Monday, May 10, 2010

Ternium is Red Hot

The big news in steel this week is Posco's bid for Daewoo Shipping . Warren Buffett obviously isn't too keen on the idea, given Berkshire Hathaway's (BRK.a/BRK.b) substantial holding in Posco (PKX) and his views on the state of the shipping business. Perhaps his stated desire to own more of this South Korean giant is changing.

If so, perhaps Mr. Buffett should take a look at Ternium (TX). The company is based in Luxembourg, but operates steel plants and an iron ore operation in Central/South America.

Recent news makes the investment rationale clear.

Just today, the company received $263.2 million in compensation from Venezuela. In 2008, the Chavez government expropriated Ternium's stake in Sidor (a Venezuelan steel company). Today's payment is the latest installment out of the $1.9 billion agreement.

Excellent timing, Mr. Chavez. Thanks for the cash.

This is one asset the socialist utopia should have left with its rightful owner. Ironically, in its insatiable grab for cash flow, the Venezuelan state monetized Ternium's asset at exactly the right time. Sidor has bled red ink ever since. And lot's of it.

In total, Ternium has collected a whopping $1.5 billion for Sidor. Another $456 million is due (in 3 tranches) before year-end.

As for the rest of Ternium?

On May 4th, Q1 earnings were announced. Thanks to excellent management throughout the downturn and improving steel demand/pricing, Ternium generated $205 million in quarterly earnings for its equity holders. Free cash flow was even higher.

In addition, TX collected $300 million from Venezuela under the aforementioned payment plan in Q1. After paying off $290 million of debt, cash and equivalents rose to $2.4 billion against $2 billion of debt. How many steel companies have NET cash?

Today's Sidor payment isn't included in these numbers.

With 200.5 million ADR-equivalent shares and a current stock price of $39, Ternium has a market value of $7.8 billion. Some 85% of TX shares are owned by tw0 (2) shareholders, leaving just 15% for the rest of us. The company's effective float is worth just $1.2 billion.

Too small for Berkshire? Probably.

But not for you or me.

$7.8 billion is a reasonable price to pay for a company that generated positive cash flow throughout the downturn. And it has the best balance sheet in the industry... and then some. Add to this the continuing Sidor payments and you have a compelling investment case.

The company has even reestablished dividend payments. The first one (50 cents per ADR) arrives in June.

Ternium has certainly come a long way from its 2008-2009 lows, but even at this price, you're getting more than you pay for.

Disclosure: Long TX.

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