CENX

Century Aluminum Company 2010 Annual Report (10-K) Summary

Business Context and Reporting Period

This report covers the fiscal year ended December 31, 2010. Century Aluminum Company is a primary aluminum producer with operations in the United States (Hawesville, Kentucky; Ravenswood, West Virginia; Mt. Holly, South Carolina) and Iceland (Grundartangi). The company also holds a 40% stake in a carbon anode facility in China and is developing a new smelter in Helguvik, Iceland. As of year-end, the Ravenswood facility remained fully curtailed, and one potline at Hawesville was idled, though a restart was planned for 2011.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $270.0 million (30%) primarily due to a 31% increase in the average London Metal Exchange (LME) price for aluminum, which rose to $2,173 per metric ton in 2010 from $1,665 in 2009.
• Profitability Turnaround: The company returned to profitability, recording a net income of $60.0 million compared to a net loss of $206.0 million in 2009. This was driven by higher price realizations and a significant non-cash benefit of $56.7 million from the elimination of retiree medical benefits at the Ravenswood facility.
• Volume Decline: Despite price increases, shipment volumes declined slightly. Direct shipments fell by 11,387 metric tons and toll shipments by 8,344 metric tons compared to 2009, attributed to capacity curtailments and a transformer outage at Grundartangi.
• Cost Increases: Gross profit was offset by $52.7 million in net cost increases, including higher power costs at U.S. smelters ($28.5 million) and increased maintenance and material costs.

Guidance, Outlook, and Risks

• Production Restart: Management plans to restart the idled potline at Hawesville in the second quarter of 2011, which would increase annualized operating capacity to approximately 615,000 metric tons.
• Helguvik Project: Construction on the Helguvik smelter in Iceland remains significantly curtailed pending resolution of arbitration with power supplier HS Orka hf. Major construction activity is expected to resume in 2011 if power supply issues are resolved.
• Debt Obligations: Holders of the company's 1.75% convertible senior notes (approx. $47 million principal) have the option to require repurchase at par in August 2011. Management expects these holders to exercise this put option.
• Liquidity: The company maintains a $100 million revolving credit facility with approximately $50 million in net availability as of year-end. Cash and cash equivalents increased to $304 million.
• Risks: Key risks include the cyclical nature of aluminum prices, potential inability to secure reliable power for the Helguvik project, union negotiations (wage terms at Grundartangi expired Jan 1, 2011), and the financial impact of high warehouse inventory levels on future pricing.

Investor Verification Checklist

• Helguvik Power Arbitration: Verify the status of the arbitration with HS Orka hf. and the likelihood of securing power supply to restart construction.
• Convertible Note Put Option: Confirm the company's liquidity position to meet the potential $47 million repurchase obligation for 1.75% notes in August 2011.
• Retiree Benefit Litigation: Monitor the outcome of the class action lawsuit regarding the elimination of Ravenswood retiree medical benefits, which generated a significant one-time accounting benefit in 2010.
• Customer Concentration: Note that approximately 80% of 2010 sales were derived from three major customers (Glencore, Southwire, and BHP Billiton).
• Asset Impairment: Review the carrying value of the Ravenswood facility ($67 million) and Helguvik construction in progress ($126 million) for potential future impairment charges if restarts are delayed indefinitely.