CENX

Century Aluminum Company 2006 10-K Summary

Business Context and Reporting Period

This Annual Report on Form 10-K covers the fiscal year ended December 31, 2006. Century Aluminum Company is the third-largest primary aluminum producer in North America. The company operates four primary aluminum reduction facilities: Nordural (Iceland), Hawesville (Kentucky), Ravenswood (West Virginia), and a 49.7% interest in Mt. Holly (South Carolina). It also holds 50% joint venture interests in the Gramercy alumina refinery (Louisiana) and St. Ann bauxite mining operations (Jamaica). As of February 28, 2007, Glencore International AG owned approximately 28.7% of the company's outstanding common stock.

Key Financial Metrics

Production Volume: Approximately 680,000 metric tons of primary aluminum were produced in 2006. Current rated capacity is 745,000 metric tons per year.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 38% to $1.56 billion, driven primarily by higher LME aluminum prices and Midwest premiums, which contributed $331.5 million to the increase. Increased tolling shipments from the Nordural expansion added $95.7 million.
• Profitability: Gross profit improved significantly to $348.5 million (up $186.8 million) due to better price realizations and volume growth from the Nordural expansion. However, this was partially offset by $108.3 million in net cost increases, including higher power, natural gas, and raw material costs.
• Net Loss Reduction: The net loss narrowed to $41.0 million from $116.3 million in 2005. This improvement was largely due to a reduction in mark-to-market losses on forward contracts (though still significant at $389.8 million) and improved operating income.
• Debt Levels: Total indebtedness increased to $772.3 million, primarily due to higher borrowings under Nordural's term loan facility to fund expansion projects.

Guidance, Outlook, Risks, and Unusual Items

Unusual Items: The 2006 net loss included a significant after-tax charge of $241.7 million ($7.19 per share) related to mark-to-market losses on forward contracts that did not qualify for cash flow hedge accounting. This was partially offset by a gain on the sale of surplus land.

Outlook and Expansion:

• Nordural Expansion: The company is expanding its Nordural facility from 220,000 to 260,000 metric tons per year (Phase V), expected to be completed in Q4 2007 at an estimated cost of $132 million.
• Helguvik Project: A memorandum of understanding was signed for a potential new greenfield smelter in Iceland (Helguvik), with initial power agreements targeting 2010 delivery.
• Republic of the Congo: Signed an MOU for the exclusive right to develop an integrated aluminum business (smelter, refinery, mine) in the Republic of the Congo.

Risks and Contingencies:

• Customer Concentration: Approximately 84% of 2006 sales were derived from four major customers (Southwire, Alcan, Glencore, BHP Billiton). The loss of a major customer, particularly those receiving molten aluminum, would increase production costs.
• Power Supply: Electricity is the single largest operating cost. Disruptions or price increases (e.g., unpriced power requirements at Hawesville starting in 2008) could materially impact margins.
• Glencore Relationship: Glencore is the sole metal hedge counterparty and a major shareholder. A material change in this relationship could affect hedging strategies.
• Environmental: The company faces ongoing environmental liabilities and potential future costs related to remediation at current and former sites.

Investor Verification Checklist

• Forward Contract Accounting: Verify the impact of mark-to-market losses on forward contracts (SFAS 133) on reported earnings, as these non-cash charges significantly distort operating performance.
• Nordural Expansion Costs: Monitor capital expenditure commitments for the Phase V expansion and potential cost overruns due to foreign currency fluctuations (Icelandic krona/Euro).
• Power Contract Renewals: Assess the pricing terms for unpriced power requirements at Hawesville (27% of needs from 2008-2010) and the status of the Ravenswood experimental rate design.
• Customer Contract Expirations: Review the status of the Alcan Metal Agreement (expiring July 2007) and the Southwire Metal Agreement (expiring March 2011) to evaluate renewal risks.
• Debt Covenants: Confirm compliance with financial covenants in the Nordural term loan facility and the revolving credit facility, particularly regarding interest coverage and debt service ratios.