The H1 18 results are OK, despite the fact cash costs have gone up mainly on energy costs. Aubert & Duval experienced a difficult H1 while forex also took its toll. The results remain decent and various initiatives are on the cards (such as the full acquisition of Mineral Deposits), so we are not too worried on the long-term prospects but price (and costs) volatility will remain.

Eramet released H1 18 numbers. Sales were up 1% to €1,813m, EBITDA reached €432m (+11%), current operating income €294m (+15%) and net income €94m (+16%). Net debt at the end of June 18 amounted to €449m vs €664m a year ago and €376m at year end 2017.

In terms of outlook, Eramet considers its markets remain favourable at the start of H2 18, “except some sectors in the Alloys division”. Management also recalled that current worries on international trade increases raw materials’ price volatility.

Taking into account forex, revenues would have been up 11% vs 1% reported (an impact that should ease in H2). Eramet also now holds 98% of Mineral Deposits in Australia, meaning that TiZir will now be fully consolidated.

By division, manganese was pretty stable in H1 (revenues +1% to €938m, recurring operating income -4% to €331m). Volumes were also very flat both for manganese ore and alloys.

TiZir’s sales were up 33% (€58m at 50%, with ROI doubling to €10m). Nickel saw a sharp recovery in profitability (sales up 17% to €365m, ROI €-22m vs €-104m): this is of course due to prices (+42% compared to H117 and +26% over H2 17), while volumes sold were very flat (28, 672t vs 28,630t in H1 17).

It is also worth mentioning that LME inventories are still going down (-27% to 299kt in H1 18), suggesting that demand could further support prices. The group estimates its current cash-cost (i.e. taking into account current forex and fuel prices) at US$5.95/lb (c. US$11,900/ton) and US$6.57/lb (US$13,100/ton) once taking into account investments and financing. In other words, the segment is currently profitable with nickel at c.US$13,500/t.

However, costs are still quite high and even current market prices would not allow for a significant margin level, which is part of the market’s disappointment after the release. The modest performance in H1 is attributed to “a labour union context that is delaying the implementation of organisational changes as well as difficulties in renegotiating energy costs”, even if the end-prices evolution is supportive.

Alloys experienced a mediocre quarter (sales down 8% to €520m, ROI down 69% to €10m), mainly attributable to the poor performance at Aubert & Duval impacted by the aerospace sector (adjustments to wide-body programmes while this sector represents 2/3rds of sales) and forex (basically €/US$).

The group indicated it has undertaken measures (cutting of temporary employment, overheads…) and is conducting a detailed review of this business “as well as of the strategic options in the medium term” (investment bankers will like the phrasing, even if there is no certainty on the future of the business at this stage).

Altogether, the market reacted to the trend (i.e. the trend in Q2 is probably less supportive than in Q1), despite the fact prices remain at rather high levels. The question is, of course, to guess whether this means a major reversal in trend is to be expected over H2 or is this just a temporary situation.

Not an easy guess. Added to the disappointment at Aubert & Duval, this has prompted a severe market reaction that we deem exaggerated.

We are certainly too high with respect to FY18, despite the fact volatility is high and things can change quickly on both the manganese and nickel fronts.

However, this does not change our view that the situation has markedly improved, that the new CEO is taking initiatives to diversify the group’s activity portfolio and that the longer-term outlook looks promising.

Therefore, any change to our numbers will not change our view on the stock, even if this may imply a downward revision of our target price.

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