Century Aluminum Company — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Century produces primary aluminum at smelters in the United States and Iceland. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $528.0 | $401.9 | $972.0 | $823.1 |
| Gross profit (loss) | $20.9 | $(13.0) | $0.2 | $(8.2) |
| Operating income (loss) | $12.1 | $(25.0) | $(24.8) | $(29.4) |
| Net income (loss) | $(35.1) | $(26.9) | $(175.1) | $(29.6) |
| Diluted loss per share | $(0.39) | $(0.30) | $(1.94) | $(0.33) |
| Operating cash flow | Not separately stated for the quarter | $(87.9) | $71.6 |
- Q2 sales rose 31% year over year; six-month sales rose 18%. Management attributed the increase in aluminum sales excluding alumina to higher LME and regional premium realizations, partly offset by lower shipments.
- Gross margin was approximately 4.0% in Q2 2021 versus negative 3.2% in Q2 2020; for the six months it was approximately 0.02% versus negative 1.0%.
- Q2 net loss included a $64.4 million loss on forward and derivative contracts and a $24.7 million loss on early extinguishment of debt. The six-month derivative-contract loss was $162.5 million. Management linked the larger derivative losses to rising LME and Midwest premium prices; these marks substantially affected reported earnings.
- The company recorded a $48.3 million Q2 income tax benefit, including a discrete $49.8 million benefit for recognition of a foreign deferred tax asset. The filing says U.S. and certain foreign deferred tax assets, net of liabilities, remain subject to valuation allowances.
Cash, liquidity and debt
- Cash and cash equivalents were $9.0 million at June 30, down from $81.6 million at December 31, 2020. Cash, cash equivalents and restricted cash declined $74.1 million in the first half.
- First-half operating cash use was $87.9 million, investing cash use was $25.9 million, and financing cash provided was $39.7 million. Working-capital movements and the net loss contributed to operating cash use; investing outlays included the Mt. Holly restart.
- Management reported total liquidity of approximately $108.6 million: $9.0 million cash and $99.6 million net availability under revolving facilities. The U.S. facility had $39.6 million drawn and $84.4 million of letters of credit; the Iceland facility had no borrowings.
- Total debt carrying value was $386.6 million at June 30, versus $315.9 million at year-end. In April, Century issued $250 million of 7.5% secured notes due 2028 and $86.3 million of 2.75% convertible notes due 2028, and tendered/redeemed its 12% notes due 2025. The refinancing extended principal maturities and reduced the coupon on the refinanced notes, but generated the $24.7 million extinguishment loss. The Hawesville term loan had $10.0 million outstanding and matures December 2021.
- Capital expenditures were $6.3 million excluding $22.4 million of Mt. Holly restart spending for the first half. Management estimated approximately $25 million of 2021 spending excluding the Mt. Holly restart project.
Operations, outlook and risks
- Management reported aluminum price increases during the first half of 2021. Higher LME and regional premium realizations improved gross profit, but higher power and alumina costs, lower volume and operating costs offset part of the benefit. Results generally reflect aluminum pricing with a one-to-three-month lag.
- Mt. Holly’s restart was reported on schedule, with completion expected in Q4 2021; its Santee Cooper contract, effective April 2021 through December 2023, is expected to support production at 75% of full capacity after restart. Hawesville was progressing toward its planned 80% capacity level; the final potline rebuild and technology upgrades are expected over the next several years, subject to market conditions.
- The filing provides no specific earnings or revenue guidance. Management stated that cash from operations and financing activities should cover operations and business needs over the next 12 months, while cautioning that actual results depend on market and operating conditions.
- Key exposures include volatile aluminum and regional premiums, market-based electricity prices and availability, alumina costs, foreign exchange, and production interruptions. The company’s sensitivity analysis estimates that a $1/MWh power-price change at full capacity would affect annual costs by about $15.8 million.
- Glencore owned 42.9% of common stock (46.7% on a fully diluted basis) and all outstanding Series A convertible preferred stock. Glencore accounted for about 58% of Q2 sales and 59.1% of first-half sales, creating customer concentration and related-party exposure.
- Management said pending legal matters were not expected to have a material adverse effect, but noted outcomes are uncertain. A Vernon environmental case was scheduled for trial on certain issues in September 2021; the filing states the outcome and potential loss range could not be estimated. The company had approximately $9.6 million of remaining contributions under its PBGC settlement and provided security for deferred payments.
Most important facts for investors to verify
- Whether operating cash flow, cash balances and borrowing availability improve as working capital and restart spending evolve.
- How much of future reported earnings volatility reflects derivative mark-to-market changes versus underlying smelter economics and realized cash settlements.
- Progress, costs and timing of the Mt. Holly restart and Hawesville production recovery, including power availability and costs.
- Debt service and covenant capacity, particularly the near-term Hawesville loan maturity and liquidity under asset-based revolvers.
- Continued realization of the recognized foreign tax asset, the scale of remaining valuation allowances, and developments in legal and pension contingencies.