CENX

Century Aluminum Company - 10-Q Summary (Period Ended September 30, 2006)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2006, and the nine-month period ended on that date. Century Aluminum Company is a primary aluminum producer with operations in the United States (Ravenswood, Hawesville, Mt. Holly) and Iceland (Nordural). The company is an accelerated filer and is not a shell company. As of October 31, 2006, there were 32,456,835 shares of common stock outstanding.

Key Financial Metrics

Note: Net income for the three months ended September 30, 2006, includes a significant non-cash gain of $210.2 million on forward contracts.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 40.8% in Q3 and 35.1% for the nine-month period compared to 2005. This was driven primarily by higher London Metal Exchange (LME) aluminum prices and increased volume from the Nordural expansion.
• Profitability: Gross profit surged 135.9% in Q3 and 101.1% for the nine-month period. Operating income more than doubled for the nine-month period.
• Forward Contracts: The company reported a net gain of $210.3 million on forward contracts in Q3 2006, compared to a loss of $53.5 million in Q3 2005. For the nine-month period, the loss narrowed to $106.9 million from $52.5 million in the prior year. These figures are largely due to mark-to-market adjustments on long-term financial sales contracts with Glencore.
• Debt Levels: Total debt increased to $752.4 million from $671.9 million at year-end 2005, primarily due to increased borrowings under the Nordural senior term loan facility to fund expansion.
• Working Capital: Inventories increased to $145.7 million from $111.4 million, reflecting higher raw material costs and production levels.

Outlook, Risks, and Management Commentary

• Capital Expenditures: The company is aggressively expanding its Nordural facility in Iceland. Capital expenditures for the nine months totaled $166.4 million, with $155.8 million dedicated to the Nordural expansion. The expansion to 260,000 metric tons per year (mtpy) is expected to be completed in Q4 2007. Outstanding capital commitments for this project were approximately $82.9 million as of September 30, 2006.
• Labor Relations: A potential strike at the Ravenswood facility was averted in August 2006 after the United Steelworkers of America (USWA) ratified a three-year agreement. A potline shutdown occurred during the negotiation, costing approximately $4.0 million to restart, with full production expected by December 2006.
• Supply Chain Risks: The company's coal tar pitch supplier declared a force majeure in July 2006, leading to reduced deliveries. Management does not expect a significant near-term impact but notes a prolonged shortage could deplete inventory.
• Market Risk: The company is exposed to fluctuations in aluminum prices, power costs, and foreign currency (Icelandic krona and Euro). Approximately 48% of production for the remainder of 2006 is hedged via alumina contracts, power contracts, and financial instruments.
• Liquidity: The company maintains a $100 million revolving credit facility with $99.0 million available and $54.0 million available under the Nordural term loan facility. Management believes these sources are sufficient to meet working capital and debt service needs.

Investor Verification Checklist

• Forward Contract Volatility: Verify the sustainability of earnings given the $210 million non-cash gain on forward contracts in Q3, which significantly inflated net income.
• Nordural Expansion Costs: Monitor capital expenditure commitments ($82.9 million outstanding) and potential cost overruns due to foreign currency fluctuations (Icelandic krona/Euro).
• Debt Covenants: Review Nordural's financial covenants (minimum interest coverage and debt service coverage) which become effective December 31, 2006.
• Supply Chain Stability: Track the resolution of the coal tar pitch force majeure and its potential impact on Ravenswood and Hawesville operations.
• Power Contract Pricing: Assess the impact of unpriced power requirements at Hawesville (increasing to 27% in 2008-2010) and Ravenswood on future margins.