Century Aluminum Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Century Aluminum produces primary aluminum at smelters in the United States and Iceland. Unless stated otherwise, financial amounts are in millions of dollars.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $421.2 | $490.0 |
| Gross profit (loss) | $4.8 | $(12.8) |
| Operating loss | $(4.4) | $(27.8) |
| Net loss | $(2.7) | $(34.6) |
| Loss per share, basic and diluted | $(0.03) | $(0.39) |
| Operating cash flow | $34.6 | $(21.5) |
| Capital expenditures | $3.7, excluding Hawesville restart spending | Not separately stated on the same basis |
Net sales declined $68.8 million, mainly from $44.0 million of unfavorable LME and regional premium effects and $14.8 million from lower shipment volume and product mix. Shipments were 202,905 tonnes, down from 206,451 tonnes. Gross profit improved by $17.6 million, reflecting lower raw-material and power prices and lower production costs, partly offset by weaker aluminum prices and regional premiums and higher operating expenses. SG&A decreased $5.8 million to $8.9 million, principally due to lower compensation costs. Derivative contracts generated a $3.8 million gain, versus a $5.7 million loss a year earlier.
Financial position and liquidity
- Cash and cash equivalents were $147.6 million at March 31, 2020, versus $38.9 million at year-end 2019. Cash, cash equivalents and restricted cash totaled $149.4 million.
- Operating activities provided $34.6 million; investing activities used $5.9 million; financing activities provided $81.0 million. Financing included revolving-credit borrowings, partly offset by repayments and a $5.0 million term-loan repayment.
- Total debt was $382.1 million, compared with $301.0 million at December 31, 2019. This included $90.0 million outstanding on U.S. and Iceland revolving facilities and $249.3 million of net senior notes payable.
- Management reported total liquidity of approximately $203.1 million: cash of $147.6 million plus $55.5 million of net revolving-facility availability. The company was in compliance with its credit-facility covenants at quarter-end.
- Shareholders’ equity was $673.8 million, compared with $675.0 million at year-end 2019.
Material changes, outlook and commentary
- COVID-19 and aluminum market: The company reported lower aluminum prices and demand amid the pandemic. Average LME aluminum prices were $1,690 per tonne in Q1 2020, versus $1,792 in 2019, and averaged $1,457 in April 2020. Because sales prices generally reflect a one-to-three-month lag, the lower prices were expected to affect later results. The company stated that the pandemic’s ultimate financial and operational impact could not then be reasonably estimated.
- Operations and mitigation: Smelters maintained pre-pandemic production rates; the company reported selling essentially all metal as cast and no material customer cancellations. It shifted toward a higher share of standard products, which could reduce average premiums. Measures included reducing discretionary spending, optimizing working capital and deferring nonessential capital projects. The company said it might also reduce production if conditions required.
- Hawesville: The smelter was operating at approximately 80% of capacity. The first of two potline rebuilds in the project’s second phase was about 50% complete and expected to finish in Q2 2020; remaining work was expected over several years, subject to market conditions. The company projected total restart and technology-upgrade cash requirements of approximately $150 million from project commencement through completion. It estimated 2020 capital spending of approximately $10 million excluding the restart project.
- Debt refinancing and liquidity risk: The $250 million principal amount of 7.5% senior secured notes matures in June 2021. The U.S. revolver would mature December 1, 2020—six months before the notes—unless the notes are refinanced, in which case the facility maturity extends to May 2023. Management said operating cash flow and financing should cover needs over the next 12 months, while warning that market volatility, aluminum prices and production costs could affect liquidity and access to financing.
- Concentration and related parties: Approximately 64% of consolidated net sales were to Glencore, which beneficially owned 42.9% of common stock and held all outstanding Series A convertible preferred stock. Glencore also provided the Hawesville term loan.
- Contingencies: The company disclosed ongoing litigation, including the Vernon environmental-indemnity case, for which it could not estimate a reasonably possible loss range. It had $9.6 million of remaining contributions under its PBGC settlement, with certain payments deferred and secured. The retiree medical settlement had $2.0 million in current and $8.9 million in other liabilities at quarter-end.
- No specific earnings guidance: The filing provides no quantitative full-year earnings or production forecast. Management cautioned that Q1 results were not necessarily indicative of full-year 2020 results.
Important facts for investors to verify
- Whether aluminum prices, premiums, demand and customer product mix recover or worsen, and how the contractual pricing lag affects subsequent quarters.
- Progress and remaining cost of the Hawesville restart and technology upgrades, including whether production rises above approximately 80% of capacity.
- Plans and available financing to refinance the June 2021 notes and address the U.S. revolver’s conditional December 2020 maturity.
- Liquidity and borrowing-base availability under both revolvers, especially if operating conditions or collateral values change.
- Any material developments in COVID-19 effects, litigation and environmental matters, labor negotiations at Grundartangi, or power costs and supply arrangements.