Description

CINR is a compelling long because:

• Low-cost producer supplying a stable and growing market

• Trades at 4.5x normalized earnings (where the company consistently earned from 2011-2019). A reasonable 9% earnings yield implies 150% upside from the current price.

CINR Overview

Ciner Resources (CINR) is a single asset MLP. The partnership produces Soda Ash from the Big Island Mine in Green River, Wyoming. The mine uses heavy equipment is used to cut trona from 800-1100 ft underground. The trona is then conveyed to the surface where it is processed into soda ash. Big Island has been in operation since 1962 and is estimated to have at least 60 years of supply remaining. About 40% of production is sold domestically and the remainder is exported. Most domestic sales are under short-term (1-3 year) contracts which specify a price and minimum volume.

In 2013 CINR’s previous owner, the Korean conglomerate OCI Enterprises, decided to take advantage of a hot market for MLPs and IPO their stake in the Big Island mine as a public partnership In 2015, the current owner Ciner Group purchased the general partner and a large limited partnership interest from OCI. Ciner Group is a private  Turkish conglomerate  with interests in mining, chemicals, media and shipping businesses with over 50,000 employees. In addition to their ownership in Ciner Resources, Ciner Group owns 4.5mm tons of soda ash production in Trukey. The group is controlled by Chairman Turgay Ciner.

The stock price fell >20% in 2019 despite the strong market after the company replaced its CEO and the company cut its distribution to fund an expansion project. The expansion project is value-creating and we do not view the CEO change as problematic. So far this year the stock is down another 35% after the global recession crushed Soda Ash demand. This demand decrease is entirely temporary and will rebound in the next couple years.

Soda Ash Market

Soda ash is a global commodity used in a variety of manufacturing and industrial applications. Approximately 53% of soda ash is used for glass production and the remaining 47% is consumed by a diverse set of uses. There are no substitutes for soda ash and generally soda ash will account for a small portion of input costs for a particular application.

Relative to many global industrial commodities, Soda ash demand is rather stable.  Even in the severe recession of 2009, demand only fell about 10% before nearly fully recovering the following year. Flat glass is the largest single end market for soda ash accounting for about 29% of total demand. Flat glass is used in construction and autos and as such demand can be cyclical. However, the other soda ash end markets  are not cyclical so even if flat glass production is down 25 - 30%, total soda ash demand will fall <10% (which is what occurred in past recessions).

Stable  demand has resulted in stable prices for Ciner.  The price CINR receives tend to stay in a rather narrow range despite economic volatility. Ciner has long relationships with their large customers and most sales are under short-term contracts which further serves to keep prices stable

Over the last 12 years demand has grown at a CAGR of 1.9%. Over the long-run demand should continue to grow around 1-3% driven by modest global GDP / population growth particularly in emerging markets such as South America and India. Demand is growing in all end markets expect for detergents which is slowly declining as consumers switch from powdered to liquid laundry soap. However, demand from lithium bicarbonate for electric vehicles should grow much faster than the overall market.

Soda Ash Today

For many years prior to 2020 the Soda Ash market was well balanced with global capacity utilization in the low-90s.  Under normal circumstances, as a low-cost producer Ciner is able to sell all the soda ash they produce. This results in consistent operating rates of 97% -99%.

At the start of the year, Soda Ash inventories were somewhat higher than average due to normal market factors. When COVID hit in March Soda Ash customers were caught with excess inventories of both Soda Ash and finished goods. Even non-cyclical customers such as Mexican beer producers had to suspend production due to safety concerns. Large export markets such as South America and SE Asia were hit particularly hard by the virus.  This caused CINR’s Q2 volumes to fall by 37%.  Ciner’s operating rate fell to 63% which is below the worst quarter of 2009 when the operating rate hit 68%.

After speaking with people who have been in the industry a long-time there is no reason to believe Soda Ash demand will not fully return once the current issues are resolved. Of course its impossible to know what will happen with COVID or with the global economy, but it seems reasonable to expect that Q2 was the trough and that demand should rebound over the next 18 months.

There is no possible new supply of low-cost low costs Soda Ash outside of the US. Mongolia has deposits but lacks the infrastructure to make mining them economic. Turkey only has 30-40 years of supply so they cannot increase production.

In addition to CINR’s planned expansion, there were other proposed capacity additions all of which are now on hold. Since it takes about 4-5 years to bring on new capacity it appears highly unlikely there will be any new supply for at least the next five years. While CINR’s proposed expansion is ‘large’ by industry standards, an additional 1mm tons is only enough to cover less than one average year of demand growth.

As such, once demand returns it seems likely that the Soda Ash market will be under-suppled for several years resulting in a favorable environment for CINR.

Low Cost Producer

The Wyoming and Turkey are the only areas where soda ash is produced from naturally occurring trona. Ciner Resources is one of only 5 global companies that produce natural soda ash. In Europe and Asia soda ash is manufactured using a synthetic process that requires limestone, salt and coal or natural gas. Synthetic production is nearly 2x the cost of trona mining however, given the limited availability of trona deposits approximately 75% of global production is synthetic. This provides CINR a significant and permanent cost advantage relative to the broader industry.

CINR Trades at 4.5x Normalized Cash Flow. Fair Value is $24/share

The bottom line here is that despite the current situation there has been no long-term changes to either the Soda Ash market or the CINR’s assets. As such, CINR’s earnings power has not changed and CINR will return to its previous long-term cash flow generation. Form 2014-2019 CINR consistently generated $40-$50mm in cash flow and paid cash distributions of $2.00 - $2.30. Shares generally traded at a 7% - 9% yield or around $25- $30/share. As shown below, normalized earnings are about $2.16/share or at 4.5x multiple on the current price. Assuming a 9% cash flow yield (which seems entirely reasonable to assets of this quality with low leverage) implies a fair value of $24/share or nearly 150% higher than the current price.

Key Risk: Corporate Governance

The most significant risk to this investment is that unitholders are hurt because of poor corporate governance. Limited partners have fewer legal rights than corporate shareholders and while there are laws and processes in place to protect limited partners, there are many examples of MLP holders treated poorly by the general partner. In this case the risk appears particularly acute given the GP is a private, Turkish company.

In order to assess this risk, we spoke with several people familiar with the situation and the Turkish business community in general. Some of the key takeaways are:

-        We could not find any instances of self-dealing or other concerning behavior.

-        Most contacts described Ciner Group as well regarded in Turkey,  but not up to western standards of transparency or governance. The family’s children however are western educated and seem keen to project a more ‘professional’ and ‘corporate’ image.

-        The recent management change and decision to leave ANSAC could be the result of the Ciner Group simply wanting greater control and integration among their soda ash operations.  In 5 years when the two projects are completed, Ciner Group will control around 15% of the global soda ash market.  At this production volume,  it likely makes sense to have integrated group wide marketing, logistics and operational integration.

-        Turgay  Ciner is politically connected. There are credible reports that Turkish president Erdogan has flown on Ciner’s jet while in office. However, as one contact told us “its impossible to be a large business in Turkey today without some political connections”. Contacts told us that they felt Ciner has done a good job of working with the government without getting too close.

-        Sisecam, a large public Turkish company was recently willing to be a JV partner with Ciner on a $2.5 billion-dollar long-term project implying that other large Turkish businesses trust the Ciner Group.

-        Culturally, Turkish owners of foreign business tend to be fairly hands off. There are indeed several global businesses with Turkish ownership that most people are unaware of (such as Godiva chocolate).

Bottom Line is: While there are some aspects of the GP are not ideal (such as the political connections or being controlled by a single strong personality), we were unable to find concrete, specific reasons for concern. Given the GP’s 74% ownership in the LP, any attempt to transfer value away from public unitholders does not appear rational.  Outright fraud is a risk for any investment, but there is no reason to believe this risk is particularly high in this case.

Catalyst

Return to normalized earnings. Resumption of dividend