Century Aluminum Company — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Century produces primary aluminum at smelters in the United States and Iceland. Hawesville and Mt. Holly were operating at approximately 40% and 50% of capacity, respectively. Glencore owned 42.9% of common stock and all outstanding Series A preferred stock, representing 47.5% ownership overall.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $333.7 million | $454.5 million | $979.3 million | $1,565.9 million |
| Gross profit (loss) | ($17.6 million) | ($42.4 million) | ($16.1 million) | $60.0 million |
| Operating loss | ($55.1 million) | ($55.5 million) | ($74.6 million) | ($10.6 million) |
| Net loss | ($58.3 million) | ($56.1 million) | ($84.0 million) | ($16.2 million) |
| Loss per diluted share | ($0.67) | ($0.65) | ($0.96) | ($0.19) |
- Q3 sales fell 26.6%; nine-month sales declined 37.5%. Management attributed the decreases principally to lower shipment volumes following production curtailments and, to a lesser extent, lower realized prices. The shift from tolling to direct sales at Grundartangi partly offset the volume impact.
- Q3 gross loss improved by $24.8 million, mainly due to favorable alumina pricing and plant operating results, partly offset by lower price realization and higher power costs. Nine-month gross profit fell by $76.1 million, primarily due to lower realized prices and shipment volumes.
- Ravenswood charges were $26.8 million in Q3 2016, comprising a $3.8 million additional impairment and a $23.0 million expense for a tentative retiree medical settlement. The nine-month 2015 comparison included a $30.9 million Ravenswood impairment.
- Cash and cash equivalents were $117.6 million at September 30, 2016, versus $115.4 million at year-end 2015. Nine-month operating cash flow was $15.6 million, investing cash outflow was $13.4 million, and cash increased by $2.2 million. Capital expenditures were $13.1 million.
- Total debt was $255.4 million, including $247.6 million carrying value of 7.5% senior secured notes due 2021 and $7.8 million of industrial revenue bonds classified as current. No revolving-facility borrowings were outstanding. Net availability under the U.S. and Iceland facilities was $40.4 million and $50.0 million, respectively.
- Total current assets were $432.5 million and current liabilities were $174.9 million. Shareholders’ equity was $937.5 million, down from $1,017.9 million at December 31, 2015.
Changes, outlook and key risks
- Versus the prior-year quarter, improved Q3 gross results were not enough to prevent a slightly larger net loss. For the first nine months, the company moved from positive gross profit to gross loss and reported a substantially larger net loss. Prior-year results included an $18.3 million gain on Mt. Holly contingent consideration; Alcoa paid the final $12.5 million settlement in March 2016.
- The tentative Ravenswood retiree medical settlement remains subject to a definitive agreement and court approval. It anticipates a $5.0 million payment upon final approval and $2.0 million annually for nine years; the company recorded a $23.0 million liability and expense.
- Management estimated 2016 capital spending of $20–$25 million, primarily for maintenance and smelter investments. No earnings or aluminum-price guidance was provided.
- Helguvik construction timing remains uncertain while the company negotiates with power suppliers. Cancellation exposure was estimated at approximately $20 million, of which approximately $12 million was accrued. Arbitration concerning the validity of a Helguvik power contract was awaiting a decision.
- Key operating exposures include aluminum prices, power prices and availability, alumina costs, production levels, and foreign exchange. Management noted that power is the largest operating cost; market-based power arrangements expose Hawesville, Sebree and Mt. Holly to price and grid-related risks.
- The company assessed that it remained in compliance with credit-facility covenants. Its fixed-charge coverage ratio was below 1.1-to-1.0, but U.S. facility availability of $40.4 million exceeded the $15.0 million threshold that activates that covenant.
- Other matters include environmental and legal proceedings with uncertain outcomes, approximately $9.6 million of remaining additional pension contributions under the PBGC settlement, and a contingent E.ON obligation of $20.0 million principal and accrued interest that was fully offset by a derivative asset. Management estimated no E.ON payments would be required under then-current aluminum-price assumptions, but circumstances could change.
- Glencore was the principal buyer under contracts covering substantially all North American primary aluminum production for 2015–2016; that agreement runs through December 31, 2016. A separate Iceland sales contract continues through 2017. This concentration and the related-party relationship are relevant to revenue and counterparty risk.
Important facts for investors to verify
- Whether aluminum prices, regional premiums, alumina costs and power costs support improved margins, and whether domestic smelter operating levels change.
- Progress on the Ravenswood asset sale and court approval and payment terms for the retiree medical settlement.
- Renewal or replacement of Glencore sales arrangements after 2016 and the commercial terms of the 2017 molten-aluminum sales.
- Helguvik arbitration, power-supply negotiations, project restart or cancellation decisions, and any resulting cost or cash exposure.
- Cash generation, credit-facility availability, covenant headroom, pension funding requirements and realization of expected Icelandic tax refunds.
- The 10-Q reports that non-U.S. affiliates of the company’s largest shareholder disclosed Iran-related contracts and gross revenue not exceeding $334.5 million for Q3; Century stated it and its global subsidiaries had no transactions or activities requiring disclosure and were not involved.