CENX

Century Aluminum Company - Q1 2004 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2004. Century Aluminum Company is a producer of primary aluminum products operating facilities in the United States (Ravenswood, Mt. Holly, Hawesville) and, following a recent acquisition, Iceland (Nordural). The filing reflects the company's transition into a new growth phase with the completion of the Nordural hf acquisition on April 27, 2004, shortly after the reporting period.

Key Financial Metrics

Note: Debt figure includes $322.4M in senior notes, $14.0M in affiliate notes, and $7.8M in industrial revenue bonds.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 30% ($53.1 million) driven by a 39.7 million pound increase in shipment volume (due to full consolidation of the Hawesville facility) and higher aluminum price realizations.
• Profitability: Gross profit surged 381% to $37.0 million. This was primarily due to improved price realizations net of alumina costs ($18.4M benefit) and lower amortization charges on intangible assets.
• Derivative Impact: A significant swing occurred in "Net gain/loss on forward contracts." The company reported a $12.8 million loss in Q1 2004 compared to a $41.7 million gain in Q1 2003. This variance is attributed to the early termination and settlement of a fixed-price forward sales contract with Glencore in the prior year.
• Accounting Changes: Q1 2003 included a one-time, non-cash charge of $5.9 million (net of tax) for the cumulative effect of adopting SFAS No. 143 (Asset Retirement Obligations), which inflated the prior year's net income comparison.

Guidance, Outlook, and Risks

• Acquisition and Expansion: The company completed the acquisition of Nordural hf (Iceland) in April 2004 for approximately $175 million plus adjustments. Nordural has a capacity of 198 million pounds, with a planned expansion to 397 million pounds estimated to cost $300 million. Financing for this expansion is not yet secured.
• Liquidity and Capital: In April 2004, the company completed a public equity offering of 9 million shares, raising approximately $209 million in net proceeds. These funds were used to finance the Nordural acquisition, repay the Glencore note ($14 million), and pay preferred stock dividends ($3 million).
• Debt Service: The company has $325 million in 11.75% Senior Secured Notes due in 2008. Standard & Poor's revised the outlook to "stable" in April 2004. The company maintains a $100 million revolving credit facility with $73.6 million available as of March 31, 2004.
• Market Risks: The company is exposed to fluctuations in primary aluminum prices and natural gas costs. It utilizes forward delivery contracts and financial instruments to hedge these risks. Nordural faces foreign currency risk (Icelandic krona and Euro vs. USD) and relies on a tolling agreement where revenue is tied to LME prices.
• Environmental and Legal: The company faces ongoing environmental remediation obligations at Ravenswood (related to prior owner Kaiser Aluminum) and Hawesville (related to prior owner Southwire). While indemnities exist, there is uncertainty regarding the ability of prior owners to meet these obligations. Asbestos litigation claims are pending but are not expected to be material.

Investor Verification Checklist

• Derivative Accounting: Verify the impact of the $12.8M loss on forward contracts and the specific terms of the Glencore settlement to understand future volatility exposure.
• Nordural Integration: Confirm the timeline and financing status of the $300 million Nordural expansion project, as this is critical to future capacity growth.
• Environmental Indemnities: Assess the financial health of Kaiser Aluminum and Southwire to determine the likelihood of Century bearing the full cost of environmental remediation at Ravenswood and Hawesville.
• Preferred Stock Arrears: Note the $3.0 million in cumulative preferred dividend arrearages ($6.00 per share) and confirm the use of equity offering proceeds to clear this liability.
• Power Contracts: Review the terms of the power supply contracts for Ravenswood, Hawesville, and Nordural, as power costs are a primary driver of aluminum production margins.