CENX

Century Aluminum Company - Q1 2007 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2007. Century Aluminum Company is a producer of primary aluminum products with operations in the United States (Ravenswood, West Virginia; Hawesville, Kentucky; Mt. Holly, South Carolina) and Iceland (Grundartangi via Nordural). The company is a large accelerated filer with 32,585,080 shares of common stock outstanding as of April 30, 2007.

Key Financial Metrics

Margins: Gross margin improved to approximately 24.7% in Q1 2007 compared to 22.0% in Q1 2006. Operating margin was 21.8% in Q1 2007 versus 18.5% in Q1 2006.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $100.8 million (29.1%) driven by higher LME aluminum prices ($50.2 million impact) and increased shipment volume ($50.6 million impact), particularly from tolling operations at Grundartangi.
• Profitability Turnaround: The company reported a net income of $64.2 million, a significant improvement from a net loss of $141.6 million in the prior year. This was largely due to a $287.2 million swing in "Net gain (loss) on forward contracts," which moved from a $286.8 million loss in 2006 to a $0.4 million gain in 2007.
• Cost Increases: Interest expense rose 61.8% to $11.0 million due to higher Nordural debt balances and reduced capitalized interest. Gross profit was partially offset by $22.5 million in net cost increases, including higher maintenance, power, and natural gas costs.
• Liquidity: Cash and cash equivalents increased by $71.8 million to $168.1 million, supported by strong operating cash flow of $98.1 million.

Guidance, Outlook, Risks, and Unusual Items

• Capital Expenditures: The company anticipates $30.0 to $35.0 million in capital expenditures for 2007 excluding the Grundartangi expansion. The Phase V expansion at Grundartangi requires approximately $95.0 million in 2007 to reach 260,000 mtpy capacity. Outstanding capital commitments were $57.4 million as of March 31, 2007.
• Regulatory Impact: In May 2007, the EU reduced the import duty on primary aluminum from 6% to 3%. This negatively impacts Grundartangi's tolling revenues, which include a premium based on the duty.
• Power Supply Risks: The Corps of Engineers plans to lower reservoir levels on the Cumberland River, potentially reducing power supply to the Hawesville facility by approximately 1.5% during summer peak months. The company is exploring alternative energy sources.
• Debt Structure: Total debt remains high at $772.6 million. Nordural made a $70.0 million optional principal payment on its term loan on April 30, 2007 (subsequent event). The company has $97.6 million available under its revolving credit facility.
• Legal and Environmental: The company is under IRS examination for tax years 2000-2002 and faces various environmental contingencies, though management does not expect a material adverse effect on financial condition.

Investor Verification Checklist

• Verify the sustainability of the $287 million swing in forward contract gains/losses and its impact on future earnings volatility.
• Monitor the impact of the EU import duty reduction on Grundartangi's revenue margins.
• Assess the progress and cost overruns of the Grundartangi Phase V expansion ($95 million required in 2007).
• Review the status of the IRS tax examination for years 2000-2002 and potential settlement costs.
• Track the resolution of power supply issues at the Hawesville facility and potential premium costs for alternative energy.
• Confirm the company's ability to service $772.6 million in debt while funding significant capital projects.