An Update on Sisecam Resources LP

How I viewed Q3 results, my take on the present situation

Sisecam Resources LP

Note: my first article on SIRE can be found here. My original tweets on the stock can be found here. BTW, I did the tweets before launching this newsletter - in the future, new ideas will always be featured here first.

Last Friday after the close, SIRE released Q3 results and declared the expected $.50/unit quarterly distribution. Results were outstanding:

• Net sales increased 40% from the prior-year third quarter

• Earnings per unit increased 111% over the prior year third quarter

• Distributable cash flow increased 105%

• Distribution coverage increased from 1.19X to 1.67X

Soda ash volume sold decreased 1.5%, which was more than made up for by a 44.3% increase in average sales price.

Perhaps due to the proposed/pending buyout offer, SIRE itself provided next to zero market/industry commentary. The company has clearly gone into stealth “pretend we are not here!” mode.

Fortunately, Genesis Energy L.P. (GEL) has a similar natural soda ash business, so their earnings call provided some useful industry insight:

“we believe the structural tightness in the soda ash market will continue to support soda ash prices in 2023, even if all or parts of the world start to see any slowdown in economic activity”

“The macro story for soda ash remains intact as worldwide demand ex China is continuing to outpace supply despite any concerns of a slowdown of the broader economy. According to third-party reports, estimated demand growth for soda ash in the ex-China market alone is expected to be in excess of approximately 1 million tons per year through the end of the decade.

“The outlook moving forward is driven by a combination of industrial production growth and increasing demand associated with the green transition, specifically from solar panel and lithium battery manufacturers at the same time as there is limited new supply available to the market outside of significantly higher cost synthetic soda ash production. As a result of the structural tightness and the cost structure of synthetic producers, our noncontracted export soda ash prices have steadily increased throughout 2022 and this again held true as our fourth quarter soda ash prices are expected to be higher than our third quarter prices.”

“Given this starting point and the nature of our contracts, we currently expect in all of our recent pricing conversations thus far would confirm that our weighted average soda ash price will be higher in 2023 than it was in 2022. This will be true even if we were to see a decline in market clearing spot prices over the course of 2023 which is not impossible but depends on a number of negative dynamics all playing out together”

(All quoted material is from Genesis Energy L.P.’s Q3 2022 earnings call)

While the specific “nature of our contracts” comment might not apply directly to SIRE, clearly Genesis executives believe the favorable pricing situation will hold for the foreseeable future.

Given strong operating results, the hugely over-covered distribution, and favorable outlook (Helpfully provided by GEL executives), I find it hard to believe that SIRE can or will be acquired without a substantial bump in the unit price.

In my view, the investment case is stronger than when I first mentioned the situation on twitter or wrote my initial article.

Let the market’s volatility work for you

In my first article on SIRE, I stated:

“Using history,  we will likely get a formal offer in 3 - 6 months.  During this time it is probable we will have numerous dips, etc as the security reacts to typical market volatility.”

I have marked the SIRE chart below with “dip areas” that created nice buy points well after my original SIRE tweet and first SIRE article:

I point this out because it is useful from a tactical point of view. It is almost never necessary to make a rushed decision after learning about an investment idea - market volatility will often work in your favor, if you are patient.

If Sisecam Chemicals doesn’t make a formal offer to acquire SIRE

While I believe a formal offer is close at hand, it is worth considering what will occur if no formal offer is made. In my view, it is highly likely that the unit price will drop as those playing for a “quick pop” rush for the exits.

While I can’t state definitively what I will do (lots of other factors to consider, such as other opportunities, etc) my current plan on any such news is to buy the dip.

Happy November

October is one of the difficult “shoulder” months to write about stocks - Q3 is over, yet it takes time for earnings season to bring incremental information. Look for an increase in publication frequency in the month of November.

I/we own units of SIRE

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