3 years ago

Annual Report 2008 - AMG Advanced Metallurgical Group NV

Annual Report 2008 - AMG Advanced Metallurgical Group NV

50% The risk of failure

50% The risk of failure to innovate requires even more intense attention and a carefully planned resolution of the conflict between cash conservation and managing the future viability of the company. As an innovation-driven organization, we are acutely aware of this. In broad strokes, about 50% of our EBITDA in 2008 was derived from activities not existing 5 years ago. options, especially in the event of defaults by their customers. It is not unrealistic to expect massive and systemic risks of “accounts receivable” turning into “uncollectible accounts”. The risk of having to write off particular accounts receivable is further compounded by the fundamental risk of customers going out of business, defaulting under longer term purchase agreements and/or attempting to re-negotiate contracts, delay shipments, et cetera. We are facing such risks, especially in the Advanced Materials Division, at Timminco and at Graphit Kropfmühl. Price Collapse in Specialty Metals In regard to the short term price risk of specialty metals, we cannot take comfort in a commodity exchange with forward pricing like the London Metal Exchange. Theoretically, the only hedge contracts available for a number of our specialty metals are between a supplier and a customer. In order to escape such tremendous volatility, we are attempting step by step to optimize our position in the value chain of each metal in such a way that we end up with a low-cost long position. This, and only this, will enable AMG to offer customers volatilityreducing formulas for long term prices. A review of AMG’s portfolio of metals that are normally quoted in tons — chrome metal, ferro-titanium, magnesium, silicon metal and aluminum — indicates an extraordinarily high level of price volatility. In addition, AMG’s specialty materials that are normally quoted in pounds — nickel, molybdenum, ferrovanadium and tantalum — also have high levels of volatility. Over a 10 year period, ferro-titanium, ferrovanadium, nickel, molybdenum and tantalum have volatilities exceeding 70%. It has to be noted that our volatility derived from those price movements is substantially less since we have (a) positioned ourselves primarily as “converters” — the customer pays for the conversion and the cost of underlying metal flows through, i.e. is being invoiced and (b) established low-cost long positions in tantalum, niobium, graphite, quartz (by way of AMG mines) and partially in ferrovanadium and ferronickel-molybdenum (by way of specially structured long-term supply contracts). We are working hard to further improve this position. Currency Shifts and Volatility The volatility of currencies has substantially increased with currency swings in the fourth quarter 2008, showing an erratic pattern not experienced in modern times: the US$/CA$ rate going from 1.04 to 1.22; the £/$ rate from 1.82 to 1.45; the £/1 rate from 1.26 to 1.03; the US$/1 rate from 0.69 to 0.71; the BRL/US$ rate from 0.53 to 0.43. For a global company producing in the US, Canada, the Euro zone, the UK and Brazil, this has massive operating and profitability implications. AMG has been navigating through these volatilities aided by “natural” short positions in the BRL, the GBP and the CA$. We also have further refined our short term currency hedging policies which aim to improve the probability of achieving yearly budgets. Capacity Under-Utilization In past economic cycles, during periods of falling prices, we generally did not experience difficulties maintaining capacity production levels. In the fourth quarter, several of our end markets, including steel, aluminum and silicon products, radically reduced production. 10 Letter to Shareholders

In those instances we were and we continue to be negatively affected not only through falling prices, but also by lower demand and therefore higher unit costs due to decreased production rates. The decrease in demand coupled with the decline in prices make implementing countermeasures against falling profitability difficult. We are aware that the metal industry is characterized by a high rate of fixed costs and a percentage of total costs. Temptation to Abandon Innovation One could be tempted, in times like these, to postpone innovation initiatives and reposition and wait for an “all clear” signal. That is the worst response to the current crisis. By doing this, the very future of the company is called into question once the storm is over. The risk of failing to innovate requires even more intense attention and a carefully planned resolution of the conflict between cash conservation and managing the future viability of the company. As an innovation-driven organization, we are acutely aware of this. In broad strokes, about 50% of our EBITDA in 2008 was derived from activities that did not exist five years ago. We have to stabilize this trend to maintain our profitability in the long term. Radically Reduced Financing Options We had also become accustomed to versatile capital markets with a vast capacity to obtain senior debt, subordinated debt and equity. Those markets appear to be closed — or available only at very high cost — for the time being. One has to assume that the debt currently in place is the total debt available and that equity is either unavailable or prohibitively expensive given the state of share price levels and the reduced universe of investors seeking equity investments. AMG’s net debt levels are 0.5x 2008 EBITDA and we are targeting to improve this further. We are taking comfort from the fact that our bank debt facilities do not expire until August 2012. Solar In 2008 AMG’s activities in solar energy were the largest driver of our growth. AMG is active in the solar market through silicon metal production at Graphit Kropfmühl and Timminco, UMSi production at Timminco, engineering of directional solidification systems for crystalline solar silicon in the Engineering Systems Division and production of rotatable targets for thin film solar applications in the Advanced Materials Division. This diverse portfolio enabled AMG to participate in multiple stages in the solar value chain. AMG generated $452.4 million in revenues from these activities during 2008. Our Engineering Systems Division increased production of directional solidification systems for the crystalline solar industry in our Berlin plant from four furnaces in 2007 to 200 furnaces in 2008. This ramp up is a major operational achievement and has been attained despite a number of critical hurdles. The Advanced Materials Division made significant progress in its targets for thin film coatings. AMG’s rotatable zinc oxide targets are used to coat thin film solar cells and improve the sunlight-to-electricity conversions of those cells. We are currently focusing on expansion of target materials for CiGS thin film cells. Letter to Shareholders 11

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