Century Aluminum Company — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Century is a primary aluminum producer with smelters in the United States and Iceland. Unless noted otherwise, financial amounts are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $401.9 | $473.1 | $823.1 | $963.2 |
| Gross profit (loss) | $(13.0) | $(4.1) | $(8.2) | $(16.9) |
| Operating income (loss) | $(25.0) | $(16.3) | $(29.4) | $(44.1) |
| Net income (loss) | $(26.9) | $(20.7) | $(29.6) | $(55.3) |
| Diluted loss per share | $(0.30) | $(0.23) | $(0.33) | $(0.63) |
- Q2 shipments were 210,309 tonnes, compared with 203,380 tonnes a year earlier. Primary aluminum sales were $392.5 million versus $452.7 million.
- Q2 gross loss widened by $8.9 million. Lower LME and regional premium realizations reduced results by $66.3 million, partly offset by favorable raw material and power realizations of $44.4 million and $16.8 million.
- For the first half, operating cash flow was $71.6 million, versus cash use of $25.6 million in 2019. Capital expenditures were $9.6 million in the cash flow statement; MD&A reports $5.4 million excluding $4.7 million of Hawesville restart spending. Investing cash use was $9.5 million.
- Cash and cash equivalents were $174.1 million at June 30, up from $38.9 million at year-end; total liquidity, including net revolving-credit availability, was approximately $197.4 million. First-half financing cash inflow was $76.0 million.
- Reported debt was $377.3 million at June 30, compared with $301.0 million at December 31, 2019. This included $45 million drawn on each of the U.S. and Iceland revolving facilities and $249.5 million of 2021 senior notes. U.S. facility net availability was $18.3 million; Iceland availability was $5.0 million.
- Total shareholders’ equity was $648.7 million, down from $675.0 million at year-end. Current assets were $531.4 million and current liabilities $249.6 million.
Material changes and operating developments
- Sales fell $71.2 million in Q2 and $140.1 million in the first half year over year, primarily reflecting lower LME and regional premium price realizations. Average LME aluminum price was $1,494 per tonne in Q2 2020 versus $1,792 in 2019; the first-half average was $1,592.
- For the first half, gross loss improved by $8.7 million year over year, as lower raw material and power costs more than partially offset weaker aluminum price realizations. SG&A fell $5.9 million for the first half, primarily due to lower compensation costs.
- Cash from operations benefited from lower losses and working-capital improvements, including receivable collections and lower raw-material prices. The cash flow reconciliation also included a $37.1 million lower-of-cost-or-net-realizable-value inventory adjustment, versus $13.4 million in the prior-year period.
- Hawesville’s first rebuilt potline was completed in Q2. The smelter was operating at approximately 80% of production capacity at filing; restart project costs to date were approximately $107.4 million.
- Glencore owned 42.9% of common shares (46.8% on a fully diluted basis) and all outstanding Series A convertible preferred stock. Glencore accounted for approximately 71% of Q2 sales and 67.6% of first-half sales, creating significant customer and related-party concentration.
Outlook, financing, risks and contingencies
- Management stated that operating cash flow and financing activities were expected to cover operations and business needs over the next 12 months, while warning that aluminum prices, production costs, COVID-19 and access to financing could materially affect liquidity. The filing provides no quantified earnings or aluminum-price guidance.
- Management reported no COVID-related disruption at its plants, continued selling essentially all metal as cast, and no material customer cancellations. It cautioned that lower prices and product-mix changes could continue to affect results. Cost-control steps included reducing discretionary spending, optimizing working capital and deferring non-essential capital projects.
- On July 1, 2020, after quarter-end, Century issued $250 million of senior secured notes due 2025, carrying 10% annual cash interest plus 2% in additional notes or cash at the company’s option. Proceeds and cash on hand funded the tender and redemption of its 2021 notes; the remaining notes were redeemed July 31. The company expected to record a third-quarter debt-extinguishment loss. The U.S. revolving facility maturity was extended to May 16, 2023.
- Management estimated 2020 capital spending of approximately $10 million excluding the Hawesville restart project. Completion of the final Hawesville potline and technology upgrades is expected over the next several years, subject to market conditions.
- Key exposures include aluminum, alumina and power prices; power supply and grid reliability; COVID-19 and global demand; foreign exchange; and financing availability. A $1/MWh change in power prices was estimated to affect annual costs by approximately $15.8 million at full capacity.
- Contingencies include the Vernon environmental-indemnity litigation, for which the company could not estimate a reasonably possible loss range; environmental matters; and pension obligations. Approximately $9.6 million remained under the PBGC settlement contribution arrangement. The company stated that it had deferred certain payments with security provided.
- Negotiations continued under the expired Grundartangi labor agreement. The company reported compliance with debt covenants or availability above covenant triggers at June 30.
Most important facts for investors to verify
- Whether lower LME prices, regional premiums and product mix continue to pressure revenue and margins, given the one-to-three-month pricing lag.
- Post-quarter refinancing details: actual proceeds and uses, the debt-extinguishment charge, and the higher interest burden on the 2025 notes.
- Available borrowing capacity and covenant headroom, particularly the U.S. facility’s $18.3 million net availability and borrowing-base sensitivity to aluminum prices.
- Progress, cost and timing of the Hawesville restart and the final potline rebuild.
- Extent of Glencore sales and related-party exposure, and any changes in those arrangements.
- Developments in the Vernon case, power contracts and costs, labor negotiations, and the remaining PBGC and retiree-benefit obligations.