 30, 2015 and 2014 and the twelve months ended June 30, 2015, 2014 and 2013.

The following management’s discussion and analysis should be read in conjunction with the consolidated financial statements of Globe for the years ended June 30, 2015, 2014 and 2013 included in this prospectus. This discussion includes forward-looking statements, which, although based on assumptions that Globe considers reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those expressed or implied by the forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” beginning on page 2 of this prospectus, and, for a discussion of risks and uncertainties, you should also see “Risk Factors” beginning on page 9 of this prospectus.

The following financial information has been extracted from the audited financial statements of Globe as of and for the year ended June 30, 2015 and the unaudited condensed consolidated financial statements of Globe as of and for the three months ended September 30, 2015.

The historical financial information for Globe has been prepared in accordance with U.S. GAAP.

Introduction

Globe is one of the leading manufacturers of silicon metal and silicon-based alloys. As of September 30, 2015, Globe owned and operated eight principal manufacturing facilities in two primary operating segments: GMI, Globe’s North American operations, and Globe Metales, Globe’s Argentine operations.

Business Segments

Globe operates in five reportable segments:

 

    GMI a manufacturer of silicon metal and silicon-based alloys located in North America with plants in Beverly, Ohio, Alloy, West Virginia, Niagara Falls, New York, Selma, Alabama, Bridgeport, Alabama and Bécancour, Quebec, and a provider of specialty metallurgical coal for the silicon metal and silicon-based alloys industries located in Corbin, Kentucky;

 

    Globe Metales a manufacturer of silicon-based alloys located in Argentina with a silicon-based alloys plant in Mendoza;

 

    Solsil a developer of upgraded metallurgical grade silicon metal located Beverly, Ohio;

 

    Corporate a corporate office including general expenses, investments, and related investment income; and

 

    Other includes an electrode production operation in China (Yonvey), a cored-wire production facility located in Poland and a manufacturer of silicon-based alloys located in South Africa (Siltech). These operations do not fit into the above reportable segments and are immaterial for purposes of separate disclosure.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are pertinent non-GAAP financial metrics Globe utilizes to measure its success and are included in Globe’s quarterly press releases. These financial metrics are used to provide supplemental measures of Globe’s performance, which we believe are important because they eliminate items that have less bearing on Globe’s current and future operating performance and highlights trends in Globe’s core business that may not otherwise be apparent when relying solely on U.S. GAAP financial measures. Reconciliations of these measures to the comparable U.S. GAAP financial measures are provided below.

 

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Three Months

Ended

        
     September 30,      Twelve Months  
     2015      2014      FY 2015      FY 2014  
     (Dollars in thousands)  

Net income

   $ 5,707         12,564         34,627         25,906   

Provision for income taxes

     3,929         7,845         21,651         7,705   

Net interest expense

     960         1,162         4,076         7,955   

Depreciation, depletion, amortization and accretion

     13,542         11,625         52,006         45,228   
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 24,138         33,196         112,360         86,794   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended September 30,      Twelve Months  
     2015      2014      FY 2015      FY 2014  
     (Dollars in thousands)  

Reported EBITDA

   $ 24,138         33,196         112,360         86,794   

Transaction and due diligence expenses

     7,084         483         16,734         1,081   

Siltech idling/start-up costs

     1,302         1,882         6,474         1,583   

Business interruption

     (3,780      1,453         5,252         2,454   

Divestiture indemnification payment

     —           —           4,559         —    

Plant relocation

     —           —           568         —    

Lease termination

     —           —           457         —    

Remeasurement of stock option liability

     (5,099      (2,405      (3,410      27,042   

Contract acquisition cost

     —           —           —          16,000   

Quebec Silicon lockout costs

     —              —          6,645   

Quebec Silicon curtailment gain

     —           —           —          (5,831

Remeasurement/true-up of equity compensation

     —           —           —          200   

Quebec Silicon plant upgrades

     2,165         —           

Variable compensation

     —              —          3,885   

Bargain purchase gain

     —           —           —          (29,538
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 25,810         34,609         142,994         110,315   
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not rely upon them or consider them in isolation or as a substitute for U.S. GAAP measures, such as net income and other consolidated income or other cash flows statement data prepared in accordance with U.S. GAAP. In addition, these non-GAAP measures may not be comparable to other similarly titled measures of other companies. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of Globe’s business.

Overview and Recent Developments

Growth in global customer demand has slowed during calendar year 2015 for silicon metal and silicon-based alloys causing global tons shipped to sharply decline from fourth quarter of fiscal year 2015. Globe is still experiencing silicon demand from the chemical, automotive and solar customers. The sales mix remained the same in the first quarter of fiscal year 2016 compared to the fourth quarter of fiscal year 2015, with the sales of silicon metal contributing 57% to the total sales. As customer demand shifts between silicon-based alloys and silicon metal, Globe is prepared to promptly switch furnaces at a U.S. plant between products to meet Globe’s customer needs.

 

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Since the beginning of calendar year 2015, silicon metal and silicon-based alloys pricing have been declining due to increased low-priced U.S. imports and global demand has not been strong enough to absorb the surplus supply built up over calendar year 2014. Globe’s fixed price contracts were negotiated in November 2014 for the 2015 calendar year; therefore, they were less affected by the price declines in the first quarter fiscal year 2016, than the market as a whole. However, Globe continues to have exposure with Globe’s contracts that are index-linked and spot priced.

Net sales for the first quarter of fiscal year 2016 decreased $27,265,000 or 14% from the immediately preceding quarter as a result of a 12% decrease in metric tons shipped, a 3% decrease in silicon metal and silicon-based alloy pricing, and a 5% decrease in silica fume and other products revenue. Silicon metal volumes decreased 8% and silicon-based alloys volumes decreased 16%. Silicon metal prices decreased 5% and silicon-based alloys prices decreased 3% in the first quarter of fiscal year 2016 compared to the fourth quarter of fiscal year 2015.

Globe’s South African facility (Siltech) remains temporarily idled until demand for silicon-based alloys returns to levels that warrant production to resume. Globe will continue to review strategic alternatives for the Siltech facility including, but not limited to, marketing the facility for potential sale.

Business Combination with FerroAtlántica

On February 23, 2015, Globe, Grupo VM, FerroAtlántica, which was a wholly owned subsidiary of Grupo VM, we, which were formerly known as VeloNewco Limited and wholly owned subsidiary of Grupo VM, and Gordon Merger Sub, Inc., a newly formed Delaware corporation and our direct wholly owned subsidiary (“Merger Sub”), entered into a Business Combination Agreement (the “Original Business Combination Agreement”) pursuant to which the parties agreed, subject to the terms and conditions of the Original Business Combination Agreement, to combine the businesses of Globe and FerroAtlántica as described below (the “Business Combination”). We became the holding company for the combined businesses of Globe and FerroAtlántica upon consummation of the Business Combination. The Original Business Combination Agreement was amended and restated on May 5, 2015 and was further amended on September 10, 2015 and November 11, 2015. The Original Business Combination Agreement, as so amended and restated, is referred to as the “Business Combination Agreement.”

Transaction Overview

Subject to the terms and conditions of the Business Combination Agreement, the Company agreed to acquire from Grupo VM all of the issued and outstanding ordinary shares of FerroAtlántica in exchange for an aggregate of 98,078,161 newly issued Ferroglobe Class A ordinary shares (each a “Class A Ordinary Share”), which resulted in FerroAtlántica becoming a wholly owned subsidiary of the Company (the “Stock Exchange”). After consummation of the Stock Exchange, Merger Sub merged with and into Globe, with Globe surviving the merger as a wholly owned subsidiary of the Company (the “Globe Merger”).

In the Stock Exchange, Grupo VM may be required to pay to Ferroglobe as additional consideration for the Class A Ordinary Shares an amount in cash, if any, based upon FerroAtlántica’s net debt at closing. In the Globe Merger, each share of common stock of Globe was converted into the right to receive one ordinary share of the Company (each an “Ordinary Share”). The Class A Ordinary Shares and the Ordinary Shares have the same rights, powers and preferences, and vote together as a single class, except for the right of the holders of Ordinary Shares to the R&W Proceeds as described below.

In connection with the transaction, the Company purchased a buy side representations and warranties insurance policy (the “R&W Policy”) to insure against certain breaches of certain representations and warranties made by FerroAtlántica and Grupo VM in the Business Combination Agreement. Under the terms of the Articles of Association of the Company (the “Ferroglobe Articles”), if the Company receives proceeds under the R&W Policy (after deduction of taxes applicable to such proceeds, if any) (the “R&W Proceeds”), the Company is required to distribute the aggregate R&W Proceeds to the holders of the Ordinary Shares. Each Class A Ordinary Share automatically converts into one Ordinary Share upon the earlier to occur of: (a) the expiration of the R&W Policy; and (b) its transfer to any person or group which is not Grupo VM, any Grupo VM family member or any affiliate of Grupo VM or a Grupo VM family member.

 

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On September 10, 2015, in connection with the Memorandum of Understanding, the parties to the Business Combination Agreement entered into a First Amendment to Amended and Restated Business Combination Agreement, which provided, among other things, additional governance provisions for the benefit of Globe’s shareholders following completion of the Business Combination.

On September 22, 2015, Globe’s shareholders voted to adopt, and adopted, the Business Combination Agreement. The Business Combination was consummated on December 23, 2015.

Outlook

Globe expects silicon consumption to rebound over the next two years supported by economic growth, growth in solar-related silicon consumption, and the use of aluminum in automotive applications as a result of more stringent fuel economy standards.

Pricing for silicon metal and silicon-based alloys has been declining since the beginning of the 2015 calendar year due to globally available capacity and increasing competition. Globe’s fixed price contracts were negotiated in December 2015 for the 2016 calendar year. These new contracts were not signed at the market pricing that was prevalent last year. However, anticipating pricing to level off during calendar year 2016, Globe limited exposure to lower than market pricing next year by negotiating the majority of its contracts with adjusted index pricing and implementing pricing floor limits to help protect against further price declines.

In the first quarter of fiscal year 2016, Globe experienced lower production costs due to less raw material quality issues and reducing maintenance and furnace downtime. With maintenance outages scheduled at two of Globe’s U.S. facilities in the second quarter of fiscal 2016 compared to six facilities in the first quarter of fiscal year 2015, Globe anticipates further reductions in production costs and higher operational efficiency.

Critical Accounting Policies

Globe prepares its consolidated financial statements in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Globe bases its estimates and judgments on historical experience, known or expected trends and other factors that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates.

Business Combinations

Globe has completed a number of significant business acquisitions over the past several years and Globe’s business strategy contemplates that it may pursue additional acquisitions in the future. When Globe acquires a business, the purchase price is allocated based on the fair value of tangible assets and identifiable intangible assets acquired and liabilities assumed. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Goodwill as of the acquisition date is measured as the residual of the excess of the consideration transferred, plus the fair value of any noncontrolling interest in the acquiree at the acquisition date, over the fair value of the identifiable net assets acquired. Globe generally engages independent third-party appraisal firms to assist in determining the fair value of assets acquired and liabilities assumed. Such a valuation requires management to make significant estimates, especially with respect to intangible assets. These estimates are based on historical experience and information obtained from the management of the acquired companies. These estimates are inherently uncertain and may impact reported depreciation and amortization in future periods, as well as any related impairment of goodwill or other long lived assets.

See note 3 to Globe’s accompanying audited consolidated financial statements for detailed disclosures related to Globe’s acquisitions.

 

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Inventories

Cost of inventories is determined by the first-in, first-out method or, in certain cases, by the average cost method. Inventories are valued at the lower of cost or market value. Circumstances may arise (e.g., reductions in market pricing, obsolete, slow moving or defective inventory) that require the carrying amount of Globe’s inventory to be written down to net realizable value. Globe estimates market and net realizable value based on current and future expected selling prices, as well as expected costs to complete, including utilization of parts and supplies in its manufacturing process. Globe believes that these estimates are reasonable; however, future market price decreases caused by changing economic conditions, customer demand or other factors could result in future inventory write-downs that could be material.

Long-Lived Assets

Globe reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. Globe considers various factors in determining whether an impairment test is necessary including, among other things, a significant or prolonged deterioration in operating results and projected cash flows, significant changes in the extent or manner in which assets are used, technological advances with respect to assets which would potentially render them obsolete, strategy and capital planning, and the economic climate in the markets Globe serves. When estimating future cash flows and, if necessary, fair value, Globe makes judgments as to the expected utilization of assets and estimated future cash flows related to those assets. Globe considers historical and anticipated future results, general economic and market conditions, the impact of planned business and operational strategies and other information available at the time the estimates are made. Globe believes these estimates are reasonable; however, changes in circumstances or conditions could have a significant impact on Globe’s estimates, which might result in material impairment charges in the future.

As of June 30, 2015, the carrying value of property, plant and equipment at Globe’s Yonvey facility is approximately $13,293,000. If market prices decrease below Globe’s cost to produce carbon electrodes at Yonvey, Globe could decide to purchase from third party producers. Such a decision would require Globe to assess the recoverability of Yonvey’s long-lived assets.

As of June 30, 2015, the carrying value of property, plant and equipment at Globe’s Siltech facility is approximately $45,558,000. During the quarter ended June 30, 2015, Globe temporarily idled Siltech as a result of high winter electricity rates. Globe assessed the recoverability of the carrying value of the long-lived assets of Siltech and concluded that the undiscounted cash flows associated with the Siltech asset group exceeded the carrying value at June 30, 2015.

Income Taxes

Globe’s deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, and applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. If Globe’s management determines it is more-likely-than-not that a portion of Globe’s deferred tax assets will not be realized, a valuation allowance is recorded. The provision for income taxes is based on domestic (including federal and state) and international statutory income tax rates in the tax jurisdictions where Globe operates, permanent differences between financial reporting and tax reporting, and available credits and incentives.

Significant judgment is required in determining income tax provisions and tax positions. Globe may be challenged upon review by the applicable taxing authorities, and positions taken may not be sustained. All or a portion of the benefit of income tax positions are recognized only when Globe has made a determination that it is more-likely-than-not that the tax position will be sustained based upon the technical merits of the position. For tax positions that are determined as more-likely-than-not to be sustained, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The accounting for uncertain income tax positions requires consideration of timing and judgments about tax issues and potential

 

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outcomes and is a subjective estimate. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they could have a material impact on Globe’s results of operations and financial condition. Interest and penalties related to uncertain tax positions are recognized in income tax expense. The United States is Globe’s most significant income tax jurisdiction.

Goodwill

Goodwill represents the excess purchase price of acquired businesses over fair values attributed to underlying net tangible assets and identifiable intangible assets. Globe tests the carrying value of goodwill for impairment at a “reporting unit” level (which for Globe is represented by each reported segment and Core Metals (a component of GMI that produces silicon-based alloys)) using a two-step approach: annually as of the last day of February or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If the fair value of a reporting unit is less than its carrying value, this is an indicator that the goodwill assigned to that reporting unit may be impaired. In this case, a second step is performed to allocate the fair value of the reporting unit to the assets and liabilities of the reporting unit as if it had just been acquired in a business combination, and as if the purchase price was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is referred to as the implied fair value of goodwill. The implied fair value of the reporting unit’s goodwill is then compared to the actual carrying value of goodwill. If the implied fair value is less than the carrying value, Globe would be required to recognize an impairment loss for that excess. The valuation of Globe’s reporting units requires significant judgment in the evaluation of, among other things, recent indicators of market activity and estimated future cash flows, discount rates and other factors. The estimates of cash flows, future earnings, and discount rate are subject to change due to the economic environment and business trends, including such factors as raw material and product pricing, interest rates, expected market returns and volatility of markets served, as well as Globe’s future manufacturing capabilities, government regulation and technological change. Globe believes that the estimates of future cash flows, future earnings and fair value are reasonable; however, changes in estimates, circumstances or conditions could have a significant impact on Globe’s fair valuation estimation, which could then result in an impairment charge in the future.

As of February 28, 2015, the date of Globe’s most recent impairment test, the estimated fair value of each of Globe’s reporting units was in excess of their respective carrying values and no impairment charges were recorded during the year ended June 30, 2015.

Share-Based Compensation

Stock Options

Share-based payments are measured based on fair value using the Black-Scholes option-pricing model. The fair value of an award is affected by Globe’s stock price as well as other assumptions, including: (i) estimated volatility over the term of the awards (which is based upon the historical volatility of Globe’s common stock or stock of similar companies), (ii) estimated period of time that Globe expects participants to hold their stock options, (which is calculated using the simplified method allowed by SAB 107, or a participant-specific estimate for certain options), (iii) the risk-free interest rate (which is based upon United States Treasury interest rates appropriate for the expected term of the award) and (iv) Globe’s expected dividend yield. Certain of Globe’s share-based payment arrangements are liability-classified, which require adjustments to the fair value of the award and compensation expense based, in part, on the fair value of Globe’s stock and the assumptions discussed above at the end of each reporting period. Further, Globe estimates forfeitures for the purposes of expensing share-based payment awards that it ultimately expects to vest. The future value of Globe’s stock, the assumptions used, and changes to its estimated forfeitures could significantly impact the amount of share-based compensation expense that Globe recognizes in future periods.

Stock Appreciation Rights

Cash-settled stock appreciation rights are settled by cash transfer, based on the difference between Globe’s stock price on the date of exercise and the grant date. Globe estimates the fair value of stock appreciation rights

 

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using the Black-Scholes option pricing model, which requires the use of the same assumptions utilized in valuing stock options. The future value of Globe’s stock and the assumptions used could significantly impact the amount of share-based compensation expense Globe recognizes in future periods.

Results of Operations

Globe Three Months Ended September 30, 2015 vs. 2014

Consolidated Operations:

 

     Three Months Ended                
     September 30,      Increase      Percentage  
     2015      2014      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Net sales

   $ 174,756         206,083         (31,327      (15.2 %) 

Cost of goods sold

     148,391         168,617         (20,226      (12.0 %) 

Selling, general and administrative expenses

     17,208         15,565         1,643         10.6

Business interruption insurance recovery

     (1,665      —          (1,665      NA   
  

 

 

    

 

 

    

 

 

    

Operating income

     10,822         21,901         (11,079      (50.6 %) 

Interest expense, net

     (960      (1,162      202         (17.4 %) 

Other loss

     (226      (330      104         (31.5 %) 
  

 

 

    

 

 

    

 

 

    

Income before provision for income taxes

     9,636         20,409         (10,773      (52.8 %) 

Provision for income taxes

     3,929         7,845         (3,916      (49.9 %) 
  

 

 

    

 

 

    

 

 

    

Net income

     5,707         12,564         (6,857      (54.6 %) 

Loss (income) attributable to noncontrolling interest, net of tax

     283         (862      1,145         (132.8 %) 
  

 

 

    

 

 

    

 

 

    

Net income attributable to Globe Specialty Metals, Inc.

   $ 5,990         11,702         (5,712      (48.8 %) 
  

 

 

    

 

 

    

 

 

    

Net Sales:

 

     Three Months Ended September 30,
2015
     Three Months Ended September 30,
2014
 
     Net Sales      Net Sales  
     $ (in 000s)      MT      $/MT      $ (in 000s)      MT      $/MT  

Silicon metal

   $ 101,708         36,525       $ 2,785       $ 110,628         39,416       $ 2,807   

Silicon-based alloys

     51,731         27,282         1,896         69,432         33,900         2,048   
  

 

 

    

 

 

       

 

 

    

 

 

    

Silicon metal and silicon-based alloys

     153,439         63,807         2,405         180,060         73,316         2,456   

Silica fume and other

     21,317               26,023         
  

 

 

          

 

 

       

Total net sales

   $ 174,756             $ 206,083         
  

 

 

          

 

 

       

Net sales decreased $31,327,000 or 15% from the prior year to $174,756,000 primarily as a result of a 2% decrease in average selling prices and a 13% decrease in metric tons sold. The decrease in sales volume was driven by a 7% decrease in silicon metal tons sold and a 20% decrease in silicon-based alloys tons sold, resulting in a decrease to net sales of $21,669,000. Additionally, a 2% decrease in average selling prices resulted in a decrease to net sales of $4,952,000, in addition to a $4,706,000 decrease to net sales of other products. The decrease in silicon metal and silicon-based alloys tons sold is due to increased competition from low-priced imports.

 

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The average selling price of silicon metal and silicon-based alloys decreased 1% and 7%, respectively, in first quarter of fiscal year 2016 as compared to the prior year. Silicon metal and silicon-based alloys pricing have been declining due to increased U.S. imports.

Other revenue decreased $4,706,000 in the first quarter primarily due to decreased shipments of fines and by-products.

Cost of Goods Sold:

The $20,226,000 or 12% decrease in cost of goods sold was a result of a 13% decrease in metric tons sold, offset by a 1% increase in cost per ton sold. The increase in cost per ton sold is primarily due to more scheduled maintenance outages and raw material quality issues.

Gross margin represented approximately 15% of net sales in the first quarter of fiscal year 2016, a decrease from 18% of net sales in the prior year. This gross margin degradation was a result of decreased shipments, lower pricing and higher production costs.

Selling, General and Administrative Expenses:

The increase in selling, general and administrative expenses of $1,643,000 or 11% was primarily due to a $5,582,000 increase in professional fees primarily related to the proposed business combination and a $1,026,000 increase in variable compensation, offset by a $4,059,000 decrease in stock-based compensation and an $862,000 decrease in salaries and benefits.

Business Interruption Insurance Recovery:

Globe recorded and received business interruption recovery payments totaling $1,665,000 related to furnace downtime as a result of a transformer failure at one of its U.S. production facilities, which occurred in January 2014.

Net Interest Expense:

Net interest expense decreased $202,000 in the first quarter of 2016 compared to the prior year comparative period primarily due to a $25,000,000 repayment on the $300,000,000 Revolving Credit Facility during the fiscal third quarter of 2015.

Other Expense:

Other loss decreased $104,000 in the first quarter of fiscal year 2016 as compared to the prior year due to slightly lower foreign exchange rate losses.

Provision for Income Taxes:

Tax provision as a percentage of pre-tax income was approximately 40.8%, or $3,929,000, in the first quarter of fiscal year 2016 and the provision as a percentage of pre-tax income was approximately 38.4% or $7,845,000 in the first quarter of fiscal year 2015. The increase in effective tax rate was a result of increased losses in jurisdictions where, due to existing valuation allowances, Globe was unable to benefit from these losses.

 

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Segment Operations

GMI

 

     Three Months Ended                
     September 30,      Increase      Percentage  
     2015      2014      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Net sales

   $ 164,454         193,455         (29,001      (15.0 %) 

Cost of goods sold

     135,484         157,914         (22,430      (14.2 %) 

Selling, general and administrative expenses

     9,198         8,023         1,175         14.6

Business interruption insurance recovery

     (1,665      —          (1,665      NA   
  

 

 

    

 

 

    

 

 

    

Operating income

   $ 21,437         27,518         (6,081      (22.1 %) 
  

 

 

    

 

 

    

 

 

    

Net sales decreased $29,001,000 or 15% from the prior year to $164,454,000. The decrease was primarily attributable to a 15% decrease in tons sold. Silicon metal volume decreased 7%, and silicon-based alloys volume decreased 25%, due to higher U.S. imports. Silicon metal pricing decreased 1% and silicon-based alloys pricing decreased 2% due to aggressively priced imports.

Cost of goods sold decreased 14% due to a 15% decrease in shipments offset by a 1% increase in the cost per ton sold. The production costs increased due to raw material quality issues and more scheduled maintenance outages as compared to the first quarter of fiscal year 2015.

Selling, general and administrative expenses increased $1,175,000 or 15% due to a $595,000 increase in miscellaneous professional services and $367,000 increase in variable compensation.

Operating income was positively impacted by a one-time $1,665,000 business interruption insurance recovery related to furnace downtime as a result of a transformer failure at one of Globe’s U.S. production facilities, which occurred in January 2014.

Globe Metales

 

     Three Months Ended                
     September 30,      Increase      Percentage  
     2015      2014      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Net sales

   $ 6,928         13,275         (6,347      (47.8 %) 

Cost of goods sold

     7,872         11,178         (3,306      (29.6 %) 

Selling, general and administrative expenses

     736         895         (159      (17.8 %) 
  

 

 

    

 

 

    

 

 

    

Operating (loss) income

   $ (1,680      1,202         (2,882      (239.8 %) 
  

 

 

    

 

 

    

 

 

    

Net sales decreased $6,347,000 or 48% from the prior year to $6,928,000. This decrease was due to a 39% decrease in tons sold along with a 14% decrease in average selling prices. Overall volume decreased due to insufficient global demand, which corresponded with a decline in average selling prices.

Operating (loss) income decreased $2,882,000 from income of $1,202,000 to a loss of $1,680,000. The loss was driven by the decline in tons shipped due to the idling of the plant in August 2015.

 

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Solsil

 

     Three Months Ended                
     September 30,      Increase      Percentage  
     2015      2014      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Cost of goods sold

   $ 1         33         (32      (97.0 %) 
  

 

 

    

 

 

    

 

 

    

Operating loss

   $ (1      (33      32         (97.0 %) 
  

 

 

    

 

 

    

 

 

    

Solsil suspended commercial production during fiscal year 2010 as a result of a significant decline in the price of polysilicon and the decline in demand for upgraded metallurgical grade silicon.

Corporate

 

     Three Months Ended                
     September 30,      Increase      Percentage  
     2015      2014      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Selling, general and administrative expenses

   $ 6,596         4,734         1,862         39.3
  

 

 

    

 

 

    

 

 

    

Operating loss

   $ (6,596      (4,734      (1,862      (39.3 %) 
  

 

 

    

 

 

    

 

 

    

Operating loss increased $1,862,000 from the prior year to $6,596,000. Selling, general and administrative expenses increased primarily due to a $5,741,000 increase in legal and due diligence fees related to the proposed business combination and a $700,000 increase in variable compensation, offset by a $4,059,000 decrease in stock-based compensation.

Globe Fiscal Year Ended June 30, 2015 vs. 2014

Consolidated Operations:

 

     Years Ended                
     June 30,      Increase      Percentage  
     2015      2014      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Net sales

   $ 800,773         752,817         47,956         6.4

Cost of goods sold

     650,677         635,735         14,942         2.4

Selling, general and administrative expenses

     88,205         92,103         (3,898      (4.2 %) 

Contract acquisition cost

     —           16,000         (16,000      NA   

Curtailment gain

     —           (5,831      5,831         NA   
  

 

 

    

 

 

    

 

 

    

Operating income

     61,891         14,810         47,081         317.9

Bargain purchase gain

     —           29,538         (29,538      NA   

Interest expense, net

     (4,076      (7,955      3,879         (48.8 %) 

Other loss

     (1,537      (2,782      1,245         (44.8 %) 
  

 

 

    

 

 

    

 

 

    

Income before provision for income taxes

     56,278         33,611         22,667         67.4

Provision for income taxes

     21,651         7,705         13,946         181.0
  

 

 

    

 

 

    

 

 

    

Net income

     34,627         25,906         8,721         33.7

Income attributable to noncontrolling interest, net of tax

     (3,307      (4,203      896         (21.3 %) 
  

 

 

    

 

 

    

 

 

    

Net income attributable to Globe Specialty Metals, Inc.

   $ 31,320         21,703         9,617         44.3
  

 

 

    

 

 

    

 

 

    

 

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Net Sales:

 

     Year Ended June 30, 2015      Year Ended June 30, 2014  
     Net Sales      Net Sales  
     $ (in 000s)      MT      $/MT      $ (in 000s)      MT      $/MT  

Silicon metal

   $ 450,788         155,673       $ 2,896       $ 377,954         136,664       $ 2,766   

Silicon-based alloys

     261,258         129,914         2,011         282,998         141,327         2,002   
  

 

 

    

 

 

       

 

 

    

 

 

    

Silicon metal and silicon-based alloys

     712,046         285,587         2,493         660,952         277,991         2,378   

Silica fume and other

     88,727               91,865         
  

 

 

          

 

 

       

Total net sales

   $ 800,773             $ 752,817         
  

 

 

          

 

 

       

Net sales increased $47,956,000 or 6% from the prior year to $800,773,000 primarily as a result of a 5% increase in average selling prices and a 3% increase in metric tons sold. The increase in sales volume was driven by a 14% increase in silicon metal tons sold, offset by an 8% decrease in silicon-based alloys tons sold, resulting in an increase to net sales of $18,060,000. Additionally, a 5% increase in average selling prices resulted in an increase to net sales of $33,034,000, offset by a $3,138,000 decrease to net sales of other products. The increase in silicon metal tons sold was due to the unionized employee lockout at the Becancour, Quebec Canada plant (the lockout concluded on December 27, 2013), which resulted in 17,453 fewer tons sold in the prior year. The decrease in silicon-based alloys tons sold occurred as Globe converted one of its U.S. furnaces from silicon-based alloys to silicon metal when demand for silicon metal was strong and prices in the ferrosilicon market were deteriorating.

The average selling price of silicon metal increased 5% and the average selling price of silicon-based alloys remained approximately the same. The increase in silicon metal pricing was due to higher pricing on annual calendar year 2015 contracts, including higher pricing on index-based contracts. The lack of change in silicon-based alloys pricing is due to an increase in import competition.

Other revenue decreased $3,138,000 in fiscal year 2015 primarily due to a decrease in fines sales.

Cost of Goods Sold:

The $14,942,000 or 2% increase in cost of goods sold was a result of a 3% increase in metric tons sold, offset by a 1% decrease in cost per ton sold. This decrease in cost per ton sold was primarily due to the ramp-up of production subsequent to the conclusion of the unionized employee lockout at the Becancour, Quebec Canada plant (the lockout concluded on December 27, 2013), which resulted in higher cost per ton sold in the third quarter of fiscal year 2014.

Gross margin represented approximately 19% of net sales in the twelve months ended June 30, 2015 and increased from 16% of net sales in the twelve months ended June 30, 2014. This increase was primarily as a result of an increase in average selling prices, an increase in metric tons sold and a decrease in cost per ton sold.

Selling, General and Administrative Expenses:

The decrease in selling, general and administrative expenses of $3,898,000 or 4% was primarily due to a decrease in stock-based compensation of approximately $30,579,000, primarily due to the re-measurement of liability based awards resulting from a decline in Globe’s stock price from June 2014 to June 2015. This decrease was offset by a divestiture indemnification payment of $4,559,000, an increase in accounting, legal and professional fees of $15,640,000 primarily related to the Business Combination, an increase in salaries and benefits of $4,059,000, and an increase in variable based compensation of $3,944,000.

Contract Acquisition Costs:

During the twelve months ended June 30, 2014, Globe acquired supply arrangements that resulted in a payment of $16,000,000.

 

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Curtailment Gain:

Globe’s subsidiary, Quebec Silicon, sponsors a postretirement benefit plan for certain employees, based on length of service and remuneration. Postretirement benefits consist of a group insurance plan covering plan members for life insurance, disability, hospital, medical, and dental benefits. On December 27, 2013, the CEP ratified a new collective bargaining agreement, which resulted in a curtailment pertaining to the closure of the postretirement benefit plan for union employees retiring after January 31, 2016. Globe remeasured the benefit obligations reflecting the curtailment which resulted in a curtailment gain of $5,831,000 in the fiscal year ended June 30, 2014.

Bargain Purchase Gain:

On November 21, 2013, Globe purchased 100% of the outstanding shares of Silicon Technology (Pty) Ltd. (Siltech) for $4,000,000. Globe paid for the acquisition from available cash. Siltech is a silicon-based alloy producer in South Africa with an annual production capacity of approximately 45,000 metric tons. The acquisition was made to increase Globe’s current silicon-based alloy capacity by approximately 30% and its strategic location will enable Globe to supplement its existing facility to service the large European, Asian and Middle Eastern markets. The purchase price allocation for the Siltech acquisition was finalized during the quarter ended December 31, 2014 and the fair value of the identifiable net assets acquired of $33,538,000 exceeded the purchase price of $4,000,000 resulting in a gain on bargain purchase of $29,538,000.

Interest Expense, Net:

Net interest expense decreased $3,879,000 compared to the prior year primarily due to the write-off of deferred financing costs of approximately $3,354,000 in connection with the refinancing of Globe’s existing $300,000,000 Revolving Credit Facility in the prior year.

Other Loss:

Other expense decreased $1,245,000 primarily due to a higher foreign exchange gain of a U.S. dollar loan at a foreign subsidiary and holdings of the Argentine peso.

Provision for Income Taxes:

Provision for income taxes as a percentage of pre-tax income was approximately 38.5% or $21,651,000 in fiscal year 2015 and provision for income taxes as a percentage of pre-tax income was approximately 22.9% or $7,705,000 in fiscal year 2014. The tax rate increased compared to the prior year, this increase was the result in losses in jurisdictions where no tax benefit was provided. In the prior year, the tax rate was impacted by the nontaxable bargain purchase gain of $29,538,000 in connection with the acquisition of Siltech.

Segment Operations

GMI

 

     Years Ended
June 30,
     Increase
(Decrease)
     Percentage
Change
 
     2015      2014        
     (Dollars in thousands)  

Results of Operations

           

Net sales

   $ 753,905         697,403         56,502         8.1

Cost of goods sold

     605,065         587,318         17,747         3.0

Selling, general and administrative expenses

     34,107         32,869         1,238         3.8

Contract acquisition cost

     —           16,000         (16,000      NA   

Curtailment gain

     —           (5,831      5,831         NA   
  

 

 

    

 

 

    

 

 

    

Operating income

   $ 114,733         67,047         47,686         71.1
  

 

 

    

 

 

    

 

 

    

 

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Net sales increased $56,502,000 or 8% from the prior year to $753,905,000. The increase was primarily attributable to a 2% increase in tons sold coupled with a 6% increase in average selling prices. Silicon metal volume increased 14% primarily due to the unionized employee lockout at the Becancour, Quebec Canada plant (the lockout concluded on December 27, 2013), which contributed 21,300 fewer tons during the twelve months ended June 30, 2014, and an increase due to the conversion of a silicon-based alloys furnace to a silicon metal furnace. Silicon-based alloys volume decreased 11%, as Globe converted a silicon-based alloys furnace to silicon metal. Silicon metal pricing increased 5% primarily due to higher pricing on annual calendar year 2015 contracts, including higher pricing on index-based contracts. Silicon-based alloys pricing increased 3% from stronger pricing in the U.S., from higher end-user demand.

Cost of goods sold increased 3% while total tons shipped increased 2%.

Selling, general and administrative expenses increased $1,238,000 to $34,107,000. This increase was primarily due to increases in salaries and wages and professional fees.

During fiscal year 2014, Globe acquired supply arrangements that resulted in a payment of $16,000,000.

Globe’s subsidiary, Quebec Silicon, sponsors a postretirement benefit plan for certain employees, based on length of service and remuneration. Postretirement benefits consist of a group insurance plan covering plan members for life insurance, disability, hospital, medical, and dental benefits. On December 27, 2013, the CEP ratified a new collective bargain agreement, which resulted in a curtailment pertaining to the closure of the postretirement benefit plan for union employees retiring after January 31, 2016. Globe remeasured the benefit obligations reflecting the curtailment which resulted in a curtailment gain of $5,831,000 during fiscal year 2014.

Operating income increased $47,686,000 from the prior year to $114,733,000. This increase was primarily due to higher average selling prices for silicon metal and silicon-based alloys and higher silicon metal volume.

Globe Metales

 

     Years Ended                
     June 30,      Increase      Percentage  
     2015      2014      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Net sales

   $ 44,945         51,213         (6,268      (12.2 %) 

Cost of goods sold

     40,007         42,179         (2,172      (5.1 %) 

Selling, general and administrative expenses

     3,587         3,288         299         9.1
  

 

 

    

 

 

    

 

 

    

Operating income

   $ 1,351         5,746         (4,395      (76.5 %) 
  

 

 

    

 

 

    

 

 

    

Net sales decreased $6,268,000 or 12% from the prior year to $44,945,000. This decrease was due to a 12% decrease in silicon-based alloys tons sold, partially offset by a 1% increase in average selling prices. Overall volume decreased due to weaker demand from Europe, partially offset by an increase in demand from North America solar, automotive, and housing markets.

Operating income decreased $4,395,000. The decrease was due to the decrease in silicon-based alloys tons sold as well a 7% increase in cost per ton sold, driven by higher raw materials cost from higher inflation.

 

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Solsil

 

     Years Ended                
     June 30,                
     2015      2014      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Cost of goods sold

   $ 81         41         40         97.6

Selling, general and administrative expenses

     —           1         (1      (100.0 %) 
  

 

 

    

 

 

       

Operating loss

   $ (81      (42      (39      92.9
  

 

 

    

 

 

    

 

 

    

Solsil suspended commercial production during fiscal year 2010 as a result of a significant decline in the price of polysilicon and the decline in demand for upgraded metallurgical grade silicon.

Corporate

 

     Years Ended                
     June 30,      Increase      Percentage  
     2015      2014      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Selling, general and administrative expenses

   $ 45,533         53,680         (8,147      (15.2 %) 
  

 

 

    

 

 

    

 

 

    

Operating loss

   $ (45,533      (53,680      8,147         (15.2 %) 
  

 

 

    

 

 

    

 

 

    

Operating loss decreased $8,147,000 from the prior year to $45,533,000. Selling, general and administrative expenses decreased primarily due to a decrease in stock-based compensation of approximately $30,579,000, primarily due to the re-measurement of liability based awards resulting from a decline in Globe’s stock price from June 2014 to June 2015. This decrease was partially offset by a $4,559,000 divestiture indemnification payment and an increase of $14,334,000 in professional fees related to costs incurred in connection with the Business Combination.

 

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Globe Fiscal Year Ended June 30, 2014 vs. 2013

Consolidated Operations:

 

     Years Ended                
     June 30,      Increase      Percentage  
     2014      2013      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Net sales

   $ 752,817         757,550         (4,733      (0.6 %) 

Cost of goods sold

     635,735         657,911         (22,176      (3.4 %) 

Selling, general and administrative expenses

     92,103         64,663         27,440         42.4

Contract acquisition cost

     16,000         —           16,000         NA   

Curtailment gain

     (5,831      —           (5,831      NA   

Business interruption insurance recovery

     —           (4,594      4,594         (100.0 %) 

Goodwill impairment

     —           13,130         (13,130      (100.0 %) 

Impairment of long-lived assets

     —           35,387         (35,387      (100.0 %) 
  

 

 

    

 

 

    

 

 

    

Operating income (loss)

     14,810         (8,947      23,757         (265.5 %) 

Bargain purchase gain

     29,538         —           29,538         NA   

Gain on remeasurement of equity investment

     —           1,655         (1,655      (100.0 %) 

Interest expense, net

     (7,955      (6,067      (1,888      31.1

Other loss

     (2,782      (3,716      934         (25.1 %) 
  

 

 

    

 

 

    

 

 

    

Income (loss) before provision for income taxes

     33,611         (17,075      50,686         (296.8 %) 

Provision for income taxes

     7,705         2,734         4,971         181.8
  

 

 

    

 

 

    

 

 

    

Net income (loss)

     25,906         (19,809      45,715         (230.8 %) 

Income attributable to noncontrolling interest, net of tax

     (4,203      (1,219      (2,984      244.8
  

 

 

    

 

 

    

 

 

    

Net income (loss) attributable to Globe Specialty Metals, Inc.

   $ 21,703         (21,028      42,731         (203.2 %) 
  

 

 

    

 

 

    

 

 

    

Net Sales:

 

     Year Ended June 30, 2014      Year Ended June 30, 2013  
     Net Sales      Net Sales  
     $ (in 000s)      MT      $/MT      $ (in 000s)      MT      $/MT  

Silicon metal

   $ 377,954         136,664       $ 2,766       $ 422,564         150,369       $ 2,810   

Silicon-based alloys

     282,998         141,327         2,002         248,276         115,766         2,145   
  

 

 

    

 

 

       

 

 

    

 

 

    

Silicon metal and silicon-based alloys

     660,952         277,991         2,378         670,840         266,135         2,521   

Silica fume and other

     91,865               86,710         
  

 

 

          

 

 

       

Total net sales

   $ 752,817             $ 757,550         
  

 

 

          

 

 

       

Net sales decreased $4,733,000 or 1.0% from the prior year to $752,817,000 primarily as a result of a 6% decrease in the average selling price offset by a 5% increase in sales volume. The decrease in the average selling price compared to the prior year was driven by a 2% decrease in silicon metal and a 7% decrease in silicon-based alloys, resulting in a decrease of $26,193,000. The increase in sales volume compared to the prior year was driven by a 22% increase in silicon-based alloys tons sold offset by a 9% decrease in silicon metal tons sold. The increase in silicon-based alloys tons sold was primarily due to increased demand from the steel and automotive industries in North America. Due to the increased demand for silicon-based alloys, Globe converted a silicon furnace to a ferrosilicon furnace at one of its U.S. plants. The decrease in silicon metal tons sold was due to lower sales volume at the Becancour, Quebec Canada facility as the sales volume for the year ended June 30, 2014 reflects the impact of a nearly eight month lockout and subsequent ramp up of production at the facility once the lockout ended in December 2013 compared to full production in the prior year period.

 

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The average selling price of both silicon metal and silicon-based alloys decreased 2% and 7%, respectively, in fiscal year 2014 compared to the prior year period. The decrease in pricing was due to weaker pricing in the marketplace driven by import competition and end-user demand, particularly in Europe.

Other revenue increased $5,155,000 in fiscal year 2014 primarily due to increased shipments of silica fume as Globe realized a full year of benefit having purchased the remaining 50% interest in an existing equity investment in December 2012.

Cost of Goods Sold:

The $22,176,000 or 3% decrease in cost of goods sold was a result of a 7% decrease in cost per ton sold. The decrease in cost per ton sold is primarily due to a shift in mix from higher cost silicon products to lower cost ferrosilicon products and manufacturing cost improvement initiatives.

Gross margin represented approximately 16% of net sales in the fiscal year 2014, an increase from 13% of net sales in fiscal year 2013. This gross margin expansion was primarily a result of increased shipment volumes and manufacturing cost improvement initiatives which more than offset a 6% decline in the average selling price year-over-year.

Selling, General and Administrative Expenses:

The increase in selling, general and administrative expenses of $27,440,000, or 42%, was primarily due to an increase in stock based compensation of approximately $18,850,000. In addition, Globe had an increase in salaries and wages of $1,168,000 and an increase in variable-based compensation expense of $4,872,000.

Contract Acquisition Costs:

During the twelve months ended June 30, 2014, Globe acquired supply arrangements that resulted in a payment of $16,000,000.

Curtailment Gain:

Globe’s subsidiary, Quebec Silicon, sponsors a postretirement benefit plan for certain employees, based on length of service and remuneration. Postretirement benefits consist of a group insurance plan covering plan members for life insurance, disability, hospital, medical, and dental benefits. As noted above, the CEP ratified a new collective bargaining agreement on December 27, 2013, which resulted in a curtailment pertaining to the closure of the postretirement benefit plan for union employees retiring after January 31, 2016. Globe remeasured the benefit obligations reflecting the curtailment which resulted in a curtailment gain of $5,831,000.

Bargain Purchase Gain:

On November 21, 2013, Globe purchased 100% of the outstanding shares of Silicon Technology (Pty) Ltd. (Siltech) for $4,000,000. Globe paid for the acquisition from available cash. Siltech is a silicon-based alloy producer in South Africa with an annual production capacity of approximately 45,000 metric tons. The acquisition was made to increase Globe’s current silicon-based alloy capacity by approximately 30% and its strategic location will enable Globe to supplement its existing facility to service the large European, Asian and Middle Eastern markets. The fair value of the identifiable net assets acquired of $33,538,000 exceeded the purchase price of $4,000,000 resulting in a gain on bargain purchase of $29,538,000.

Net Interest Expense:

Net interest expense increased $1,888,000 in fiscal year 2014 compared to fiscal year 2013 primarily due to the write-off of deferred financing costs of $3,354,000 in connection with the refinancing of Globe’s existing $300 million Revolving Credit Facility, offset partially by a decrease of $941,000 attributable to loan repayment at Quebec Silicon.

 

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Other Expense:

Other loss decreased $934,000 primarily due to foreign exchange loss on holdings of the Argentine peso partially offset by the elimination of a foreign exchange loss resulting from the revaluation of a U.S. dollar denominated loan at a foreign subsidiary in the prior year.

Provision for Income Taxes:

Provision for income taxes as a percentage of pre-tax income was approximately 22.9% or $7,705,000 in fiscal year 2014 and provision for income taxes as a percentage of pre-tax loss was approximately (16.0%) or $2,734,000 in fiscal year 2013. The tax rate increased compared to the prior year, due to increase in valuation allowance of $5,214,000 attributable to change in tax law that impacted the utilization of certain state tax credits offset by the nontaxable bargain purchase gain of $29,538,000 in connection with the acquisition of Siltech. In the prior year, the tax rate was impacted by certain nondeductible impairment charges recognized offset by a net reduction in valuation allowance associated with state tax credits due to an updated assessment regarding the likelihood of realization.

Segment Operations

GMI

 

     Years Ended                
     June 30,      Increase      Percentage  
     2014      2013      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Net sales

   $ 697,403         702,275         (4,872      (0.7 %) 

Cost of goods sold

     587,318         603,548         (16,230      (2.7 %) 

Selling, general and administrative expenses

     32,869         29,706         3,163         10.6

Contract acquisition cost

     16,000         —           16,000         NA   

Curtailment gain

     (5,831      —           (5,831      NA   

Business interruption insurance recovery

     —           (4,594      4,594         (100.0 %) 
  

 

 

    

 

 

    

 

 

    

Operating income

   $ 67,047         73,615         (6,568      (8.9 %) 
  

 

 

    

 

 

    

 

 

    

Net sales decreased $4,872,000 or 1% from the prior year to $697,403,000. The decrease was primarily attributable to a 6% decrease in average selling prices. Silicon metal tons sold decreased 9% due to lower sales volume at the Becancour, Quebec Canada facility as the sales volume for the year ended June 30, 2014 reflects the impact of a nearly eight month lockout and subsequent ramp up of production at the facility once the lockout ended in December 2013 compared to full production in the prior year period. Silicon-based alloys tons sold increased 27% primarily due to increased demand from the steel and automotive industries in North America and from the conversion of a silicon furnace to a ferrosilicon furnace at one of Globe’s U.S. plants. Silicon metal pricing decreased 2% and silicon-based alloys pricing decreased 7% driven by pricing pressure from imports. Other revenue increased $4,685,000 primarily due to increased shipments of silica fume as Globe realized a full year of benefit having purchased the remaining 50% interest in an existing equity investment in December 2012.

Cost of goods sold decreased 3% while total tons shipped increased 5%. Cost per ton sold decreased in fiscal year 2014 primarily due to a shift in mix from higher cost silicon products to lower cost ferrosilicon products and manufacturing cost improvement initiatives.

Selling, general and administrative expenses increased $3,163,000 to $32,869,000. This increase was primarily due to increases in salaries and wages and professional fees.

During fiscal year 2014, Globe acquired supply arrangements that resulted in a payment of $16,000,000.

 

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A Globe subsidiary, Quebec Silicon, sponsors a postretirement benefit plan for certain employees, based on length of service and remuneration. Postretirement benefits consist of a group insurance plan covering plan members for life insurance, disability, hospital, medical, and dental benefits. On December 27, 2013, the CEP ratified a new collective bargain agreement, which resulted in a curtailment pertaining to the closure of the postretirement benefit plan for union employees retiring after January 31, 2016. Globe remeasured the benefit obligations reflecting the curtailment which resulted in a curtailment gain of $5,831,000 during the second quarter of fiscal year 2014.

Operating income decreased $6,568,000 from the prior year to $67,047,000. This decrease was primarily due to a $16,000,000 expense for supply arrangements acquired offset by a $5,831,000 curtailment gain discussed above and a 6% decrease in the average selling price.

Globe Metales

 

     Years Ended                
     June 30,      Increase      Percentage  
     2014      2013      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Net sales

   $ 51,213         51,266         (53      (0.1 %) 

Cost of goods sold

     42,179         44,753         (2,574      (5.8 %) 

Selling, general and administrative expenses

     3,288         2,901         387         13.3

Goodwill impairment

     —           6,000         (6,000      (100.0 %) 
  

 

 

    

 

 

    

 

 

    

Operating (loss) income

   $ 5,746         (2,388      8,134         (340.6 %) 
  

 

 

    

 

 

    

 

 

    

Net sales were essentially the same in fiscal year 2014 compared to fiscal year 2013. Total tons shipped increased 5% while the average selling price decreased 6% primarily due to product mix. Overall demand increased due to stronger demand from the steel market and the European economy.

Operating income increased $8,134,000 from the prior year to $5,746,000. The increase was primarily due to increased volumes and lower costs due to the devaluation of the Argentine peso as well as the recognition of a goodwill impairment of $6,000,000 during fiscal year 2013.

Solsil

 

     Years Ended                
     June 30,      Increase      Percentage  
     2014      2013      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Cost of goods sold

     41         2,542         (2,501      (98.4 %) 

Selling, general and administrative expenses

     1         153         (152      (99.3 %) 

Impairment of long-lived assets

     —           18,452         (18,452      (100.0 %) 
  

 

 

    

 

 

    

 

 

    

Operating loss

   $ (42      (21,147      21,105         (99.8 %) 
  

 

 

    

 

 

    

 

 

    

Solsil suspended commercial production during fiscal year 2010 as a result of a significant decline in the price of polysilicon and the decline in demand for upgraded metallurgical grade silicon. Operating loss of ($21,147,000) from the prior year was related to the write-off of equipment as a result of Globe’s decision to indefinitely take these assets out of service in response to sustained pricing declines that have rendered its production methods uneconomical and inventory write-downs due to expected lower net realizable values for certain inventories.

 

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Corporate

 

     Years Ended                
     June 30,      Increase      Percentage  
     2014      2013      (Decrease)      Change  
     (Dollars in thousands)  

Results of Operations

           

Selling, general and administrative expenses

   $ 53,680         30,699         22,981         74.9

Impairment of long-lived assets

     —           16,935         (16,935      (100.0 %) 
  

 

 

    

 

 

    

 

 

    

Operating loss

   $ (53,680      (47,634      (6,046      12.7
  

 

 

    

 

 

    

 

 

    

The operating loss increased $6,046,000 from the prior year to $53,680,000. Selling, general and administrative expenses increased $22,981,000 year over year primarily due to an increase in stock based compensation of approximately $18,850,000. Globe also had an increase in variable-based compensation of $5,147,000. These increases were offset by lower professional fees and the recognition of long-lived assets impairment of approximately $16,935,000 in the prior year.

Liquidity and Capital Resources

Sources of Liquidity

Globe’s principal sources of liquidity are its cash and cash equivalents balance, cash flows from operations, and unused commitments under its existing credit facilities. At September 30, 2015, Globe’s cash and cash equivalents balance was approximately $107,126,000 and it had $198,978,000 available for borrowing under its existing financing arrangements. Globe generated cash flows from operations totaling $9,162,000 during the three months ended September 30, 2015. As of September 30, 2015, the amount of cash and cash equivalents included in Globe’s consolidated cash that was held by foreign subsidiaries was approximately $13,854,000.

Certain of Globe’s subsidiaries borrow funds in order to finance working capital requirements and capital expansion programs. The terms of certain of Globe’s financing arrangements place restrictions on distributions of funds to Globe; however, Globe does not expect this to have an impact on its ability to meet its cash obligations. Globe believes it has access to adequate resources to meet its needs for normal operating costs, capital expenditures, and working capital for its existing business. Globe’s ability to fund planned capital expenditures and make acquisitions will depend upon its future operating performance, which will be affected by prevailing economic conditions in its industry as well as financial, business and other factors, some of which are beyond Globe’s control.

Cash Flows

The following table summarizes Globe’s primary sources (uses) of cash during the periods presented:

 

    

Three Months

Ended

       
     September 30,     Year Ended June 30,  
     2015     2014     2015     2014     2013  
     (Dollars in thousands)  

Cash and cash equivalents at beginning of period

   $ 115,944        97,792        97,792        169,676        178,010   

Cash flows provided by operating activities

     9,162        24,889        109,249        62,556        72,740   

Cash flows used in investing activities

     (12,839     (9,831     (42,243     (64,271     (49,029

Cash flows used in financing activities

     (5,520     (6,377     (49,753     (68,608     (30,994

Effect of exchange rate changes on cash

     379        (78     899        (1,561     (1,051
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 107,126        106,395        115,944        97,792        169,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Three Months Ended September 30, 2015

Operating Activities:

Globe’s business is cyclical and cash flows from operating activities may fluctuate during the year and from year-to-year due to economic conditions.

Net cash provided by operating activities was approximately $9,162,000 and $24,889,000 in the first three months of fiscal year 2016 and 2015, respectively. The $15,727,000 decrease in net cash provided by operating activities was due to a decrease in operating results for the first three months of fiscal year 2016 as compared to the prior year as well as an increase in working capital (primarily accounts payable).

Investing Activities:

Net cash used in investing activities was approximately $12,839,000 and $9,831,000 in the first three months of fiscal year 2016 and 2015, respectively. The $3,008,000 increase was mostly due to the comparative effect of the $7,005,000 sale of marketable securities in the prior year, partially offset by decreased capital expenditures in fiscal 2016 as the Siltech facility was restarted in the prior year.

Financing Activities:

Net cash used in financing activities was approximately $5,520,000 and $6,377,000 in the first three months of fiscal year 2016 and 2015, respectively. Net cash used for financing activities decreased by approximately $857,000 from the prior year primarily due to borrowings of $930,000 in fiscal 2016.

Exchange Rate Change on Cash:

The effect of exchange rate changes on cash was related to fluctuations in renminbi, Canadian dollars and rand, the functional currency of Globe’s Chinese, Canadian and South African subsidiaries.

Fiscal Year Ended June 30, 2015 vs. 2014

Operating Activities:

Globe’s business is cyclical and cash flows from operating activities may fluctuate during the year and from year-to-year due to economic conditions.

During fiscal year 2015, net cash provided by operating activities was $109,249,000, compared to $62,556,000 in the prior year. The increase in net cash provided by operating activities is primarily due to significant increase in operating results for fiscal year 2015 as compared to the prior year, which was partially offset by a decrease in working capital. In fiscal year 2015, inventory increased due to the start-up of the Siltech facility, increased production at Yonvey, and mine production at Alden.

Investing Activities:

During fiscal year 2015, net cash used in investing activities was $42,243,000, compared to $64,271,000 in the prior year. The decrease is primarily due to $13,396,000 used for the purchase of marketable securities in fiscal 2014, while fiscal 2015 included $7,776,000 in proceeds from the sale of marketable securities. In addition, the acquisition of Siltech in fiscal 2014 resulted in the use of approximately $3,800,000 in net cash. These decreases in cash used for investing activities were partially offset by capital expenditures. In fiscal year 2015, capital expenditures increased by approximately $2,944,000 primarily due to the start-up of the Siltech facility.

Globe expects the capital spending for fiscal year 2016 to be approximately $36,000,000, which it plans to fund primarily with cash from operations.

 

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Financing Activities:

During fiscal year 2015, net cash used in financing activities was approximately $49,753,000, compared to $68,608,000 in the prior year. The decrease in net cash used in financing activities is primarily due to the decrease of $28,720,000 of stock repurchases made in the prior year which was partially offset by a $9,826,000 increase in net debt payments in fiscal 2015 when compared to the prior year.

Exchange Rate Change on Cash:

The effect of exchange rate changes on cash was related to fluctuations in renminbi, Canadian dollars and rand, the functional currency of Globe’s Chinese, Canadian and South African subsidiaries.

Fiscal Year Ended June 30, 2014 vs. 2013

Operating Activities:

Globe’s business is cyclical and cash flows from operating activities may fluctuate during the year and from year-to-year due to economic conditions.

During fiscal year 2014, net cash provided by operating activities was $62,556,000, compared to $72,740,000 in the prior year. The decrease in net cash provided by operating activities is primarily attributable to payments made to acquire supply agreements and the cash settlement of stock appreciation rights exercised during the year, offset by favorable working capital comparisons to the prior year.

Investing Activities:

During fiscal year 2014, net cash used in investing activities was $64,271,000, compared to $49,029,000 in the prior year. During the year, $13,396,000 of cash was used to purchase marketable securities. In addition, $3,800,000 of cash was used, net of cash acquired, in the acquisition of Siltech.

Financing Activities:

During fiscal year 2014, net cash used in financing activities was approximately $68,608,000, compared to $30,994,000 in the prior year. The increase in net cash used in financing activities was mainly attributable to the utilization of $28,962,000 to purchase shares of Globe’s own common stock and the net repayment of $14,250,000 under Globe’s revolving credit agreements. These increases in cash used in financing activities were offset by a decrease in Dividend payments of $6,751,000 as a result of an additional dividend payment made during fiscal year 2013.

Exchange Rate Change on Cash:

The effect of exchange rate changes on cash was related to fluctuations in renminbi, Canadian dollars and rand, the functional currency of Globe’s Chinese, Canadian and South African subsidiaries.

 

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Commitments and Contractual Obligations

The following tables summarize Globe’s contractual obligations at June 30, 2015 and the effects such obligations are expected to have on its liquidity and cash flows in future periods:

 

                   2017-      2019-      2021 and  

Contractual Obligations(3)

   Total      2016      2018      2020      beyond  
     (Dollars in thousands)  

Long-term debt obligations

   $ 101,048         953         95         100,000         —     

Power commitments (1)

     17,794         17,794         —           —           —     

Purchase obligations (2)

     42,646         31,486         11,160         —           —     

Operating lease obligations

     8,472         2,247         2,048         1,052         3,125   

Capital lease obligations

     7,193         2,627         2,797         932         837   

 

(1) Represents minimum charges that are enforceable and legally binding, and do not represent total anticipated purchases. Minimum charges requirements expire after providing one-year notice of contract cancellation.
(2) Globe has outstanding purchase obligations with suppliers for raw materials in the normal course of business. These purchase obligation amounts represent on those items, which are based on agreements that are enforceable and legally binding, and do not represent total anticipated purchases.
(3) Globe’s contractual obligations have not materially changed from the period presented to September 30, 2015.

The table above also excludes certain other obligations reflected in Globe’s consolidated balance sheet, including estimated funding for pension obligations, for which the timing of payments may vary based on changes in the fair value of pension plan assets and actuarial assumptions. Globe expects to contribute approximately $1,237,000 to its pension plans for the year ended June 30, 2016.

Off-Balance Sheet Arrangements

Globe does not have any material off-balance sheet arrangements or relationships with unconsolidated entities of financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Litigation and Contingencies

Globe is subject to various lawsuits, investigations, claims, and proceedings that arise in the normal course of business, including, but not limited to, labor and employment, commercial, environmental, safety, and health matters, as well as claims and indemnities associated with Globe’s historical acquisitions and divestitures. Although it is not presently possible to determine the outcome of these matters, in the opinion of management, it is not reasonably possible that the ultimate disposition of these matters will have a material adverse effect on Globe’s consolidated financial position, results of operations, or liquidity. During the fiscal year ended June 30, 2015, Globe recorded an expense of $4,559 with respect to an indemnification obligation from a prior divestiture, of which $1,659 is unpaid and is included in Other long-term liabilities at June 30, 2015.

Litigation Related to the Business Combination

On March 23, 2015, a putative class action lawsuit was filed on behalf of Globe’s shareholders (“Globe Shareholders”) in the Court of Chancery of the State of Delaware. The action, captioned Fraser v. Globe Specialty Metals, Inc., et al., C.A. No. 10823-VCG, named as defendants Globe, the members of its board of directors, Grupo VM, FerroAtlántica, Merger Sub and the Company. The complaint alleged, among other things, that the Globe directors breached their fiduciary duties by failing to obtain the best price possible for Globe Shareholders, that the proposed merger consideration to be received by Globe Shareholders is inadequate and significantly undervalued Globe, that the Globe directors failed to adequately protect against conflicts of interest in approving the transaction, and that the Business Combination Agreement unfairly deters competitive offers. The complaint also alleged that Globe, Grupo VM, FerroAtlántica, Merger Sub and the Company aided and abetted these alleged breaches. The action sought to enjoin or rescind the Business Combination, damages, and attorneys’ fees and costs.

 

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On April 1, 2015, a purported Globe Shareholder filed a putative class action lawsuit on behalf of Globe Shareholders challenging the Business Combination in the Court of Chancery of the State of Delaware. The action, captioned City of Providence v. Globe Specialty Metals, Inc., et al., C.A. No. 10865-VCG, named as defendants Globe, the members of its board of directors, its Chief Executive Officer, Grupo VM, FerroAtlántica, Merger Sub and the Company. The complaint alleged, among other things, that Globe’s board of directors and Chief Executive Officer, aided and abetted by Grupo VM, FerroAtlántica, Merger Sub and the Company, breached their fiduciary duties by entering into the Business Combination for inadequate consideration and that certain provisions in the Business Combination Agreement unfairly deterred a potential alternative transaction. The complaint further alleged, among other things, that Globe’s Executive Chairman and Chief Executive Officer, aided and abetted by Grupo VM, FerroAtlántica, Merger Sub and the Company, breached their fiduciary duties by negotiating the Business Combination Agreement, and, in the case of the Executive Chairman, by entering into a voting agreement in favor of the Business Combination Agreement, out of self-interest. The action sought to enjoin the Business Combination, to order the board of directors to obtain an alternate transaction, damages, and attorneys’ fees and costs.

On April 10, 2015, a purported Globe Shareholder filed a putative class action lawsuit on behalf of Globe Shareholders challenging the Business Combination in the Court of Chancery of the State of Delaware. The action, captioned Int’l Union of Operating Engineers Local 478 Pension Fund v. Globe Specialty Metals, Inc., et al., C.A. No. 10899-VCG, named as defendants Globe, the members of its board of directors, its Chief Executive Officer, Grupo VM, FerroAtlántica, Merger Sub and the Company. The complaint made identical allegations and sought the same relief sought in City of Providence v. Globe Specialty Metals, Inc., et al., C.A. No. 10865-VCG.

On April 21, 2015, a purported Globe Shareholder filed a putative class action lawsuit on behalf of Globe Shareholders challenging the Business Combination in the Court of Chancery of the State of Delaware. The action, captioned Cirillo v. Globe Specialty Metals, Inc., et al., C.A. No. 10929-VCG, named as defendants Globe, its board of directors, Grupo VM, FerroAtlántica, Merger Sub and the Company. The complaint alleged, among other things, that Globe’s directors, aided and abetted by Globe, Grupo VM, FerroAtlántica, Merger Sub and the Company, breached their fiduciary duties in agreeing to the Business Combination for inadequate consideration and that certain provisions in the Business Combination Agreement unfairly deterred a potential alternative transaction. The action sought to enjoin or rescind the Business Combination, disclosure of information, damages, and attorneys’ fees and costs.

On May 4, 2015, the Court of Chancery of the State of Delaware consolidated these four actions under the caption In re Globe Specialty Metals, Inc. Stockholders Litigation, Consolidated C.A. No. 10865-VCG (the “Action”). The Court further designated the complaint filed in C.A. No. 10865-VCG as the operative complaint in the consolidated action. Plaintiffs filed a motion for a preliminary injunction seeking to enjoin Globe from convening a special meeting of Globe Shareholders to vote on the proposal to adopt the Business Combination Agreement or consummating the Business Combination. In addition, Plaintiffs filed a motion for expedited proceedings, and supporting brief, in which they requested that the Court schedule a trial in this action before the Globe Shareholders vote on the Business Combination. Defendants, including Globe, filed an opposition brief in which they objected to Plaintiffs’ motion for expedited proceedings to the extent it seeks expansive discovery and an expedited trial on the merits in lieu of a preliminary injunction hearing. Subsequently, the parties reached agreement on the scope of expedited discovery.

On June 15, 2015, Plaintiffs filed an amended consolidated class action complaint, realleging, among other things, that Globe’s board of directors and Chief Executive Officer, aided and abetted by Grupo VM, FerroAtlántica, Merger Sub and the Company, breached their fiduciary duties by entering into the Business Combination for inadequate consideration and that certain provisions in the Business Combination Agreement unfairly deterred a potential alternative transaction. The amended complaint further alleged that, among other things, Globe’s preliminary proxy statement/prospectus filed with the SEC on May 6, 2015, was materially misleading and incomplete, and that Globe’s board of directors and Chief Executive Officer breached their fiduciary duties by failing to disclose purportedly material information to Globe Shareholders in connection with the Business Combination. The amended complaint sought, among other relief, an order enjoining the Defendants from consummating the proposed Business Combination; a declaration that the disclosures contained in the preliminary proxy statement/prospectus are deficient; damages; and attorneys’ fees and costs. On August 26, 2015, the Court held a hearing on Plaintiffs’ motion for a preliminary injunction.

 

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On September 10, 2015, the parties to the Action entered into a Memorandum of Understanding (the “MOU”), which outlined the terms of an agreement in principle to settle the Action. Based on the terms of the MOU, the parties to the Action entered into a formal stipulation of settlement (the “Stipulation”) on October 30, 2015. The Stipulation provided that the settlement would be subject to certain conditions, including final court approval of the settlement, final certification of a settlement class, and closing of the Business Combination. Upon satisfaction of these conditions, a $32.5 million aggregate cash payment would be paid after the closing of the Business Combination by the combined companies on a pro rata basis to the holders of shares of Globe common stock (other than the defendants in the Action and certain related persons) as of the close of business on the business day immediately prior to completion of the Business Combination. The Stipulation also provided that the Defendants would implement governance amendments for the benefit of Globe’s shareholders following completion of the Business Combination. Defendants further agreed to pay or cause to be paid such attorneys’ fees and expenses as may be awarded by the Court to Plaintiffs’ Counsel for their efforts in prosecuting the Action, as well as the costs of administering the settlement. The Stipulation included a release of all claims against the Defendants and their advisors relating to or arising from the Action.

On December 23, 2015, the parties to the Business Combination Agreement completed the Business Combination. On February 10, 2016, the Court of Chancery of the State of Delaware held a hearing on Plaintiffs’ motion to approve the proposed settlement, including final certification of the settlement class, and Plaintiffs’ application for an award of attorneys’ fees and expenses. The Court approved the settlement, including final certification of the settlement class, and awarded Plaintiffs’ Counsel $9,989,376.73 in attorneys’ fees and expenses. Following court approval of the settlement, Globe paid $32.5 million into a settlement fund to be held for the benefit of the settlement class. With respect to the attorneys’ fee and expense award, Globe’s Insurers paid eighty-five percent of the award and Globe paid the remaining fifteen percent of the award. Globe anticipates further discussions with the Insurers toward reaching a final agreement with the Insurers on reimbursement for a portion of the settlement fund and a final allocation of the attorneys’ fee and expense award.

In connection with the above, on October 27, 2015, Mr. Kestenbaum submitted a request for indemnification under the Employment Agreement between Mr. Kestenbaum and Globe entered into as of January 27, 2011, as amended on February 22, 2015. The indemnity claim arises from the Stipulation and Agreement of Settlement (the “Settlement”), described above under “—Litigation Related to the Business Combination.” Pursuant to the Settlement, $32.5 million will be paid by Globe to all record and beneficial holders of common stock of Globe who held their stock at any time during the period from and including February 22, 2015 through the date on which the Business Combination was completed, and whose shares of Globe common stock were exchanged for shares of Ferroglobe ordinary share in the Business Combination. The Settlement provides that the individual defendants in the Litigation Related to the Business Combination, including Mr. Kestenbaum, shall not be paid any of the $32.5 million in settlement proceeds. As the holder of approximately 13% of Globe’s common stock during the relevant period, Mr. Kestenbaum contends that he has suffered an indemnifiable loss within the meaning of his Employment Agreement to the extent he is ineligible to receive a pro rata distribution from the settlement proceeds. Globe has submitted Mr. Kestenbaum’s claim to the Insurers as an additional claim under the main claim for the Litigation Related to the Business Combination. Separately, the Globe Board of Directors considered Mr. Kestenbaum’s request for indemnification and advised him that it had not approved payment of the claim. There has been no resolution to date.

 

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FERROATLÁNTICA MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following is a discussion of FerroAtlántica’s financial condition and results of operations for the six months ended June 30, 2015 and 2014 and for the years ended December 31, 2014, 2013 and 2012.

Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to FerroAtlántica’s plans and strategy for the FerroAtlántica business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, FerroAtlántica’s actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. This discussion should be read in conjunction with the consolidated financial statements of FerroAtlántica for the six month period ended June 30, 2015 and 2014 and the years ended December 31, 2014, 2013 and 2012 included in this prospectus,

The following financial information has been extracted from the interim unaudited condensed consolidated financial statements of FerroAtlántica as of and for the six months ended June 30, 2015 and 2014 and the audited financial statements of FerroAtlántica as of and for the years ended December 31, 2014, 2013 and 2012. The consolidated financial information of FerroAtlántica included in this prospectus were translated from Euro to U.S. dollars. In accordance with IAS 21 - The Effects of Changes in Foreign Exchange Rates, FerroAtlántica’s consolidated income statements for the six month periods ended June 30, 2015 and 2014 and the years ended December 31, 2014, 2013 and 2012 have been translated from Euro into U.S. dollars using the rate of 1.1157, 1.3703, 1.3285, 1.3281 and 1.2851, respectively, to one Euro, each of which is the average prevailing during the applicable period of the daily Euro foreign exchange reference rates as published by the European Central Bank, and FerroAtlántica’s consolidated balance sheets as of June 30, 2015, December 31, 2014, 2013 and 2012 have been translated from Euro into U.S. dollars using the rate of 1.1190, 1.2141, 1.3791 and 1.3194, respectively, to one Euro, each of which is the Euro foreign exchange reference rate at the end of such date as published by the European Central Bank.

Overview

FerroAtlántica is the parent company of a Spanish multinational group operating globally in the silicon metal, manganese- and silicon-based alloy and other specialty metals industries, with interests in hydroelectric power in Spain and France and with quartz mining activities in Spain and South Africa. FerroAtlántica is a leading global silicon metal producer based on production output for 2015 and a leading global manganese- and silicon-based alloy producers based on production output for 2015.

FerroAtlántica’s business is organized into two segments: (i) electrometallurgy and (ii) energy. FerroAtlántica generates revenues and cash flows principally from the sale of silicon and ferroalloys to industrial customers. The Electrometallurgy segment includes FerroAtlántica’s silicon mining operations and its silicon metal and ferroalloy production, whereas the Energy segment comprises its hydroelectric power operations.

Principal Factors Affecting Results

Sale prices. FerroAtlántica’s operating performance is highly correlated to sales prices, which are influenced by several different factors that vary across FerroAtlántica’s two segments.

Manganese-based alloy prices have shown a direct correlation with the price of manganese ore. During 2015, we have seen two different trends. During the first part of the year, we have seen a high demand due to the performance of the steel industry, with sustained support in prices for the manganese alloys. Since June, prices declined, with a significant decrease in prices of all raw materials and specifically manganese ore. This had an impact in the evolution of prices.

 

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Market prices for silicon metal and silicon–based alloys have seen a similar evolution. The first part of the year had a positive evolution due to high demand on the chemical industry for silicon metal as well as a contained supply of alloys and silicon. During the second part of the year, as in manganese-based alloys, there was a retreat in prices.

Under FerroAtlántica’s pricing policy, which is aimed at reducing dependence on spot market prices, prices applied to its term contracts are a function of (i) a base price representing a mark-up over real costs, which are calculated once a year and (ii) the spot market price, which is typically set by reference to CRU spot prices for each particular product, to which a premium or discount can be applied using a case by case analysis. FerroAtlántica sells certain high quality products, for which pricing is not directly correlated to spot market prices.

Cost of raw materials. The key raw materials sourced by Grupo FerroAtlántica are manganese ore, coal, quartz, wood and charcoal. Manganese ore is the largest component of the cost base for manganese-based alloys. In 2015, 98.17% of Grupo FerroAtlántica’s total $62 million expense with respect to manganese ore fell under contractual agreements with producers of manganese ore with terms of one to three years, while the remaining 1.83% was spent to procure manganese ore from the international spot market. Coal meeting certain standards for ash content and other physical properties is used as a major carbon reductant in silicon-based alloy production. In 2015, coal represented an $86 million expense for Grupo FerroAtlántica. Wood is an important element for the production of silicon alloys and is used to produce charcoal, which is used as a carbon reductant at Grupo FerroAtlántica’s South African and Chinese plants. Grupo FerroAtlántica’s wood expense amounted to $44.6 million in 2015. Grupo FerroAtlántica sources 45% of its quartz needs from its own mines in Spain and South Africa. Its French and Chinese operations source their quartz needs from third parties. Total quartz consumption in 2015 represented an expense of $71.4 million.

Power. Power constitutes the largest expense for most of FerroAtlántica’s products other than manganese-based alloys. FerroAtlántica focuses on minimizing energy prices and unit consumption throughout its operations by concentrating its silicon- and manganese-based alloy production during periods when energy prices are lower. In 2015, FerroAtlántica’s total power consumption was 6,322 GWh, representing a total expense of €180.7 million. FerroAtlántica’s power contracts vary across its operations. In Spain, South Africa and China (which collectively represent 53% of FerroAtlántica’s total power consumption in 2015), power prices are mostly spot or daily prices with important seasonal fluctuations, whereas in France and Venezuela, FerroAtlántica has power contracts that provide for flat or near-flat rates for most of the year.

In Spain, FerroAtlántica receives a rebate on a portion of its energy costs in exchange for an agreement to interrupt production, and thus power usage, upon request. FerroAtlántica uses derivative financial instruments to partly hedge risks related to energy price volatility in Spain. In France, until 2015, FerroPem had access to relatively low power prices, as a result of a discount on Electricité de France’s green tariffs. These green tariffs expired at the end of 2015 and the Government and Legislature came up with a new regulation for highly intensive energy consumers. Under this new regulation, prices for energy in France will be partly subject to wholesale energy markets, but will enjoy favorable terms in regulated parts of the power rates and rebates for services offered to the system. Additionally, the new system avoids the need to shut down its factories in January and February, when energy prices were historically at their highest.

In Venezuela, FerroAtlántica has access to low and stable power prices denominated in U.S. dollars through a long-term contract with the local power supplier, as its factories are located in the proximity of five hydroelectric power plants. In South Africa, the National Energy Regulator (“NERSA”) regulates energy prices and price increases are publicly announced in advance. In China, FerroAtlántica purchases energy from the grid at a set tariff. During the dry season, which runs from January through May, FerroAtlántica shuts down operations in China due to the high cost of energy.

Foreign currency fluctuation. FerroAtlántica production costs are mostly dependent on local factors, with the exception of the cost of manganese ore and coal, whereas its product prices are more dependent on global factors. The relative strength of the functional currencies of FerroAtlántica’s subsidiaries influences its competitiveness in the international market, most notably in the case of FerroAtlántica’s Venezuelan and South African operations, which export a majority of their production to the U.S. and the European Union.

In South Africa, since 2012, the Rand has lost value against the U.S. dollar and the euro at a higher rate than its inflation differential with both the U.S. and the Eurozone, so the competitiveness of FerroAtlántica’s South

 

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African production units has increased during this period. In Venezuela, the devaluation of the Venezuelan Bolivar in February 2013 (from VEF 4.3 to 6.3 to one U.S. dollar) was insufficient to compensate for the inflation differential between Venezuela and the U.S. since 2012, resulting in a loss of $23.1 million at our Venezuelan operations in 2013. This trend was reversed in February 2014 when the Venezuelan Government approved a new exchange rate for exporting companies of VEF49.99 to one U.S. dollar. In January 2016, the exchange rate for export companies have been fixed at VEF199 to one U.S. dollar.

The current loss of value of the euro versus the U.S. dollar has resulted in a significant price gap between U.S. dollar- and euro-denominated spot market prices for silicon metal in particular, which enhances the competitiveness of our European production units in the international markets.

Regulatory changes. FerroAtlántica’s energy operations are subject to government regulation. In Spain, the regulatory framework applicable to electricity producers underwent significant changes in 2013. The regulatory framework previously applicable to renewable energies was abolished, and the foundation for a new framework was established through the enactment of Royal Decree-Law 9/2013. The development of this new framework continued with the passing of the Electricity Industry Law in Spain in December 2013, and was completed with the enactment of Royal Decree 413/2014 and Order IET/1045/2014.

As a result of regulatory changes, since July 2013, FerroAtlántica has sold the electricity it generates at market prices, optimizing its generation by operating during peak price hours and participating in the “ancillary services” markets rather than at guaranteed prices that provided a premium above market prices, with the exception of energy generated by the Novo Pindo plant in Galicia, which continues to receive a premium. It is expected that new regulations will allow FerroAtlántica to continue to participate in ‘ancillary services’ markets. New power supply arrangements that have been entered into in 2016 for our French plants have managed to avoid this seasonal interruption.

 

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Results of Operations

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

 

    

Six Months Ended

June 30,

 

($ thousands)

   2015      2014  

Sales

     697,747         747,829   

Cost of sales

     (428,369      (465,631

Other operating income

     6,674         5,221   

Staff costs

     (92,997      (96,279

Other operating expenses

     (82,973      (92,916

Depreciation and amortization charges, operating allowances and write-downs

     (32,185      (36,432
  

 

 

    

 

 

 

Operating profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals of non-current assets and other gains and losses

     67,897         61,792   

Net impairment losses

     (870      —     

Net gains/losses due to changes in the value of assets

     —           —     

Gains/losses on disposals of non-current assets

     —           69   

Other gains/losses

     202         8   

Operating Profit

     67,229         61,869   

Finance income

     243         2,284   

Finance costs

     (15,025      (19,756

Exchange differences

     5,575         1,284   
  

 

 

    

 

 

 

Profit Before Tax

     58,022         45,681   

Income tax

     (25,210      (27,940
  

 

 

    

 

 

 

Profit for the Period

     32,812         17,741   

(Profit) loss attributable to non-controlling interests

     1,346         2,516   
  

 

 

    

 

 

 

Profit/(Loss) Attributable to Grupo FerroAtlántica

     34,158         20,257   
  

 

 

    

 

 

 

 

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Sales

Sales were $ 697,747,000 for the six months of ended June 30, 2015, a decrease of $ 50,082,000, or 6.6%, from $ 747,829,000 for the first six months ended June 30, 2014, which was due to the evolution of the EUR/USD exchange rate, from 1.37 EUR/USD at June 30, 2014 to 1.12 EUR/USD at June 30, 2015, because in 2015 the sales in euros increased due to increased sales prices. The decrease in energy segment sales was due to the low rainfall in Galicia (Spain) during the first six months of 2015. Sales volumes for the electrometallurgy segment were 377,292 tons in the first half of 2015 (excluding fines, silica fume and other byproducts), a 5% increase from the first half of 2014 sales volumes, and average sales prices in the first half of 2015 were $1,375 per ton, a 11% decrease compared to the first half of 2014, which were $1,543 per ton. In euros, the sales price has increased in 9% at the same period due to the evolution of exchange rate.

Cost of sales

Cost of sales decreased $ 37,262,000, or 8%, to $ 428,369,000 for the six months ended June 30, 2015, from $ 465,631,000 for the six months ended June 30, 2014, mainly due to the evolution of the EUR/USD exchange rate, from 1.37 EUR/USD at June 30, 2014 to 1.12 EUR/USD at June 30, 2015. Cost of sales was 61.3% of total sales for the six months ended June 30, 2015, compared to 62.2% for the six months ended June 30, 2014.

Other operating income

Other operating income increased $ 1,453,000, or 27.8%, to $ 6,674,000 for the six months ended June 30, 2015 from $ 5,221,000 for the six months ended June 30, 2014 due to indemnity received for damages in Silicon Smelters in South Africa.

Staff costs

Staff costs decreased $3,282,000, or 3.4%, to $ 92,997,000 for the six months ended June 30, 2015 from $ 96,279,000 for the six months ended June 30, 2014 due to the evolution of the EUR/USD exchange rate, from 1.37 EUR/USD at June 30, 2014 to 1.12 EUR/USD at June 30, 2015.

Other operating expenses

Other operating expenses decreased $ 9,943,000 or 10.7%, to $ 82,973,000 for the six months ended June 30, 2015 from $ 92,916,000 for the six months ended June 30, 2014, which was due to the evolution of the EUR/USD exchange rate, from 1.37 EUR/USD at June 30, 2014 to 1.12 EUR/USD at June 30, 2015 despite the incurrence of expenses related to the merger project.

Depreciation and amortization charges, operating allowances and write-downs

Depreciation and amortization charges, operating allowances and write-downs decreased $ 4,247,000, or 11.6%, to $ 32,185,000 for the six months ended June 30, 2015 from $ 36,432,000 for the six months ended June 30, 2014, due to allowances and write-downs for two customers in FerroAtlántica and Hidro Nitro in 2015 that have been less significant as a result of exchange rate evolution during the period.

Operating profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals on non-current assets and other gains and losses

Operating profit before impairment and results on disposals increased $ 6,105,000, or 9.9%, to $ 67,897,000 for the six months ended June 30, 2015 from $ 61,792,000 for the six months ended June 30, 2014 as a result of the factors discussed above.

 

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Net impairment losses

Net impairment losses increased $ 870,000, or 100%, to $ 870,000 for the six months ended June 30, 2015 from $ 0 for the six months ended June 30, 2014, due to some minor impairments in the electrometallurgy division.

Operating profit

Operating profit increased $ 5,360,000, or 8.6%, to $ 67,229,000 for the six months ended June 30, 2015 from $ 61,869,000 in the first half of 2014 as a result of the factors discussed above.

Finance income

Finance income decreased $ 2,041,000, or 89.3%, to $ 243,000 for the six months ended June 30, 2015 from $ 2,284,000 for the six months ended June 30, 2014, due to the shareholder partially repaying its debt as receivables of subsidiaries, causing finance income to decrease during the period.

Finance costs

Finance costs decreased $ 4,731,000, or 23.9%, to $ 15,025,000 for the six months ended June 30, 2015 from $ 19,756,000 for the six months ended June 30, 2014 due to a decrease in the finance debt during the period.

Exchange differences

Exchange differences increased $4,291,000, or 334.1%, to $5,575,000 for the six months ended June 30, 2015, as the Rmb/EUR exchange rate decreased to 13.64 Rmb/EUR at June 30, 2015 from 14.46 Rmb/EUR at June 30, 2015.

Income tax

Income tax expense decreased $2,730,0000, or 9.7%, to $25,210,000 for the six months ended June 30, 2015 from $27,940,000 for the six months ended June 30, 2014. This increase income tax is due to the exchange rate above mentioned, because in euros, the amount has increased because the more profitable group companies as of June 30, 2015 has an income tax rate higher than the one in other group companies. Specially FerroPem, French subsidiary, that has a 38% income tax compared to the average of the group of approximately 30%. Furthermore, Spanish tax authorities has changed for fiscal year 2015 the income tax rate to 28% when in 2014 it was 30%.

 

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Segment operations

Electrometallurgy

 

    

Six Months Ended

June 30,

 

($ thousands)

   2015      2014  

Sales

     682,897         726,684   

Cost of sales

     (427,786      (464,377

Other operating income

     7,158         5,766   

Staff costs

     (91,380      (94,088

Other operating expenses

     (77,639      (85,070

Depreciation and amortization charges, operating allowances and write-downs

     (29,747      (33,534
  

 

 

    

 

 

 

Operating profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals of non-current assets and other gains and losses

     63,503         55,381   
  

 

 

    

 

 

 

Sales

Sales for the electrometallurgy segment decreased $43,787,000, or 6%, to $682,897,000 for the six months ended June 30, 2015 from $ 726,684,000 for the six months ended June 30, 2014 due to the evolution of the EUR/USD exchange rate, from 1.37 EUR/USD at June 2014 to 1.12 EUR/USD at June 30, 2015, because euro-denominated sales increased due to increases in the sales price. Sales volumes for the electrometallurgy segment were 377,292 tons for the six months ended June 30, 2015 (excluding fines, silica fume and other byproducts), a 5% increase from the six months ended June 30, 2014. Sales volumes, and average sales prices for the six months ended June 30, 2015 were $1,375 per ton, an 11% decrease compared to the six months ended June 30, 2014, which were $1,543 per ton. In euros, the sales price increased 9% during the same period due to the evolution of the exchange rate.

Cost of sales

Cost of sales for the electrometallurgy segment decreased $36,591,000, or 7.8%, to $427,786,000 for the six months ended June 30, 2015 from $464,377,000 for the six months ended June 30, 2014 due to the evolution of the EUR/USD exchange rate, from 1.37 EUR/USD at June 30, 2014 to 1.12 EUR/USD at June 30, 2015.

Other operating income

Other operating income for the electrometallurgy segment increased $1,392,000, or 24.1%, to $7,158,000 for the six months ended June 30, 2015 from $5,776,000 for the six months ended June 30, 2014 due to indemnity received for damages in Silicon Smelters in South Africa.

 

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Staff costs

Staff costs for the electrometallurgy segment decreased $2,708,000 or 2.8% to $91,380,000 for the six months ended June 30, 2015 from $94,088,000 for the six months ended June 30, 2014 due to the evolution of the EUR/USD exchange rate, from 1.37 EUR/USD at June 30, 2014 to 1.12 EUR/USD at June 30, 2015.

Other operating expenses

Other operating expenses for the electrometallurgy segment decreased $ 7,431,000, or 8.7%, to $77,639,000 for the six months ended June 30, 2015 from $85,070,000 for the six months ended June 30, 2014 as a result of the evolution of the EUR/USD exchange rate from 1.37 EUR/USD at June 30, 2014 to 1.12 at June 30, 2015 despite the incurrence of expenses related to the merger project.

Depreciation and amortization charges, operating allowances and write-downs

Depreciation and amortization charges, operating allowances and write-downs for the electrometallurgy segment decreased $3,787,000, or 11.2%, to $29,747,000 for the six months ended June 30, 2015 from $33,534,000 for the six months ended June 30, 2014 due to allowances and write downs for two customers of FerroAtlántica and Hidro Nitro being much less significant in 2015 as a result of exchange rate evolution during the period.

Energy

 

     Six Months Ended
June 30,
 

($ thousands)

   2015      2014  

Sales

     14,858         21,145   

Cost of sales

     (583      (1,254

Other operating income

     79         107   

Staff costs

     (1,617      (2,191

Other operating expenses

     (5,905      (8,498

Depreciation and amortization charges, operating allowances and write-downs

     (2,438      (2,898
  

 

 

    

 

 

 

Operating profit before impairment losses, net gains/losses on disposals of non-current assets and other gains and losses

     4,394         6,411   
  

 

 

    

 

 

 

Sales

Sales for the Energy segment decreased $6,287,000, or 29.7%, to $14,858,000 for the six months ended June 30, 2015 from $21,145,000 for the six months ended June 30, 2014 due to the regulatory changes abovementioned and a dry spell in Spain in 2015.

Cost of sales

Cost of sales for the Energy segment decreased $671,000, or 53.5%, to $583,000 for the six months ended June 30, 2015 from $1,254,000 for the six months ended June 30, 2014, as the cost of sales decrease corresponded with the sales decrease during this period.

 

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Other operating income

Other operating income for the Energy segment decreased $28,000, or 26.1%, to $79,000 for the six months ended June 30, 2015 from $107,000 for the six months ended June 30, 2014.

Staff costs

Staff costs for the Energy segment decreased $574,000, or 26.1%, to $1,617,000 for the six months ended June 30, 2015 from $2,191,000 for the six months ended June 30, 2014 due to the evolution of the exchange rate between June 30, 2015 and June 30, 2014.

Other operating expenses

Other operating expenses for the Energy segment decreased $2,593,000, or 30.5%, to $5,905,000 for the six months ended June 30, 2015 from $8,498,000 for the six months ended June 30, 2014 due to the decrease in sales during the period.

Depreciation and amortization charges, operating allowances and write-downs

Depreciation and amortization charges, operating allowances and write-downs for the Energy segment decreased $460,000, or 15.8%, to $2,438,000 during the six months ended June 30, 2015 from $2,898,000 for the six months ended June 30, 2014 due to the evolution of the exchange rate between June 30, 2015 and June 30, 2014.

Results of Operations—2014 Compared to 2013

 

($ thousands)

   2014      2013  

Sales

     1,466,304         1,463,878   

Cost of sales

     (889,561      (910,892

Other operating income

     6,891         36,904   

Staff costs

     (218,043      (217,527

Other operating expenses

     (165,491      (197,670

Depreciation and amortization charges, operating allowances and write-downs

     (74,752      (79,103
  

 

 

    

 

 

 

Operating profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals of non-current assets and other gains and losses

     125,348         95,590   

Net impairment losses

     (399      (1,061

Net gains/losses due to changes in the value of assets

     (9,472      6,475   

Gains/losses on disposals of non-current assets

     555         448   

Other gains/losses

     (60      (2,802

Operating Profit

     115,972         98,650   

Finance income

     4,771         2,858   

Finance costs

     (37,105      (47,225

Exchange differences

     7,800         (7,677
  

 

 

    

 

 

 

Profit Before Tax

     91,438         46,606   

Income tax

     (59,707      (24,558
  

 

 

    

 

 

 

Profit for the Year

     31,731         22,048   

(Profit) loss attributable to non-controlling interests

     6,706         6,400   
  

 

 

    

 

 

 

Profit/(Loss) Attributable to Grupo FerroAtlántica

     38,437         28,448   
  

 

 

    

 

 

 

 

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Sales

Sales were $1,466,304,000 in 2014, an increase of $2,426,000, or 0.17%, from $1,463,878,000 in 2013, which was due to a reduction of $22,971,000 or 31.82% in energy segment sales as a result of lower energy production, which was 737,022MWh in 2014, a 2.70% decrease as compared to 2013, and a lower average sale price per MWh in 2014 of $66.79, a 29.97% decrease from $95.37 in 2013 due to the regulatory changes discussed above. The decrease in energy segment sales was offset by a moderate increase of $25,405,000, or 1.83%, in electrometallurgy segment sales. Sales volumes for the electrometallurgy segment were 708,863 tons in 2014 (excluding fines, silica fume and other byproducts), a 3.6% increase from 2013 sales volumes, and average sales prices in 2014 were $1,836 per ton, a 1.33% increase compared to 2013, which were offset by lower sales of silicon fines and other byproducts.

Cost of sales

Cost of sales decreased $21,331,000, or 2.34%, to $889,561,000 in 2014, from $910,892,000 in 2013, mainly due to lower manganese ore prices and lower energy costs in Venezuela and in Spain. Cost of sales for the electrometallurgy segment was 62.65% of total sales in 2014, compared to 65.15% in 2013.

Other operating income

Other operating income decreased $30,013,000, or 81.33%, to $6,891,000 in 2014 from $36,904,000 in 2013 due to the discontinuation of the power buyback program implemented by Eskom, the state-owned monopoly utility for power generation and distribution in South Africa, during 2013, which resulted in an extraordinary income of ZAR259 million during that period.

Staff costs

Staff costs increased $516,000, or 0.24%, to $218,043,000 in 2014 from $217,527,000 in 2013 due to wage increases across FerroAtlántica’s operations other than in Venezuela, as a result of collective bargaining agreements and higher bonus and retirement payments at FerroAtlántica’s French subsidiary and an increase in the average annual total cost per employee from $68,297 in 2013 to $69,045 in 2014, which were offset by a $16 million reduction in staff costs in Venezuela as a result of the 2014 devaluation of the Venezuela Bolivar and a decrease in FerroAtlántica’s average total workforce from 3,185 in 2013 to 3,158 in 2014.

 

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Other operating expenses

Other operating expenses decreased $32,179,000, or 16.28%, to $165,491,000 in 2014 from $197,670,000 in 2013, $12.1 million of which was due to a decrease in costs for FerroAtlántica’s Venezuelan operations due to the devaluation of the Venezuelan Bolívar in 2014, and $7.8 million of which was due to a decrease in fees paid to Villar Mir Energía (which are correlated with revenues) along with lower taxes on power generation.

Depreciation and amortization charges, operating allowances and write-downs

Depreciation and amortization charges, operating allowances and write-downs decreased $4,351,000, or 5.50%, to $74,752,000 in 2014 from $79,103,000 in 2013, due to lower amortization charges recorded in 2014 as a result of a decrease in fixed assets.

Operating profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals on non-current assets and other gains and losses

Operating profit before impairment and results on disposals increased $29,758,000, or 31.13%, to $125,348,000 in 2014 from $95,590,000 in 2013 as a result of the factors discussed above.

Net impairment losses

Net impairment losses decreased $662,000, or 62.39%, to $399,000 in 2014 from $1,061,000 in 2013.

Net gains/losses due to change in the value of assets

Net gains/losses due to a change in the value of assets decreased $15,947,000, or 246.29%, to a loss of $9,472,000 in 2014 from a gain of $6,475,000 in 2013 due to a provision for certain assets pertaining to the electrometallurgy segment located outside the European Union and a loss relating to the sale of FerroAtlántica’s stake in OHL to its parent, Grupo Villar Mir, at the end of 2014, which were partly offset by a revaluation of FerroAtlántica’s forest reserves in South Africa amounting to $4.35 million in 2014, compared to $3.33 million in 2013.

Gains/losses due to disposal of non-current assets

Gains/losses due to the disposal of current financial assets increased $107,000, or 23.88%, to $555,000 in 2014 from $448,000 in 2013.

Other gains/losses

Other gains/losses increased $2,742,000, or 97.87%, to a loss of $60,000 in 2014 from a loss of $2,802,000 in 2013, due to a $3.1 million loss recorded at a Spanish quartz mine subsidiary in respect of the expropriation of a portion of the land subject to FerroAtlántica’s concession for occupation by a high-speed railway.

Operating profit

Operating profit increased $17,322,000, or 17.56%, to $115,972,000 in 2014 from $98,650,000 in 2013.

Finance income

Finance income increased $1,913,000, or 66.92%, to $4,771,000 in 2014 from $2,858,000 in 2013, due to a significant increase in the intercompany financial position with FerroAtlántica’s parent Grupo Villar Mir, which position was cancelled in full by the end of 2014. As at December 31, 2013, there were $56.0 million in loans from FerroAtlántica to Grupo Villar Mir outstanding. FerroAtlántica made several additional loans in a total amount of $90.7 million to Grupo Villar Mir between July 2014 and December 2014, which is when the intercompany financial position was cancelled in full against a portion of the dividends distributed by FerroAtlántica to its sole shareholder.

 

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Finance costs

Finance costs decreased $10,120,000, or 21.43%, to $37,105,000 in 2014 from $47,225,000 in 2013 due to a reduction in average interest rates (from 6.78% in 2013 to 5.07% in 2014), as revolving credit facilities were renewed at lower rates and term loans spreads narrowed as a result of lower leverage at FerroAtlántica’s major subsidiaries, and a 6%, or approximately $33 million, reduction in quarterly average indebtedness throughout 2014 as compared to throughout 2013.

Exchange differences

Exchange differences increased $15,477,000, or 201.60%, to positive $7,800,000 in 2014, mostly arising from our Chinese and Venezuelan operations, from negative $7,677,000 in 2013, arising from our Venezuelan and South African operations, due to the depreciation of the euro against the U.S. dollar, South African Rand and Chinese Yuan during 2014.

Income tax

Income tax increased $35,149,000, or 143.12%, to $59,707,000 in 2014 from $24,558,000 in 2013 due to the recording of a $36.3 million tax expense as a consequence of the impact on FerroAtlántica’s deferred tax position in Venezuela of the devaluation of the Venezuelan Bolivar in 2014 from VEF 6.3 to VEF 49.98 to one U.S. dollar, which was partly offset by the local revaluation of the tax value of certain assets allowed by local tax regulations.

Segment operations

Electrometallurgy

 

($ thousands)

   2014      2013  

Sales

     1,417,094         1,391,689   

Cost of sales

     (887,772      (906,469

Other operating income

     8,142         38,083   

Staff costs

     (213,829      (213,355

Other operating expenses

     (148,553      (172,808

Depreciation and amortization charges, operating allowances and write-downs

     (69,131      (73,484
  

 

 

    

 

 

 

Operating profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals of non-current assets and other gains and losses

     105,951         63,656   
  

 

 

    

 

 

 

Sales

Sales for the electrometallurgy segment increased $25,405,000, or 1.83%, to $1,417,094,000 in 2014 from $1,391,689,000 in 2013 due to a 3.6% increase in sales volumes from to 708,863 tons in 2014 (excluding silicon fines, silica fume and other byproducts), and a $1,836 per ton, or 1.33%, increase in average sale prices from 2013 to 2014, which were offset by lower sales of silicon fines and other byproducts.

 

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Cost of sales

Cost of sales for the electrometallurgy segment decreased $18,697,000, or 2.06%, to $887,772,000 in 2014 from $906,469,000 in 2013 due to lower manganese ore prices and lower energy costs in Venezuela and in Spain. Cost of sales for the electrometallurgy segment was 62.65% of total sales in 2014, compared to 65.15% in 2013.

Other operating income

Other operating income for the electrometallurgy segment decreased $29,941,000, or 78.62%, to $8,142,000 in 2014 from $38,083,000 in 2013 due to the discontinuation of the power buyback program implemented by Eskom, the state-owned power utility in South Africa, during 2013, which resulted in extraordinary income of ZAR259 million during that period.

Staff costs

Staff costs for the electrometallurgy segment increased $474,000, or 0.22%, to $213,829,000 in 2014 from $213,355,000 in 2013 due to wage increases across FerroAtlántica’s operations other than in Venezuela associated with collective bargaining agreements and higher bonus and retirement payments at FerroAtlántica’s French subsidiary, which were offset by a $16 million decrease in staff costs in Venezuela as a result of the 2014 devaluation of the Venezuela Bolívar.

Other operating expenses

Other operating expenses for the electrometallurgy segment decreased $24,255,000, or 14.04%, to $148,553,000 in 2014 from $172,808,000 in 2013 as a result of a decrease of $12.1 million in expenses with respect to FerroAtlántica’s Venezuelan operations due to the devaluation of the Venezuelan Bolívar in 2014.

Depreciation and amortization charges, operating allowances and write-downs

Depreciation and amortization charges, operating allowances and write-downs for the electrometallurgy segment decreased $4,353,000, or 5.92%, to $69,131,000 in 2014 from $73,484,000 in 2013 due to lower amortization charges recorded in 2014 as a result of a decrease in fixed assets.

Energy

 

($ thousands)

   2014      2013  

Sales

     49,225         72,196   

Cost of sales

     (1,789      (4,423

Other operating income

     197         190   

Staff costs

     (4,214      (4,172

Other operating expenses

     (18,401      (26,238

Depreciation and amortization charges, operating allowances and write-downs

     (5,621      (5,619
  

 

 

    

 

 

 

Operating profit before impairment losses, net gains/losses on disposals of non-current assets and other gains and losses

     19,397         31,934   
  

 

 

    

 

 

 

 

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Sales

Sales for the Energy segment decreased $22,971,000, or 31.82%, to $49,225,000 in 2014 from $72,196,000 in 2013 due to a 2.70% decrease in production to 737,022MWh in 2014 and a 29.97% decrease in the average sales price per MWh from $95.37 in 2013 to $66.79 in 2014, due to regulatory changes discussed above.

Cost of sales

Cost of sales for the Energy segment decreased $2,634,000, or 59.54%, to $1,789,000 in 2014 from $4,423,000 in 2013, mainly due to a decrease in energy purchases from third parties from $4.25 million in 2013 to $1.59 million in 2014.

Other operating income

Other operating income for the Energy segment increased $7,000, or 3.68%, to $197,000 in 2014 from $190,000 in 2013.

Staff costs

Staff costs for the Energy segment increased $42,000, or 1.02%, to $4,214,000 in 2014 from $4,172,000 in 2013 due to the lack of employee changes.

Other operating expenses

Other operating expenses for the Energy segment decreased $7,837,000, or 29.87%, to $18,401,000 in 2014 from $26,238,000 in 2013 due to lower fees paid to Villar Mir Energía (which are directly correlated to our sales), and lower taxes on power generation.

Depreciation and amortization charges, operating allowances and write-downs

Depreciation and amortization charges, operating allowances and write-downs for the Energy segment remained relatively stable compared to $5,619,000 in 2013.

Results of Operations—2013 Compared to 2012

 

($ thousands)

   2013      2012  

Sales

     1,463,878         1,479,606   

Cost of sales

     (910,892      (921,790

Other operating income

     36,904         15,676   

Staff costs

     (217,527      (212,427

Other operating expenses

     (197,670      (199,123

Depreciation and amortization charges, operating allowances and write-downs

     (79,103      (68,582
  

 

 

    

 

 

 

Operating profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals of non-current assets and other gains and losses

     95,590         93,360   

Net impairment losses

     (1,061      (15,663

Net gains/losses due to changes in the value of assets

     6,475         (2,751

Gains/losses disposals of non-current assets

     448         (13

Other gains/losses

     (2,802      1,487   
  

 

 

    

 

 

 

Operating Profit

     98,650         76,420   

Finance income

     2,858         5,123   

Finance costs

     (47,225      (45,665

Exchange differences

     (7,677      81   
  

 

 

    

 

 

 

Profit Before Tax

     46,606         35,959   

Income tax

     (24,558      (1,280
  

 

 

    

 

 

 

Profit for the Year

     22,048         34,679   

(Profit) loss attributable to non-controlling interests

     6,400         509   
  

 

 

    

 

 

 

Profit/(Loss) Attributable to the Grupo FerroAtlántica

     28,448         35,188   
  

 

 

    

 

 

 

 

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Sales

Sales decreased $15,728,000, or 1.06%, to $1,463,878,000 in 2013 from $1,479,606,000 in 2012, due to a $20,530,000 decrease in electrometallurgy segment sales as a result of a decrease in prices for silicon metal, FeSi and FeMn (-2.6%, -12.5% and -7% respectively) from 2012 to 2013 while sale volumes remained flat, partly offset by a 41% and 15% increase in sale volumes for FeMn and foundry products, respectively, a 29% increase in prices for silicon fines, and a $4,809,000 increase in energy segment sales as a result of a significant increase in production output (from 451 GWh in 2012 to 757 GWh in 2013), partly offset by a reduction in energy sale prices from $149.42 per MWh in 2012 to $95.37 per MWh in 2013.

Cost of sales

Cost of sales decreased $10,898,000, or 1.18%, to $910,892,000 in 2013 from $921,790,000 in 2012 due to a decrease in cost of sales of $10,932,000 with respect to the energy segment as a consequence of lower expenses in connection with energy trading activities in 2013, partly offset by a $34,000 increase in cost of sales for the electrometallurgy segment caused by a 41% increase in FeMn volumes, which was partly offset by a 3.2%, 4.6% and 30% decrease in unitary costs for silicon metal, foundry products and silicon fines, respectively.

Other operating income

Other operating income increased $21,228,000, or 135.42%, to $36,904,000 in 2013 from $15,676,000 in 2012 due to extraordinary revenues of ZAR259 million from the power buyback program implemented by Eskom, the state-owned power utility in South Africa, during 2013, under which 132 MW of furnace capacity (out of a total capacity of 180 MW) was shut down during approximately five months.

 

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Staff costs

Staff costs increased $5,100,000, or 2.4%, to $217,527,000 in 2013 from $212,427,000 in 2012 due to the appreciation of the euro against the U.S. dollar in 2013, which was offset by lower U.S. dollar-denominated costs at the South African and Venezuelan subsidiaries, which represented approximately 19% of total 2013 staff costs, as a result of the depreciation of the Rand and the VEF against the U.S. dollar in 2013.

Other operating expenses

Other operating expenses decreased $1,453,000, or 0.73%, to $197,670,000 in 2013 from $199,123,000 in 2012 due to a $9,451,000 decrease in other operating expenses for the electrometallurgy segment as a result of a €10.6 million or 13% reduction in maintenance expenses with respect to FerroAtlántica’s European operations, which was partly offset by the impact of the appreciation of the euro against the U.S. dollar, and a $8,332,000 increase in other operating expenses for the Energy segment as a result of the payment of a new power generation tax in the amount of $5.3 million arising from the new regulatory framework implemented in 2013.

Depreciation and amortization charges, operating allowances and write-downs

Depreciation and amortization charges, operating allowances and write-downs increased $10,521,000, or 15.34%, to $79,103,000 in 2013 from $68,582,000 in 2012, primarily due to a $6.24 million increase in depreciation of property, plant and equipment, which was caused by a higher volume of fixed assets integrated as a result of investments made in previous years.

Operating profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals of non-current assets and other gains and losses

Operating profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals of non-current assets and other gains and losses increased $2,230,000, or 2.39%, to $95,590,000 in 2013 from $93,360,000 in 2012 as a result of the various factors discussed above.

Net impairment losses

Net impairment losses decreased $14,602,000 or 93.23% to $1,061,000 in 2013 from $15,663,000 in 2012, which corresponded to an impairment of goodwill with respect to the Electrometallurgy segment.

Changes in value of assets

In 2013, FerroAtlántica recognized a gain due to change in the value of assets of $6,475,000, due to a $3.33 million increase in the value of FerroAtlántica’s South African biological assets, compared to a loss of $2,751,000 in 2012 related to the write down in the value of current financial assets.

Disposals of non-current assets

In 2013, FerroAtlántica recognized a gain due to disposal of current financial assets of $448,000, compared to a loss of $13,000 in 2012.

Other gains/losses

In 2013, FerroAtlántica recognized a loss in other gains/losses of $2,802,000, compared to a gain of $1,487,000 in 2012. The loss in 2013 was due to a $3.1 million loss registered in respect of the expropriation of part of a Spanish quartz mine concession area for use by a high-speed railway.

Operating profit

Operating Profit increased $22,230,000, or 29.09%, to $98,650,000 in 2013 from $76,420,000 in 2012.

 

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Finance income

Finance income decreased $2,265,000, or 44.21%, to $2,858,000 in 2013 from $5,123,000 in 2012, mainly due to the cancellation in 2012 of balances of $80 million with respect to the intercompany net financial position between FerroAtlántica and its parent, Grupo Villar Mir.

Finance expense

Finance expense increased $1,560,000, or 3.42%, to $47,225,000 in 2013 from $45,665,000 in 2012 due to an increase in average consolidated interest rates from 5.56% in 2012 to 6.78% in 2013 as a result of the refinancing of Spanish credit facilities at higher rates in 2012, which was partly offset by a decrease of $88.9 million in average gross indebtedness.

Exchange differences

In 2013, FerroAtlántica recognized a loss with respect to exchange differences of $7,677,000, compared with a profit of $81,000 in 2012, due to the negative impact of the devaluation of the Venezuelan Bolívar in February 2013, from 4.3 to 6.3 to the U.S. dollar, and the depreciation of the South African Rand against the U.S. dollar in 2013.

Income tax expense

Income tax expense increased $23,278,000 to $24,558,000 in 2013 from $1,280,000 in 2012, mainly as a consequence of $11,896,000 of positive income tax at the parent level as a result of the fact that impairment in respect of Mangshi in 2012 was tax-deductible, and positive variation in deferred income tax at the Venezuelan subsidiary due to the increase in the value of its tax assets due to local tax inflation.

Business Segments

Electrometallurgy

 

(US$ thousands)

   2013      2012  

Sales

     1,391,689         1,412,219   

Cost of sales

     (906,469      (906,435

Other operating income

     38,083         16,709   

Staff costs

     (213,355      (208,512

Other operating expenses

     (172,808      (182,259

Depreciation and amortization charges, operating allowances and write-downs

     (73,484      (64,422
  

 

 

    

 

 

 

Operating profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals of non-current assets and other gains and losses

     63,656         67,300   
  

 

 

    

 

 

 

 

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Sales

Sales for the electrometallurgy segment decreased $20,530,000, or 1.45%, to $1,391,689,000 in 2013 from $1,412,219,000 in 2012 due to a decrease in silicon metal, FeSi and FeMn prices (-2.6%, -12.5% and -7% respectively) without an increase in sales volumes for silicon metal and FeSi, which was partly offset by an increase of 41% and 15% in sales volumes for FeMn and foundry products, respectively, and a 29% increase in prices for silicon fines.

Cost of sales

Cost of sales for the electrometallurgy segment increased $34,000, or 0.01%, to $906,469,000 in 2013 from $906,435,000 in 2012 due to a reduction in unitary costs for silicon metal, foundry products and silicon fines (-3.2%, -4.6% and -30% respectively), which was partly offset by a 41% increase in FeMn sales volumes.

Other operating income

Other operating income for the Electrometallurgy segment increased $21,374,000, or 127.92%, to $38,083,000 in 2013 from $16,709,000 in 2012, mainly due to an extraordinary income of ZAR259 million pursuant to the power buyback program implemented by Eskom, the state-owned power utility in South Africa, during 2013, pursuant to which 132 MW of furnace capacity (out of a total capacity of 180MW) was shut down for approximately five months.

Staff costs

Staff costs for the electrometallurgy segment increased $4,843,000, or 2.32%, to $213,355,000 in 2013 from $208,512,000 in 2012, due to the appreciation of the euro against the U.S. dollar in 2013 and a total increase in FerroAtlántica’s total payroll expense from $3.16 million in 2012 to $3.19 million in 2013, the effect of which was partly offset by lower U.S. dollar-denominated costs at the South African and Venezuelan subsidiaries (which together represented approximately 19% of total 2013 staff costs), as the Rand and the VEF depreciated against the U.S. dollar in 2013.

Other operating expenses

Other operating expenses for the Electrometallurgy segment decreased $9,451,000, or 5.19%, to $172,808,000 in 2013 from $182,259,000 in 2012, primarily as a result of a €10.6 million or 13% reduction in maintenance expenses for FerroAtlántica’s European operations, which was partially offset by the effect of the appreciation of the euro against the U.S. dollar in 2013.

Depreciation and amortization charges, operating allowances and write-downs

Depreciation and amortization charges, operating allowances and write-downs for the Electrometallurgy segment increased $9,062,000, or 14.07%, to $73,484,000 in 2013 from $64,422,000 in 2012, primarily as a result of an $8.32 million increase in depreciation of property, plant and equipment in connection with the integration of a higher volume of fixed assets as a result of prior year investments.

 

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Energy

 

(US$ thousands)

   2013      2012  

Sales

     72,196         67,387   

Cost of sales

     (4,423      (15,355

Other operating income

     190         9   

Staff costs

     (4,172      (3,915

Other operating expenses

     (26,238      (17,906

Depreciation and amortization charges, operating allowances and write-downs

     (5,619      (4,160
  

 

 

    

 

 

 

Operating profit before impairment losses, net gains/losses on disposals of non-current assets, gains/losses on disposals of non-current assets and other gains and losses

     31,934         26,060   
  

 

 

    

 

 

 

Sales

Sales for the Energy segment increased $4,809,000, or 7.14%, to $72,196,000 in 2013 from $67,387,000 in 2012, due to a reduction in energy sale prices from $149.42 per MWh in 2012 to $95.37 per MWh in 2013, which was partly offset by an increase in production output from 451GWh in 2012, during a severe drought, to 757GWh in 2013, and lower revenues from energy trading volumes in 2013 compared to 2012.

Cost of sales

Cost of sales for the Energy segment decreased $10,932,000, or 71.2%, to $4,423,000 in 2013 from $15,355,000 in 2012, primarily due to lower expenses related to energy trading activities in 2013.

Other operating income

Other operating income for the Energy segment increased $181,000 to $190,000 in 2013 from $9,000 in 2012.

Staff costs

Staff costs for the Energy segment increased $257,000, or 6.57%, to $4,172,000 in 2013 from $3,915,000 in 2012 due to the appreciation of the euro against the U.S. dollar in 2013 and one-off retirement expenses.

Other operating expenses

Other operating expenses for the Energy segment increased $8,332,000, or 46.54%, to $26,238,000 in 2013 from $17,906,000 in 2012 primarily due to a new power generation tax in the amount of $5.3 million related to the new Spanish regulatory framework established in 2013.

 

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Depreciation and amortization charges, operating allowances and write-downs

Depreciation and amortization charge, operating allowances and write-downs for the Energy segment increased $1,459,000, or 35.08%, to $5,619,000 in 2013 from $4,160,000 in 2012.

Effect of Inflation

Management believes that the impact of inflation was not material to FerroAtlántica’s results of operations in the six month period ended June 30, 2015, and the years ended December 31, 2014, 2013 and 2012, with the exception of the impact of Venezuelan inflation in 2014 and 2013 on FerroVen’s production costs in 2014 and 2013, which resulted in a loss of competitiveness.

Seasonality

The seasonality of energy prices and the energy-intensive nature of ferroalloy production have an impact on the yearly production planning of FerroAtlántica’s plants. FerroAtlántica’s Spanish plants modulate their power consumption during the summer months to avoid production during the hours of the day when energy prices are at their peak. FerroAtlántica’s French plants have also stopped their production during winter, from December to mid-March in order to avoid higher energy prices during this period. New power supply arrangements that have been entered into in 2016 for our French plants have managed to avoid this seasonal interruption. In South Africa, FerroAtlántica’s plants tend to reduce production of silicon metal and FeSi by approximately one third between June and August. FerroAtlántica’s Mangshi plant in China ceases production during the dry season, which typically lasts from December to May. The state owned power grid publishes a forward monthly energy tariff which works as an official indicator of beginning date for each season. This seasonality in production planning has an impact on the management of finished goods inventories which tend to grow before production reductions in winter and summer to help ensure supply to FerroAtlántica’s customers.

Liquidity and Capital Resources

As of June 30, 2015, FerroAtlántica has financed its capital requirements with operating cash flows and long-term bank borrowings. Its primary short-term liquidity needs are to fund its capital expenditure commitments and operational needs and service its existing debt. FerroAtlántica’s long-term liquidity needs primarily relate to debt repayment. FerroAtlántica’s core objective with respect to capital management is to maintain a balanced and sustainable capital structure through the economic cycles of the industries in which it has a presence, while keeping the cost of capital at competitive levels so as to fund FerroAtlántica’s growth.

As of June 30, 2015, operating activities generated $46,614,000 in cash. Investing activities absorbed a total of $34,521,000 of cash. Financing activities absorbed a total of $23,630,000 in cash. See “—Cash Flow Analysis” below for additional information.

FerroAtlántica finances its operations through cash flows from operations, which totaled $46,614,000 at June 30, 2015, compared to $150,130,000 at June 30, 2014, corporate financing through each of FerroAtlántica’s main subsidiaries in the currency in which it operates, which totaled $334,949,000 at June 30, 2015, compared to $330,903,000 at June 30, 2014, and liquidity facilities taken out by FerroAtlántica under bilateral agreements with banks to provide FerroAtlántica with flexibility in its cash management activities, which totaled $96,308,000 at June 30, 2015, compared to $128,385,200 at June 30, 2014. In Venezuela, given the complexity of the local financial market and the restriction on capital flows, long-term financing is structured through intercompany loan agreements, whereas working capital needs are met with local currency bilateral agreements without recourse to FerroAtlántica.

Cash and cash equivalents are held primarily in euro, with approximately 41.8% held in U.S. dollars, South African Rand, Chinese Yuan and other currencies as of June 30, 2015.

At June 30, 2015, FerroAtlántica’s total gross financial debt was $455,922,658, compared to $487,134,422 at June 30, 2014. Of the total gross financial debt at June 30, 2015, $106,032,000 ($136,801,259 at June 30, 2014) related to finance leases that are treated as debt under IFRS. Of the remaining $349,900,658 of debt at June 30, 2015

 

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($350,333,163 at June 30, 2014), bank borrowings accounted for $342,100,248 ($339,988,594 at June 30, 2014) and other financial liabilities, consisting of interest rate swaps, accounted for the remaining $7,809,922 ($10,344,569 at June 30, 2014). In addition, at June 30, 2015, FerroAtlántica had approximately $89,828,649 in available committed credit lines expiring after June 30, 2016. See Note 13 to the consolidated financial statements of FerroAtlántica included in this prospectus for additional information on FerroAtlántica’s indebtedness at June 30, 2015.

Working Capital Position

Taking into account generally expected market conditions, FerroAtlántica anticipates that cash flow generated from operations will be sufficient to fund its operations, including its working capital requirements, and to make the required principal and interest payments on its indebtedness during the next 12 months.

As of June 30, 2015, FerroAtlántica’s current assets totaled $714,360,000 while current liabilities totaled $372,929,000 resulting in a positive working capital position of $341,431,000.

Cash Flow Analysis

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

The following table summarizes FerroAtlántica’s primary sources (uses) of cash for the periods indicated:

 

     Six Months Ended June
30,
 

(US$ thousands)

   2015      2014  

Cash and cash equivalents at beginning of period

     48,651         62,246   

Cash flows from operating activities

     46,614         150,130   

Cash flows from investing activities

     (34,521      (41,015

Cash flows from financing activities

     (23,630      (111,409

Exchange differences on cash and cash equivalents in foreign currencies

     1,838         685   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

     38,952         60,637   
  

 

 

    

 

 

 

 

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Cash flows from operating activities

Cash flows from operating activities decreased by $103,516,000, to $46,614,000 the first half of 2015, from $150,130,000 during first half of 2014. The decreased was due to a decrease in operating working capital, due to a decrease in trade payables and an increase in trade receivables to June 30, 2015 from June 30, 2014.

Cash flows from investing activities

Cash flows from investing activities increased by $6,494,000 to an outflow of $34,521,000 in the first half of 2015, from an outflow of $41,015,000 in the first half of 2014. Capital expenditures has increased in the six months period ended June 30, 2015 when compared to the six months period ended June 30, 2014 due to some investments the group was committed to in prior year as, for example, increase in production capacity of the Energy segment. In addition, investments in financial assets has decreased because FerroAtlántica, in the comparative six months period, made some loans to its shareholder. Similar loans were not done during the six months period ended June 30, 2015.

Cash flows from financing activities

Cash flows from financing activities increase by $87,779,000 to an outflow of $23,630,000 for the six months ended June 30, 2015, from an outflow of $111,409,000 for the six months ended June 30, 2014. The increase is mainly attributable to a 82,720,000 decrease in debt repayments.

Year ended December 31, 2014 compared to the year ended December 31, 2013

The following table summarizes FerroAtlántica’s primary sources (uses) of cash for the periods indicated:

 

(US$ thousands)

   2014      2013  

Cash and cash equivalents at beginning of period

     62,246         71,631   

Cash flows from operating activities

     191,420         166,695   

Cash flows from investing activities

     (155,293      (32,072

Cash flows from financing activities

     (50,913      (139,801

Exchange differences on cash and cash equivalents in foreign currencies

     1,190         (4,207
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

     48,651         62,246   
  

 

 

    

 

 

 

The following table sets forth the dividends paid by FerroAtlántica to Grupo VM in the year ended December 31, 2014.

 

(US$ thousands)

      

Cash payment

     40,116   

Compensation of Accounts Receivables from Grupo VM existing as of December 31, 2013 (Non-Cash movement)

     95,111   

Compensation of Accounts Receivables from Grupo VM debited and credited in 2014 (Cash movement)

     86,991   
  

 

 

 

Total dividends

     222,218   
  

 

 

 

 

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Cash flows from operating activities

Cash flows from operating activities increased by $24,724,000, to $191,420,000 in the year ended December 31, 2014, from $166,695,000 during the year ended December 31, 2013. The increase was due to higher profit from operations, a $10.12 million decrease in financial interest expense, and positive short-term variations totaling $4.42 million, partly offset by a $9.24 million increase in income tax paid and a $5.26 million decrease in funds from working capital changes.

Cash flows from investing activities

Cash flows from investing activities decreased by $123,221,000 to an outflow of $155,293,000 in the year ended December 31, 2014, from an outflow of $32,072,000 in the year ended December 31, 2013. The additional cash outflow is primarily due to a $14.37 million increase in capital expenditures, a $95.44 million increase in cash outflows relating to investment in non-current financial assets, a $10.30 million decrease in cash inflows from the sale of current financial assets and an increase of $5.7 million in payments relating to other investment activities.

Cash flows from financing activities

Cash flows from financing activities improved by $88,888,000 to an outflow of $50,913,000 in the year ended December 31, 2014, from an outflow of $139,801,000 in the year ended December 31, 2013. The increase is mainly attributable to a $98.76 million decrease in debt repayments, a $12.62 million increase in cash dividends paid in 2013 and $2.74 million in other positive financing variations.

Year ended December 31, 2013 compared to the year ended December 31, 2012

The following table summarizes FerroAtlántica’s primary sources (uses) of cash for the periods indicated:

 

(US$ thousands)

   2013      2012  

Cash and cash equivalents at beginning of period

     71,631         31,816   

Cash flows from operating activities

     166,695         109,470   

Cash flows from investing activities

     (32,072      (163,476

Cash flows from financing activities

     (139,801      91,993   

Exchange differences on cash and cash equivalents in foreign currencies

     (4,207      1,828   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

     62,246         71,631   
  

 

 

    

 

 

 

Cash flows from operating activities

Cash flows from operating activities increased by $57,225,000, to $166,695,000 in the year ended December 31, 2013, from $109,470,000 in the year ended December 31, 2012. The increase was due to higher profits from operations, a $9.34 million decrease in income tax paid, an $18.57 million increase from working capital changes and an $18.12 million increase in cash flows due to other short term variations.

Cash flows from investing activities

Cash flows from investing activities increased by $131,404,000 to an outflow of $32,072,000 in the year ended December 31, 2013, from an outflow of $163,476,000 in the year ended December 31, 2012. The improvement was due to a $79.30 million decrease in capital investments and acquisitions as FerroAtlántica

 

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curtailed expansionary projects and limited capital expenditures to those required for maintenance (See “—Capital Expenditures” on page 96 of this prospectus) as part of a deleveraging strategy and a $51.57 million decrease in outflows related to current and non-current financial assets.

Cash flows from financing activities

During the year ended December 31, 2013, cash flows from financing activities consisted of a cash outflow of $139,801,000, compared to cash generated by financing activities of $91,993,000 in the year ended December 31, 2012. The difference was primarily due to a net decrease in bank borrowings of $109.5 million in the year ended December 31, 2013 as a result of FerroAtlántica’s implementation of its debt reduction strategy, compared to an increase in bank borrowings of $140.44 million in the year ended December 31, 2012, and a $18.6 million decrease in cash dividends paid in 2013 compared to 2012.

Capital Resources

FerroAtlántica’s core objective is to maintain a balanced and sustainable capital structure through the economic cycles of the industries in which it has a presence, while keeping the cost of capital at competitive levels so as to fund FerroAtlántica’s growth. In addition to cash flows from continuing operations, the main sources of financing are long-term corporate financing through each of FerroAtlántica’s main subsidiaries and in the currency in which they operate and liquidity facilities taken out by FerroAtlántica under bilateral agreements with banks to provide FerroAtlántica with flexibility in its cash management activities. In the case of Venezuela, given the complexity of the Venezuelan financial market and the restrictions on capital flows, long-term financing is structured through intercompany loan agreements, whereby working capital needs are met with local currency bilateral agreements without recourse to FerroAtlántica. FerroAtlántica’s general policy is for each main subsidiary to be financed without recourse to or guarantees provided by FerroAtlántica.

The following table summarizes certain terms of FerroAtlántica’s outstanding credit facilities as of December 31, 2014:

 

Subsidiary

   Amount
outstanding
(Millions of
U.S. $)
    

Interest Rate

   Maturity      Limit
(Millions of
U.S. $)
 

Grupo FerroAtlántica S.A.U.

     9.2       LIBOR +3.00%      2015         10.7   

Grupo FerroAtlántica S.A.U.

     8.4       EURIBOR +3.25%      2016         8.5   

Grupo FerroAtlántica S.A.U.

     20.9       EURIBOR +3.25%      2016         24.3   

Grupo FerroAtlántica S.A.U.

     12.2       EURIBOR +3.00%      2016         12.1   

Grupo FerroAtlántica S.A.U.

     0.8       EURIBOR +1.80%      2015         12.1   

Grupo FerroAtlántica S.A.U.

     12.2       EURIBOR +2.70%      2016         12.1   

Grupo FerroAtlántica S.A.U.

     0.0       EURIBOR +3.00%      2016         12.1   

Grupo FerroAtlántica S.A.U.

     12.2       EURIBOR +2.30%      2016         12.1   

FerroAtlántica, S.A.U.

     1.1       EURIBOR +4.50%      2015         1.1   

 

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Subsidiary

   Amount
outstanding
(Millions of
U.S. $)
    

Interest Rate

   Maturity      Limit
(Millions of
U.S. $)
 

FerroAtlántica, S.A.U.

     21.9       EURIBOR +4.50%      2016         46.1   

FerroAtlántica, S.A.U.

     0.0       EURIBOR +3.50%      2015         6.1   

FerroPem, S.A.S.

     36.4       EURIBOR +2.00%      2018         36.4   

FerroPem, S.A.S.

     15.8       EURIBOR +2.50%      2018         18.2   

FerroPem, S.A.S.

     1.8       EURIBOR +2.00%      2015         7.3   

FerroAtlántica de Venezuela S.A.

     3.7       18%      2015         4.0   

FerroAtlántica de Venezuela S.A.

     2.3       18%      2015         3.0   

FerroAtlántica de Venezuela S.A.

     0.9       15%      2015         1.2   

FerroAtlántica de Venezuela S.A.

     0.8       17%      2015         0.7   

Mangshi Sinice

     7.5       PBOC* (1.28)      2015         14.3   

Mangshi Sinice

     8.8       PBOC* (1.23)      2015         10.3   

Mangshi Sinice

     9.8       6.95%      2015         14.3   

Rocas, Arcillas y Minerales, S.A.

     3.6       EURIBOR +3.50%      2015         3.6   

Discount lines

     8.0       EURIBOR +3.50%      2015         40.9   

FerroAtlántica, S.A.U. (1)

     37.0       EURIBOR +4.50%      2016         63   

Silicon Smelters (Pty.), Ltd. (3)

     17.3       JIBAR +2.60%      2018         17.0   

Silicon Smelters (Pty.), Ltd. (3)

     14.7       JIBAR +2.60%      2016         21.9   

FerroPem, S.A.S. (4)

     36.5       EURIBOR +2.75%      2018         42   

Mangshi Sinice Silicon Industry Company, Ltd (5)

     25.3       EURIBOR +2.60%      2019         25.3   

Thaba Chueu Mining (Pty.), Ltd. (6)

     8.8       JIBAR +3.35%      2018         8.8   

Grupo FerroAtlántica, S.A.U.

     8.6       LIBOR +3.40%      2015         8.6   

Grupo FerroAtlántica, S.A.U.

     6.1       2.75%      2016         6.1   

Grupo FerroAtlántica, S.A.U.

     15.1       EURIBOR +3.95%      2021         15.1   

Silicio FerroSolar, S.L.U.

     2.5       0%      2017         2.5   

Silicio FerroSolar, S.L.U.

     0.2       0%      2024         0.2   

Hidro Nitro Española S.A. (2)

     1.7       EURIBOR +1.10%      2015         1.7   
  

 

 

          

 

 

 

Total

     372.1               523.7   
  

 

 

          

 

 

 

These credit facilities contain certain customary representations, warranties and covenants, and certain of them contain maintenance financial covenants. None of FerroAtlántica or its subsidiaries is in default under any of its credit facilities except for Mangshi Sinice Silicon Industry Company, Ltd. (“Mangshi Sinice”), which, in 2014, did not comply with the financial maintenance covenants contained in the agreement governing its credit facility with COFIDES in China. Mangshi Sinice requested and obtained a waiver from COFIDES in which COFIDES waived its right to accelerated amortization of the loan. The default did not affect any cross-default provisions.

Off-Balance Sheet Arrangements

Financial Guarantees

FerroAtlántica’s financial guarantees require it to make contingent payments upon the occurrence of certain events or changes in an underlying instrument that is related to an asset, a liability or the equity of the guaranteed party. These guarantees include arrangements that are direct obligations, giving the party receiving the guarantee a direct claim against FerroAtlántica, as well as indirect obligations, under which FerroAtlántica has agreed to provide the funds necessary for another party to satisfy an obligation.

At June 30, 2015, FerroAtlántica and its subsidiaries had granted guarantees on the debt or commitments of third parties or associated entities totaling $46,221,758 ($34,790,136 at December 31, 2014) related to Mangshi Sinice’s Chinese Yuan-denominated revolving facilities and a Thaba Chueu Mining (Pty.), Ltd. long-term loan.

 

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Contractual Obligations

The following table sets forth FerroAtlántica’s contractual obligations and commercial commitments with definitive payment terms that will require significant cash outlays in the future, as of June 30, 2015: