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Black Bear Value Partners: “EAF is in a Unique Position”

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Black Bear Value Partners, an investment management firm, published its “Black Bear Value Fund” second-quarter 2022 investor letter – a copy of which can be downloaded here. The Black Bear Value Fund, LP (the “Fund”) returned –6.7% in June and –2.7% YTD. If a downturn is going to impair a business permanently, it’s typically not a fit for this Fund. Go over the fund’s top 5 positions to have a glimpse of its finest picks for 2022.

In its Q2 2022 investor letter, Black Bear Value Fund mentioned GrafTech International Ltd. (NYSE:EAF) and explained its insights for the company. Founded in 1886, GrafTech International Ltd. (NYSE:EAF) is a Brooklyn Heights, Ohio-based carbon and graphite product manufacturing company with a $1.9 billion market capitalization. GrafTech International Ltd. (NYSE:EAF) delivered a -35.59% return since the beginning of the year, while its 12-month returns are down by -28.38%. The stock closed at $7.62 per share on July 21, 2022.

Here is what Black Bear Value Fund has to say about GrafTech International Ltd. (NYSE:EAF) in its Q2 2022 investor letter:

"GrafTech manufactures graphite electrodes in North America and Europe. The electrodes are necessary to produce electric arc furnace steel, a more environmental process than blast furnace production. EAF benefits from a global push to decarbonize steelmaking which is driving new capacity in electric arc steelmaking. EAF can self-source their main input, pet-needle coke, through their Seadrift subsidiary. Pet-needle coke is increasingly going to be in short supply as it is an important input commodity for electric vehicle battery production. Owning your own input commodity is a strategic advantage as others cannot guarantee production nor guarantee a profit on an order.

EAF is in a unique position. Their product helps steelmakers emit less greenhouse gases which helps drive the topline. They can guarantee their product as they know 2/3 of their capacity can be covered by Seadrift. The market is worried about recession which could result in some short-term pain to the industry. Another area of concern are long-term-agreements (LTA's) which are starting to roll off. Bears are concerned that as the business shifts to the spot market, the margins will decline. I will concede that historical margins are unlikely to be repeated but it seems likely new LTA's will be signed.

Recall our earlier discussion on scarcity. Their competitors DO NOT have control of their input costs…this advantage will become more pronounced as pet needle coke becomes scarcer as EV production ramps up. That should lead to higher top-line prices and healthy margins for EAF. I conservatively think we own this business at 11-16% FCF yield and presume no new long-term contracts are signed. In time new LTA's will be signed and the business should achieve a more appropriate valuation."



Our calculations show that GrafTech International Ltd. (NYSE:EAF) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. GrafTech International Ltd. (NYSE:EAF) was in 30 hedge fund portfolios at the end of the second quarter of 2022, compared to 31 funds in the previous quarter. GrafTech International Ltd. (NYSE:EAF) delivered a -23.34% return in the past 3 months.

In April 2022, we also shared another hedge fund’s views on GrafTech International Ltd. (NYSE:EAF) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.

Disclosure: None. This article is originally published at Insider Monkey.