CENX

Century Aluminum Company 2004 10-K Summary

Business Context and Reporting Period

This Annual Report on Form 10-K covers the fiscal year ended December 31, 2004. Century Aluminum Company is a leading producer of primary aluminum, ranking as the second-largest producer in the United States. The company operates four primary aluminum reduction facilities: Ravenswood (West Virginia), Hawesville (Kentucky), Mt. Holly (South Carolina, 49.7% interest), and Nordural (Iceland, acquired April 2004). In October 2004, the company also acquired a 50% joint venture interest in the Gramercy alumina refinery (Louisiana) and related bauxite mining assets in Jamaica.

Key Financial Metrics

Note: Working capital is negative in 2004 primarily due to the classification of $175 million in convertible senior notes as current liabilities.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 36% to $1.06 billion, driven by higher LME aluminum prices, increased shipment volumes from the Nordural acquisition, and the full-year inclusion of the additional 20% interest in the Hawesville facility.
• Profitability: Gross profit improved significantly by $128.4 million (166% increase) due to better price realizations and volume growth, partially offset by increased power costs and raw material quality issues.
• Acquisitions: The company acquired the Nordural facility in Iceland for $195.3 million and a 50% interest in the Gramercy alumina refinery and Jamaican bauxite assets for $11.5 million (company share).
• Debt Refinancing: The company refinanced $325 million of senior secured first mortgage notes, incurring a one-time loss on early extinguishment of debt of $47.4 million. This was funded by issuing $250 million in 7.5% senior notes and $175 million in 1.75% convertible notes.
• Forward Contracts: The company recorded a net loss of $21.5 million on forward contracts in 2004, compared to a net gain of $25.7 million in 2003, reflecting changes in LME prices and contract settlements.

Guidance, Outlook, and Risks

Outlook and Strategy: Management expects to fund the ongoing $454 million expansion of the Nordural facility (targeting completion in late 2006) through operating cash flow and a new $365 million term loan facility secured in February 2005. The company aims to grow by acquiring reduction facilities with favorable returns and diversifying into bauxite mining and alumina refining.

Key Risks and Contingencies:

• High Indebtedness: The company carries significant debt ($524.1 million outstanding plus $365 million available at Nordural), which limits cash available for dividends and growth and increases vulnerability to economic downturns.
• Customer Concentration: Four customers (Pechiney, Southwire, Glencore, BHP Billiton) accounted for 76.3% of 2004 sales. Loss of a major customer, particularly those receiving molten aluminum, would increase production costs.
• Power Supply: Operations are highly sensitive to power interruptions. The Ravenswood facility signed a new power agreement with Appalachian Power effective 2006, subject to regulatory approval.
• Raw Material Costs: Alumina prices are volatile. While the Gramercy acquisition secures supply for Hawesville, pricing is now cost-based rather than LME-based, which could be higher during periods of low aluminum prices and high natural gas costs.
• Environmental Liabilities: The company faces ongoing remediation obligations at Ravenswood and Hawesville. While current liabilities are not considered material, future regulatory changes or unknown conditions could result in significant costs.

Investor Verification Checklist

• Debt Covenants: Verify compliance with restrictive covenants in the revolving credit facility and senior notes indentures, particularly regarding capital expenditures and dividend payments.
• Nordural Expansion Funding: Confirm the drawdown schedule and interest rate exposure of the new $365 million Nordural term loan facility.
• Power Contract Approvals: Monitor the status of the Public Services Commission of West Virginia's approval for the new Ravenswood power contract with Appalachian Power.
• Customer Contract Renewals: Track the expiration dates of key supply agreements with Pechiney (2005/2007) and Southwire (2011) and the potential for renewal or replacement.
• Environmental Indemnities: Assess the financial stability of Southwire regarding its indemnity obligations for pre-closing environmental liabilities at the Hawesville facility.