Century Aluminum Company — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in millions of dollars unless stated otherwise. Century produces primary aluminum at smelters in the United States and Iceland; results are sensitive to aluminum prices, power and raw-material costs, production volumes and product mix.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $856.6 | $528.0 | $1,610.2 | $972.0 |
| Gross profit | $15.9 | $20.9 | $109.1 | $0.2 |
| Operating income (loss) | $(149.5) | $12.1 | $(68.2) | $(24.8) |
| Net income (loss) | $37.4 | $(35.1) | $55.1 | $(175.1) |
| Diluted EPS | $0.36 | $(0.39) | $0.54 | $(1.94) |
- Gross margin was approximately 1.9% in Q2 2022 versus 4.0% in Q2 2021; first-half gross margin was approximately 6.8% versus near breakeven a year earlier.
- Q2 net income included a $231.8 gain on forward and derivative contracts; first-half gain was $175.1, compared with a $162.5 loss in the prior-year period. These gains substantially affected reported earnings.
- Q2 operating loss included a $159.4 Hawesville asset impairment. First-half cash from operations was $68.6, versus cash used of $87.9 in 2021. Investing used $51.7; financing used $25.1. Capital expenditures were $51.8 in the cash flow statement.
- At June 30, cash and cash equivalents were $30.0, with $2.5 of restricted cash. Net availability under revolving facilities was $195.6; management reported total liquidity of approximately $225.6 and considered resources adequate for the next 12 months.
- Total reported debt was $427.6 versus $451.2 at December 31, 2021. This included $50.0 drawn on revolving facilities, $39.4 net carrying value of the Grundartangi casthouse facility, $246.2 of 7.5% senior notes and $84.2 of 2.75% convertible notes. The June amendment increased U.S. revolver capacity to $250.0; $150.6 remained available after borrowings and letters of credit. The Iceland facility had $45.0 available.
Material changes and operating developments
- Revenue rose 62% year over year in Q2 and 66% in the first half, principally reflecting higher realized aluminum prices and premiums and increased shipment volumes. First-half primary aluminum shipments were 425,495 tonnes versus 386,591 tonnes.
- Sequentially, gross profit fell $77.4 from Q1. Management attributed the decline mainly to unfavorable raw-material and power price realizations and higher operating costs, partly offset by favorable metal-price realization and volume.
- Century fully curtailed its Hawesville, Kentucky smelter after announcing the action on June 22, citing historically high energy costs and declining LME prices. It recorded a $159.4 impairment, reducing the asset group to estimated fair value of $15.0, and accrued $8.2 for wages and severance. The company intends to maintain the plant and consider restarting when market conditions support operating and restart costs.
- Mt. Holly’s restart project was completed in Q2, bringing production to 75% of full capacity. The Grundartangi billet casthouse project was progressing, with completion expected in the second half of 2023 and funding through its dedicated facility.
- Glencore beneficially owned 42.9% of common shares (46.3% on a fully diluted basis) and all outstanding Series A convertible preferred stock. It accounted for approximately 57% of Q2 sales; related-party sales were $483.5 in Q2 and $916.6 in the first half.
Outlook, risks and contingencies
- Management expects energy costs to continue pressuring results near term until power prices normalize and/or aluminum prices improve. Q2 average LME aluminum price was $2,882 per tonne, down from $3,267 in Q1; the Midwest premium averaged $805 per tonne, versus $794 in Q1.
- Century estimated Kentucky capacity-demand power costs of approximately $11.5 per quarter after June 1, notwithstanding Hawesville’s curtailment. Its sensitivity disclosure estimates each $1/MWh change in power prices could affect annual costs by $15.8 at full capacity; the table does not reflect partial curtailments.
- EDF notified the company it would stop serving as MISO market participant for Hawesville and Sebree effective May 31, 2023. Century was seeking a replacement. European energy and natural-gas supply uncertainty could also affect Grundartangi and Vlissingen.
- Century estimated approximately $30.0 of 2022 capital spending for ongoing plant and sustainability projects, excluding the Mt. Holly restart and Grundartangi casthouse projects. It incurred $15.8 and $15.2, respectively, for those projects during the first half.
- Legal matters were not considered likely to have a material adverse effect, though unfavorable outcomes could affect results or liquidity. The company was in compliance with credit-facility covenants. U.S. and certain foreign deferred tax assets remained subject to valuation allowances.
- On August 3, 2022, a subsidiary agreed, subject to customary conditions, to sell approximately 133 acres near Mt. Holly for $30.0. The filing provides no clear expected closing date or accounting gain.
Important facts for investors to verify
- Whether Hawesville remains curtailed and what market, power-price and capital conditions would support a restart.
- How much reported profit reflects derivative mark-to-market gains rather than operating performance, and how those positions may settle.
- Current power and raw-material costs, replacement MISO market-participant arrangements, and their effect on operating margins and liquidity.
- Progress, remaining funding needs and expected returns for the Mt. Holly restart and Grundartangi casthouse project.
- Glencore-related sales concentration and transactions, revolving-credit availability and borrowing-base effects after the Hawesville curtailment.
- Completion conditions and proceeds from the Mt. Holly-area land sale, plus the timing of scheduled PBGC contributions and other contingent payments.