Century Aluminum Company — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Century produces primary aluminum at smelters in the United States and Iceland. Results depend chiefly on aluminum prices and premiums, production volume, and power and raw-material costs. Unaudited amounts below are in millions of dollars except per-share data and tonnes.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $392.9 | $438.0 | $1,216.0 | $1,401.2 |
| Gross profit (loss) | $(27.1) | $(13.7) | $(35.3) | $(30.6) |
| Operating income (loss) | $(37.9) | $(25.2) | $(67.3) | $(69.2) |
| Net income (loss) | $(58.2) | $(20.7) | $(87.8) | $(76.0) |
| Basic and diluted EPS | $(0.65) | $(0.23) | $(0.98) | $(0.86) |
Q3 gross margin was approximately negative 6.9%, versus negative 3.1% a year earlier; nine-month gross margin was approximately negative 2.9%, versus negative 2.2%. The nine-month period included a $40.8 inventory lower-of-cost-or-net-realizable-value adjustment, compared with $15.8 in 2019.
- Revenue drivers: Q3 sales fell 10.3% year over year; nine-month sales fell 13.2%. Management attributed the declines primarily to lower LME and regional premium realizations—$65.1 in Q3 and $175.4 for nine months, excluding alumina sales. Higher raw-material realizations partly offset the pressure.
- Cash flow: Nine-month operating cash flow was $33.3, versus cash used of $4.4 in 2019, primarily reflecting working-capital improvements. Investing cash use was $11.4, including $11.5 of property, plant and equipment purchases. Financing provided $23.5. Cash, cash equivalents and restricted cash increased $45.4 to $85.1.
- Balance sheet and liquidity: At September 30, cash and cash equivalents were $81.4; current assets were $443.3 and current liabilities $201.2. Total debt was $325.6, versus $301.0 at year-end 2019. The company reported $88.0 of net revolving-credit availability and total liquidity of approximately $169.4. It reported compliance with applicable credit-facility covenants.
- Debt refinancing: In July, Century issued $250.0 principal amount of 12% senior secured notes due 2025, receiving $243.8 before fees, and used proceeds plus cash to tender for or redeem its 7.5% notes due 2021. The new notes carry 10% cash interest and 2% payable in additional notes or cash, at the company’s option. The refinancing resulted in a $1.2 extinguishment loss.
- Related-party exposure: Glencore owned 42.9% of common stock (46.8% on a fully diluted basis) and all outstanding Series A convertible preferred stock. Glencore accounted for about 60.0% of Q3 sales and 65.2% of nine-month sales.
Changes, outlook and key risks
- Despite lower year-over-year shipments in the U.S. in Q3, total primary-aluminum shipments increased to 203,022 tonnes from 198,543 tonnes, mainly reflecting higher Iceland shipments. The company said product prices had begun to recover: average LME aluminum was $1,706 per tonne in Q3 and $1,803 in October. Sales pricing generally lags current prices by one to three months, so recovery may take time to flow through results. No formal earnings guidance is provided.
- COVID-19 had not disrupted plant operations as of the filing; Century reported continuing to sell essentially all metal as cast. The company reduced discretionary spending, optimized working capital and deferred non-essential capital projects. Future pandemic and market impacts remained uncertain.
- Mt. Holly: Its power contracts were due to expire December 31, 2020. On October 20, the company notified employees it intended to curtail operations by then unless it secured competitively priced power. A curtailment could cause significant costs and an asset write-down and could affect customers, suppliers and employees.
- Hawesville: The smelter was operating at approximately 80% capacity after completion of a potline rebuild in Q2. Project costs to date were approximately $107.4; the final potline rebuild and technology upgrades were expected over the next several years, subject to market conditions.
- Power and commodity risks: Power, alumina, carbon products and labor represent more than 75% of cost of goods sold. Management estimated a $1/MWh power-price change could affect quarterly costs by approximately $4.0 at full capacity. Aluminum and power derivatives had a net fair-value asset of $12.3 ($18.0 assets less $5.7 liabilities); a hypothetical 10% adverse price change would reduce derivative asset value to $7.6 and increase liabilities to $22.8.
- Contingencies: The company said it could not estimate a reasonably possible loss range for the Vernon environmental-indemnity litigation. Other environmental matters and lawsuits remain pending. Approximately $9.6 of PBGC-agreement contributions remained; certain payments were deferred with security provided. Ravenswood retiree medical settlement liabilities totaled $9.3, including current and long-term amounts.
- Management stated operating cash and financing activities should cover business needs over the next 12 months, while noting that aluminum-price declines, production costs, COVID-19 and access to capital could adversely affect liquidity. Estimated 2020 capital spending was approximately $10.0 excluding the Hawesville restart project; nine-month spending was $7.2 on that basis, plus $4.7 associated with the restart.
Important facts for investors to verify
- Whether Mt. Holly secured competitive power and whether any curtailment, restructuring cost or impairment followed the stated deadline.
- How aluminum prices and premiums, with the disclosed sales lag, affected subsequent realized prices, margins and cash generation.
- Liquidity and borrowing-base availability, covenant headroom, and the cash-versus-payment-in-kind interest choice on the 2025 notes.
- Glencore sales concentration and related-party transactions, alongside the valuation and performance of commodity and power derivatives.
- Developments in the Vernon litigation, environmental matters, PBGC contributions and other disclosed obligations.