Century Aluminum Company — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Century produces primary aluminum at smelters in the United States and Iceland. All financial amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $637.2 million | $581.4 million | $2,247.4 million | $1,553.4 million |
| Gross profit (loss) | ($43.0) million | $54.6 million | $66.1 million | $54.8 million |
| Operating income (loss) | ($51.5) million | $40.3 million | ($119.7) million | $15.5 million |
| Net income (loss) | $44.3 million | ($52.4) million | $99.4 million | ($227.5) million |
| Diluted EPS | $0.43 | ($0.58) | $0.97 | ($2.52) |
- Margins: Gross margin was approximately negative 6.7% in Q3 2022, versus 9.4% in Q3 2021; for the nine-month periods, approximately 2.9% versus 3.5%.
- Cash flow: Nine-month operating cash flow was $57.2 million, compared with cash used of $12.1 million a year earlier. Investing used $70.1 million, including capital spending; financing provided $38.2 million. Cash, cash equivalents and restricted cash ended at $66.0 million, including $64.8 million of unrestricted cash.
- Debt and liquidity: Debt totaled $491.4 million at September 30, 2022, including $121.3 million of current debt and a new $39.4 million net casthouse facility balance. Cash was $64.8 million. Revolving-facility availability, net of borrowings and letters of credit, was $136.9 million. Management reported total liquidity of approximately $215.1 million, including available Iceland Term Facility borrowings.
- Balance sheet: Current assets were $758.6 million and current liabilities $406.1 million. Shareholders’ equity was $516.6 million. Property, plant and equipment declined to $740.9 million from $892.5 million at year-end 2021, principally reflecting the Hawesville impairment.
Material changes versus comparable periods
- Q3 sales increased 9.6% year over year, but declined from $856.6 million in Q2 2022. Compared with Q2, lower aluminum prices and premiums and reduced shipment volumes—particularly following Hawesville’s curtailment—reduced sales.
- Q3 gross results deteriorated to a loss, reflecting lower metal-price realizations, less favorable shipment mix and power costs. Lower operating costs after Hawesville’s curtailment and favorable raw-material realizations partly offset those pressures.
- Nine-month sales rose substantially year over year, driven mainly by higher LME and premium realizations and improved volume and mix, including the Mt. Holly restart. Higher raw-material and power costs offset much of the gross-profit benefit.
- Net income reflects large, volatile derivative results: gains on forward and derivative contracts were $112.6 million in Q3 and $287.7 million for the nine months, versus losses of $76.7 million and $239.2 million, respectively, in the 2021 comparable periods. These gains substantially differ from operating performance.
- The nine-month results include a $159.4 million Hawesville asset impairment. The company also recognized an $8.0 million non-cash postretirement-benefit curtailment gain.
Outlook, commentary and risks
- Century fully curtailed Hawesville production after citing historically high energy costs and declining LME prices. It intends to maintain the facility and restart when energy and aluminum prices can support ongoing costs and restart capital requirements; no restart date is provided.
- Management said operating cash and financing sources should be adequate for the next 12 months. It estimated 2022 capital spending of $25–$30 million for ongoing and sustainability projects, excluding the Mt. Holly restart and Grundartangi casthouse projects. The casthouse project was expected to continue through the second half of 2023 and be completed on time, subject to market conditions.
- Management reported average LME aluminum prices fell from $3,267 per tonne in Q1 to $2,354 in Q3 2022. It cited energy prices, aluminum prices, raw-material costs and production volumes as key drivers of results. No earnings or revenue guidance was provided.
- Energy exposure remains material. Kentucky plants face market-based MISO power costs and capacity charges; expected capacity demand costs were approximately $11.5 million per quarter after June 1, 2022, including during Hawesville’s curtailment. Century was seeking replacement MISO market participants after EDF’s planned exit in May 2023. European energy-market disruption could also affect Vlissingen and Grundartangi.
- Derivative valuations are significant and sensitive to commodity and currency prices. Related-party concentration is also notable: Glencore accounted for approximately 63.5% of Q3 consolidated sales and owned 42.9% of common stock, or 46.3% on a fully diluted basis.
- Other items to monitor include pension contributions of approximately $2.4 million annually through 2025 under the amended PBGC settlement; the contingent Hawesville power obligation of $29.1 million, offset by a derivative asset; and legal and environmental contingencies. Management said pending legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain.
- Subsequent events: Grundartangi drew €13.6 million under its Iceland Term Facility on October 10, 2022. An agreement to sell approximately 133 acres of Mt. Holly land was terminated October 28, 2022.
Important facts for investors to verify
- Whether Hawesville remains curtailed, what conditions and costs would support a restart, and how ongoing power and idling costs evolve.
- How much reported earnings and derivative asset values depend on unrealized or unsettled commodity and currency positions, and how those positions compare with underlying operating margins.
- Whether cash generation and borrowing availability remain adequate as aluminum prices, power costs and borrowing-base levels change; confirm compliance with credit-facility covenants.
- Progress, funding and completion costs for the Mt. Holly restart and Grundartangi casthouse project, alongside actual capital spending versus management’s estimate.
- Glencore sales concentration and related-party transaction terms, as well as the status of replacement power-market arrangements and material contingencies.