Philip Gibbs, a Vice President, Equity Research Analyst with KeyBanc Capital Markets, says a name he favors in the metals & mining sector is Kaiser Aluminum Corp. (KALU). He says the company has a similar profile to the carbon EAFs, except that they are aluminum processors.
“So essentially they’d benefit from gradually declining aluminum prices, and they also have some fairly good visibility in aerospace, automotive and industrial,” Gibbs says.
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Kaiser Aluminum has put forth some spot price increases in heat-treated aluminum plate, which Gibbs says is the company’s staple product. He says lead times in that product have decreased to 10 weeks, as compared to nearly 20 weeks a year ago, creating good visibility in their order book.
“This is also a company that’s in a very good position to pay down debt beginning in the second quarter, and then they have roughly $600 million in net operating loss carryforwards or NOLs, which allow them to pay a very de minimis amount of cash taxes and really enhances free cash flow,” Gibbs says. “We like the demand visibility and high single-digit free cash flow yield.”
Finally, Gibbs says Kaiser Aluminum has the potential to do a reverse merger, purchasing a larger company in terms of EBITDA generation.
“It would make tremendous sense to us because that would allow them to fully keep their NOLs and really drive a lot of value for shareholders, bringing that cash more aggressively forward here over the next couple of years,” Gibbs says. “So dividend yield support as well strong free cash flow, and that’s really what we are looking for right now during a time period where we see a lot of global deflation.”
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