CENX

Century Aluminum Company - 10-Q Summary (Period Ended Sept 30, 2005)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005, for Century Aluminum Company, a producer of primary aluminum products. The company operates facilities in the U.S. (Ravenswood, Mt. Holly, Hawesville) and Iceland (Nordural). The financial statements have been restated to reflect a change in inventory costing from LIFO to FIFO effective in the second quarter of 2005. The company is currently executing a major expansion of its Nordural facility in Iceland.

Key Financial Metrics

Note: Total debt includes $175M Convertible Senior Notes, $250M Senior Unsecured Notes, and ~$197M Nordural debt.

Material Changes vs. Prior Period

• Q3 2005 Loss: The company reported a net loss of $20.1 million for the quarter, compared to a loss of $16.0 million in Q3 2004. This deterioration was primarily driven by a $53.5 million net loss on forward contracts (mark-to-market losses on long-term financial sales contracts with Glencore), compared to a $3.1 million loss in the prior year quarter.
• YTD 2005 Profit: For the nine months ended Sept 30, 2005, net income was $32.4 million, a significant increase from $8.8 million in the same period of 2004. This improvement was due to higher LME aluminum prices and increased volume from the Nordural facility, partially offset by higher operating costs and a $52.5 million loss on forward contracts.
• Revenue: Nine-month net sales increased 9% to $839.5 million, driven by higher price realizations and Nordural volume, despite reduced shipment volumes at the Hawesville facility.
• Costs: Gross profit for the nine months decreased slightly ($1.5 million) due to significant increases in raw material costs, power/natural gas costs, and depreciation/amortization charges.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The primary driver of volatility in earnings is the accounting treatment of long-term financial sales contracts with Glencore, which do not qualify for cash flow hedge accounting, resulting in significant mark-to-market losses recognized in the income statement.
• Nordural Expansion: The company is expanding the Nordural facility from 90,000 to 220,000 metric tons per year. The project is estimated to cost $474 million, with $149.4 million in outstanding capital commitments as of Sept 30, 2005. Completion is projected for mid-to-late 2006.
• Liquidity: The company has $95.9 million available under its revolving credit facility and $177.0 million available under Nordural's term loan facility. Management believes these sources are sufficient to meet working capital and debt service needs.
• Risks:
  • Commodity Prices: Exposure to fluctuations in aluminum, alumina, and energy prices. Approximately 55% of 2005 production is hedged.
  • Power Supply: Risks related to power contract renewals and pricing, particularly at the Ravenswood facility where a rate increase is being contested.
  • Foreign Currency: Nordural expansion costs are denominated in Euros and Icelandic Krona, creating exchange rate risk.
  • Environmental/Legal: Ongoing EPA remediation at Ravenswood and St. Croix facilities, though management does not expect material adverse effects.

Investor Verification Checklist

• Forward Contract Accounting: Verify the specific terms of the Glencore contracts and the rationale for excluding them from cash flow hedge accounting, as this is the primary cause of Q3 losses.
• Nordural Expansion Progress: Confirm the timeline and cost estimates for the Nordural expansion, including potential currency impacts on the $149.4 million remaining commitment.
• Power Contract Renewals: Review the status of the Ravenswood power contract renewal and the potential impact of the contested rate increase effective July 2006.
• Debt Covenants: Assess the impact of the revolving credit facility covenants on future capital expenditures and dividend payments.
• Environmental Liabilities: Monitor the status of the EPA Corrective Measures Study at Ravenswood and the St. Croix litigation for any changes in estimated liabilities.