CENX

Century Aluminum Company - 10-Q Summary (Period Ended June 30, 2008)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Century Aluminum Company for the period ended June 30, 2008. The company is a producer of primary aluminum with operations in the United States (Ravenswood, West Virginia; Hawesville, Kentucky; Mt. Holly, South Carolina) and Iceland (Grundartangi). The company is classified as a Large Accelerated Filer. As of July 31, 2008, there were 49,048,396 shares of common stock outstanding.

Key Financial Metrics

Note: The significant Net Loss is primarily driven by a $652.1 million unrealized loss on forward contracts (mark-to-market adjustments), which is a non-cash item.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 11.5% year-over-year, driven by higher LME aluminum prices and increased shipment volumes (particularly toll shipments from the Grundartangi expansion).
• Profitability: Operating income increased 14.5% to $219.5 million due to improved gross margins from price realizations, partially offset by higher power, natural gas, and material costs.
• Net Income Volatility: The company swung from a net income of $3.6 million in the prior year to a net loss of $235.1 million. This deterioration is almost entirely attributable to a $447.2 million increase in the "Net loss on forward contracts" line item, reflecting mark-to-market losses on long-term financial sales contracts.
• Cash Flow: Operating cash flow surged to $364.8 million, compared to $21.1 million in the prior year. This improvement was aided by the sale of short-term investments and strong operational cash generation.
• Balance Sheet: Cash and cash equivalents increased significantly from $61.0 million to $351.6 million. Total assets grew to $2.96 billion.

Guidance, Outlook, and Material Events

Subsequent Event - Termination of Forward Contracts: On July 7, 2008, Century Aluminum and Glencore agreed to terminate all outstanding forward financial sales contracts. The settlement required a cash payment of $730.2 million (partially deferred) and the issuance of 160,000 shares of non-voting preferred stock (convertible into 16 million common shares). This transaction effectively eliminated the massive mark-to-market volatility seen in the Q2 results.

Equity Offering: On July 16, 2008, the company completed a public equity offering of 7.475 million shares at $62.25 per share, raising approximately $442 million in net proceeds. These funds were used to pay a portion of the deferred cash settlement to Glencore.

Capital Projects:

• Helguvik Project: Groundbreaking occurred in June 2008 for a new greenfield smelter in Iceland. The first phase (150,000-180,000 mtpy) is expected to be operational by late 2010. Total cost for the first phase is estimated at $1.2 billion.
• Chinese Joint Venture: In April 2008, the company acquired a 40% stake in Baise Haohai Carbon Co., Ltd. for $27.6 million.

Risks and Contingencies:

• Power Costs: An 11% increase in power rates for the Ravenswood smelter was approved, effective July 1, 2008.
• Tax Settlement: The company expects to pay approximately $16.8 million to the IRS in Q3 2008 to settle tax deficiencies for years 2000-2002.
• Market Risk: The company remains exposed to fluctuations in aluminum prices, power costs, and foreign exchange rates (Icelandic krona and Euro), though hedging strategies are in place.

Investor Verification Checklist

• Derivative Exposure: Verify the impact of the July 2008 termination of forward contracts on future earnings volatility and the specific terms of the preferred stock issued to Glencore.
• Capital Expenditures: Confirm the funding sources for the $1.2 billion Helguvik project, specifically the status of the new European debt facility mentioned in the filing.
• Power Contract Renewals: Monitor the progress of the long-term power contract restructuring for the Hawesville facility and the impact of the rate increase at Ravenswood on margins.
• Glencore Relationship: Assess the implications of Glencore's increased ownership (approx. 48.5% economic interest post-transaction) and the restrictions on their ability to acquire more voting securities.
• Tax Liability: Confirm the payment of the $16.8 million IRS settlement in the third quarter.