Century Aluminum Company — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Century produces primary aluminum at smelters in the United States and Iceland. Unless noted otherwise, financial amounts are in millions of dollars.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $581.4 | $392.9 | $1,553.4 | $1,216.0 |
| Gross profit (loss) | $54.6 | $(27.1) | $54.8 | $(35.3) |
| Operating income (loss) | $40.3 | $(37.9) | $15.5 | $(67.3) |
| Net income (loss) | $(52.4) | $(58.2) | $(227.5) | $(87.8) |
| Loss per share, diluted | $(0.58) | $(0.65) | $(2.52) | $(0.98) |
- Gross margin was approximately 9.4% in Q3 2021 versus negative 6.9% in Q3 2020; for the nine-month periods it was approximately 3.5% versus negative 2.9%.
- Q3 revenue increased about 48% year over year. Management attributed the improvement primarily to higher LME aluminum prices and regional premiums; shipment volume was a modest offset. Nine-month revenue excluding alumina sales rose $339.7, mainly from improved price realizations.
- Higher prices also brought higher input costs: management cited unfavorable power-price realizations of $64.6 and alumina-price realizations of $25.4 in Q3, plus higher operating costs. Nine-month unfavorable power and alumina impacts were $146.3 and $51.5, respectively.
- Net loss included a reported $76.7 loss on forward and derivative contracts in Q3 and $239.2 for nine months. The filing attributes the substantial year-to-date loss mainly to rising LME and Midwest premium prices; these mark-to-market losses do not by themselves represent equivalent cash outflows in the period.
- Operating cash flow was negative $12.1 for nine months, versus positive $33.3 in 2020. Investing cash outflow was $45.7, primarily reflecting higher capital spending; financing cash flow was positive $42.4. Cash, cash equivalents and restricted cash totaled $68.9 at period end, including $57.6 unrestricted cash.
- At September 30, cash plus stated unused revolver availability of $69.2 yielded reported liquidity of approximately $126.8. The U.S. facility had $17.3 drawn and $108.5 of letters of credit; net availability was $49.2. The Iceland facility had $30.0 drawn and $20.0 available.
- Total debt was $389.6, compared with $315.9 at December 31, 2020. Current debt included $5.0 on the Hawesville term loan, $17.3 on the U.S. revolver and $30.0 on the Iceland revolver. Shareholders’ equity was $320.2, down from $546.1, principally reflecting the year-to-date net loss.
Material changes, outlook and risks
- In April 2021, Century issued $250.0 of 7.5% secured notes due 2028 and $86.3 of 2.75% convertible notes due 2028, and tendered or redeemed its 12.0% notes due 2025. The refinancing extended maturities and reduced the stated coupon on the refinanced notes, but produced a $24.7 early-extinguishment loss.
- A $49.8 discrete tax benefit in Q2 from recognizing a foreign deferred tax asset contributed to the nine-month tax benefit of $43.8. U.S. and certain foreign deferred tax assets remained subject to valuation allowances.
- Management said available cash and financing resources should be adequate for operations and business needs over the next 12 months. It estimated 2021 capital spending of approximately $25.0 for ongoing and sustainability projects, excluding the Mt. Holly restart project.
- Mt. Holly restart work was reported on schedule, with completion expected in Q4 2021; its power arrangement is expected to support production at 75% of full capacity. Hawesville was progressing toward a planned 80% of capacity after equipment issues, with the final potline rebuild and technology upgrades expected over the next several years, subject to market conditions.
- After quarter-end, Century announced a Grundartangi billet casthouse project with expected 150,000-tonne annual billet capacity and planned first-quarter 2024 production. An eight-year facility provides up to $130.0 of project financing; no amount had been drawn at filing. The project’s timing, costs, funding and expected returns are uncertain.
- Key exposures include volatile aluminum, regional premium, alumina and electricity prices; power availability and grid stability; foreign exchange; and substantial derivative fair-value movements. A hypothetical 10% adverse market-price change would increase reported derivative liabilities from $203.5 to $251.6, based on the filing’s sensitivity analysis.
- Glencore beneficially owned 42.9% of common stock and held all Series A convertible preferred stock. Glencore accounted for approximately 60.3% of Q3 sales. A $4.0 Glencore-related settlement loss was recorded in cost of goods sold.
- Century recorded a $3.9 Vernon environmental settlement payable in Q4. It also disclosed an October 2021 PBGC agreement requiring approximately $2.4 annually for four years, beginning November 2022, subject to possible acceleration. Management said pending legal matters were not expected to have a material adverse effect, while acknowledging outcomes remain uncertain.
Important facts for investors to verify
- Whether higher aluminum and regional premium realizations can continue to exceed rising power, alumina and other operating costs.
- The cash-flow and earnings effects of derivative settlements and mark-to-market changes, including the scale and terms of open commodity and power positions.
- Liquidity availability under borrowing-base limits, letters of credit and facility covenants, particularly if aluminum prices or production fall.
- Execution, total cost, financing terms and expected returns for the Mt. Holly restart and Grundartangi casthouse project.
- Glencore-related sales concentration, transactions and derivative exposure, along with the outcomes and payment timing of environmental, pension and other contingencies.