CENX

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

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2005, and the six months ended June 30, 2005. Century Aluminum Company is a producer of primary aluminum products. The financial statements have been restated to reflect a change in inventory costing from LIFO to FIFO. The Company operates facilities in the U.S. (Ravenswood, Mt. Holly, Hawesville) and Iceland (Nordural). A significant portion of the Company's operations involves tolling agreements and long-term supply contracts for alumina and power.

Key Financial Metrics

Note: Total Debt calculated as sum of Long-term debt (current portion), Convertible senior notes, Industrial revenue bonds, Senior unsecured notes payable, and Nordural debt.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 15% ($72.8 million) year-over-year, driven by higher LME aluminum prices, Midwest premiums, and increased volume from the Nordural facility.
• Profitability: Net income more than doubled to $52.5 million. This was significantly aided by a $24.5 million net gain on forward contracts in the second quarter (compared to a $1.2 million loss in the prior year quarter) and $10.2 million in equity earnings from joint ventures (Gramercy Alumina and St. Ann Bauxite).
• Cost Pressures: Gross profit margins faced pressure from increased raw material costs (alumina), higher power costs, and increased pot cell replacement expenses, partially offset by favorable price realizations.
• Accounting Change: The Company switched from LIFO to FIFO inventory costing, resulting in a retroactive restatement of prior periods. This change increased net income for the six months ended June 30, 2005, by $510,000.
• Debt Refinancing: Nordural closed a new $365 million senior term loan facility in February 2005 to refinance existing debt and fund expansion. The Company also retired $83 million of debt during the period.

Guidance, Outlook, and Risks

• Capital Expenditures: The Company anticipates approximately $20 million in capital expenditures for 2005, excluding the Nordural expansion. The Nordural expansion is estimated to cost $473 million, with approximately $330 million expected to be spent in 2005. Completion is projected for mid-2006, with final capacity added by mid-2007.
• Liquidity: The Company maintains $100 million in availability under its revolving credit facility and $220 million under the Nordural term loan facility. Management believes these sources are sufficient for working capital and debt service.
• Key Risks:
  • Commodity Prices: Exposure to fluctuations in primary aluminum, alumina, and natural gas prices. Approximately 53% of 2005 production is hedged via contracts.
  • Power Supply: Reliance on long-term power contracts; interruption could halt production.
  • 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; potential for future liabilities.
  • Labor: Approximately 81% of the U.S. workforce is unionized with contracts expiring in 2006.

Investor Verification Checklist

• Forward Contract Gains: Verify the sustainability of the $24.5 million gain on forward contracts in Q2 2005, which was a primary driver of earnings growth.
• Nordural Expansion Costs: Monitor the $199.8 million in outstanding capital commitments for the Nordural expansion and potential cost overruns due to foreign currency fluctuations.
• Joint Venture Earnings: Confirm the $10.2 million equity earnings from Gramercy Alumina and St. Ann Bauxite, as these are non-operating cash flows dependent on third-party sales.
• Debt Covenants: Review Nordural's new term loan covenants, specifically the restrictions on dividends until production reaches 212,000 metric tons per year.
• Environmental Liabilities: Assess the status of the EPA 3008(h) Order at Ravenswood and the St. Croix natural resource damage claims.