Century Aluminum Company (CENX) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I'll now turn the conference over to your host, Mr. Peter Trpkovski. Please go ahead, Sir.

Thank you, Berry. Good afternoon, everyone, and welcome to the conference call. I'm joined today by Mike Bless, Century's President and Chief Executive Officer; and Shelly Harrison, our Senior Vice President of Finance and Treasurer. After our prepared remarks, we will take your questions. As a reminder, today's presentation is available on our website www.centuryaluminum.com. We use our website as a means of disclosing material information about the company after complying with Regulation FD. Turning to Slide 2, please take a moment to review the cautionary statement shown here with respect to forward-looking statements and non-GAAP financial measures contained in today’s discussion. With that, I'll hand the call to Mike.

Thanks Pete. And thanks to all of you for joining us this afternoon. If you can just turn to Slide 4 please. I'll give you a quick update on a quarter. We are very pleased with the progress we made during the last several months. Importantly, our safety performance has been generally very good across the company. All plants have been stable and performing well. And the financial performance came in precisely as we predicted. We saw excellent operating leverage on the increasing revenue. Very good product mix, we believe this continues to validate the investments we've made in our value added our product strategy and very strong cash flow conversion if you had to chance to look at it. The industry environment remains volatile on multiple fronts. I suppose that's an understatement. Pete's going to give you some more detail on the macro situation in just a moment. But let me make a just couple points to put the rest of my comments into context. The fundamentals we believe remain reasonably positive. Demands holding up well on almost all regions. It's clearly the case in our markets in the US and in Europe. Identified inventories are down significantly across the world and even so called hidden stocks have been shipped away. When we talked you last, the metal price had been strengthening and obviously then it took leg up in August and September. It seems now to be holding at or above $2,100 in fact today nicely above. The significant new development as we talked to you last time of the alumina price. The index sky rocketed from around $300 where it has been stuck for some time; it's almost $500 a ton now. All that happens in just a couple of weeks time beginning on a couple of weeks ago. As you may remember, we saw a similar pattern in the fourth quarter of last year as we expected the index price fell early in the year this year. And like last time, we don't think the current situation is sustainable for a couple reasons when we go through. First, you need to understand why this is happened. As those of who you follow this markets know this index represents a very thin market of traded alumina. And thus it exhibits really poor price discovery. It does converts significantly based upon the small number of buyers and sellers in this market and that's precisely what happened here. Several refineries in China curtailed ahead of the closure of smelters that obviously we are seeing now. And a number of smelters in China and also in India got very short in alumina. They needed to find cargos literally at any cost for the obvious reason and that creates the predictable herd mentality. In addition, the smaller part of the price increase is in fact is explained by a cost push. Caustic soda of course the key raw material in the refining of bauxite in two ways into alumina has recently hit the recent high. Again those of who you follow this market know it's a very volatile commodity. In recent memory, this commodity is traded as low as zero i.e. you could pick it up for free from the suppliers. Second, the world has plenty of alumina even with the curtailments in China. This is especially true in the Atlantic. Of course, we procure all of our alumina both for our US plants and for Iceland in the Atlantic basin where we recently had a 1.6 million ton of refinery restarted in Jamaica. The owner of this refinery said, they are considering building another larger refinery Jamaica. We are hearing increasing rumors of capacity restarts in other parts of the Atlantic region. And thus we believe the medium and long term supply demand equation in alumina is quite favorable. Last, the current economics are simply not supportable in the current environment. The current index price implies well over 22% of the aluminum price, which is just not sustainable on a fundamental economic basis. If you look back over the last couple of years, the historical relationship has moved around between say 15% and 18%. And at the current metal price, this implies alumina price in the mid $300 per ton. We've also seen a run up in other commodities that believe isn't sustainable. The most significant example being [calpha] and petroleum and coke. Again, this is driven by the rapidly changing environmental rules and other conditions in China. We are confident these commodities will return to historical relationships in a not too distant future. But at their current value, obviously this environment will squeeze our cash flow somewhat versus what it would normally have been with an LME around $2,100 or above. And Shelly will give some detail on the raw impacts both in the third quarter and our forecast for the fourth quarter in just a moment. Moving along, a quick update on trade front. Pardon me, the administration has been quite upfront about where it sees this issues and it lists the priorities. We know they continue to work hard in several potential avenues. They have been in touch with us on frequent basis. In addition, you've recently seen some key members of Congress anxious for a resolution on this matter. We believe the administration remains absolutely committed to making sure the playing field is leveled for the long term. And we continue to believe it's critical that there is follow through on the already announced actions. The major ones are those of course being the filing of the WTO case earlier in the year and the President's order on the section 232 a couple of months ago. Moving along, all operations as I said have been stable, been operating with good production metrics and importantly improving throughout the year. And I'll give you some more detail on the operations in just a few moments. There is a new operational challenge that emerged over the last couple of months. This is one over which have no control but we need to make sure that you understands how it affects us and why we have reported on and this is a problem with the two locks, locks 52 and 53 on the Ohio river you probably read again, have been written extensively even the popular press. Several mechanical and other failures have left the river un-passable for significant periods of time. So it's really a significant, significant condition. Like thousands of other industrial and agricultural companies, we depend on the Ohio for our logistics. For example, it is the only mean by which alumina has historically been transported to our Kentucky smelters. It goes without saying a catastrophe ensues if aluminum smelter on that of alumina. So we thus been forced to find alternate means to mitigate that huge risk. The principal thing we've doing we've been unloading barges down river of the blockage. The blockage is now been fixed. The river traffic is flowing again but this condition did exist for several weeks. We were unloading alumina down river of the blockage. And transporting the last distance to the plant by truck. This requires significant amount of vehicle. Just to give you a sense of the mass required. One barge holds 1500 metric tons. And that's enough to supply our two Kentucky plant. It's just about shy to Kentucky plants for one day. But you can put the plant to their current production rate use just shy of 1,700 metric tons a day. So the barge holds 1,500 metric tons. A truck can take 20 metric tons. So you get a sense of the logistical challenges we had 75 trucks on given days going back and forth just to keep the plants on a very passive basis. We have other meanings as well. We can take extra cargos if need be at Charleston, South Carolina and rail the material to Kentucky. Charleston is where we of course unload Ocean borne alumina from Mount Holly. These measures during the last month, month and half combined the sum of our barges actually getting through the rocks have kept the plants start. But it will result in some increased logistics costs during the fourth quarter. And Shelly will give you some detail on that in just a moment. Okay, moving along, and as you may have read as federal judge about a month ago in South Carolina did dismiss our antitrust lawsuit against the state power company. We studied the order very carefully as you would have hope. And we do respectfully believe the decision was incorrect. We continue to strongly believe the power company structured today did not in compliance with antitrust laws. Those laws are quite clear. The entity must be actively supervised to be exempted from the antitrust laws. That's clearly not the case here. So do we see real path and appeal to the circuit court and that's what we are in the process of doing. We do continue to believe however the right path is to reach an agreement that will restart -- that will support restart of the second potline. As you know, for the last almost two years, one of the two potlines has been curtailed so the plants have been running at 50% capacity. We are absolutely convinced that a simple structure exist that will allow Mount Holly to purchase all of its power need at full capacity from the wholesale market. And at the same time that structure would keep the power company absolutely whole which is the revenue they are receiving from us today. Time is up the essence here as you know our current agreement with the power company expires at the end of 2018. Thus we need to reach an agreement with them by early this coming year so that we can procure additional power for the post 2018 period. And agreement like that would allow the restart of the second potline and it would create immediately 300 very good jobs at the plant. And even more just indirect jobs throughout the region. We are very hopeful that the power company management will look at the facts on objective basis. As we maintained, there is only economic logic for the restart of the second line at Mount Holly if we can to 100% market power for the entire plant. It's a very different situation in Hawesville. Power prices continued to be quite favorable in the US Midwest, just to remind you those of who you have been following the company know we've been operating two and five potlines so 40% of capacity at Hawesville for almost the past two years or just about the past two years now frankly. Again, power markets continue to be good in the US Midwest. The delivered price is decreased every quarter to Hawesville this year versus the increasing throughout the year at Mount Holly. We believe the situation will continue in Kentucky. Their fundamentals are good and the power markets are stable. And that's we believe is growing case to restart some capacity at Hawesville. We are right now doing some preparation work in that regard. Our technical people have developed the new cell design that should enable us to squeeze more performance out of this older technology pot. We need to rebuild just to remind you, will need to rebuild whether we restart one line or two. We will need to rebuild the significant number of cells as we've been cannibalizing cells in each of those curtailed line to feed the line that have been running the last two years. We are going to be test grading this upgraded pot technology over the coming months to confirm that the benefit is truly there. Using this upgraded technology, the restart cost would be somewhat higher than using the current technology. But the IRR significantly better and even the simply payback shorter. These next couples of months we will also doing the testing will also allow hopefully the Ohio River operations to stabilize and the alumina market to settle down. And with that I'll turn you over to Pete to go through the industry.

Thanks Mike. If you can move on to Slide 5 please I'll take you through the current state of the whole new alumina market. The cash LME price averaged $2,011 per ton in Q3, which reflects the 5% increase over Q2. Shelly is going to provide the quarter-over-quarter impact on realized prices, the LME price on a two month lag basis was pretty flat quarter-over-quarter at around $1,900 per ton. In the last month, aluminum prices have broken to the $2,100. A level we haven't seen since late 2014 and as Mike said are currently sitting right around $2,175. In the third quarter, regional premiums averaged approximately $0.08 per pound in the U.S. and $141 per ton in Europe. However, premiums have picked up are currently approximately $0.0950 per pound in the US and $155 per ton in Europe. In the third quarter of 2017, global aluminum demand grew at a rate of almost 6% as compared to the year ago quarter. We saw 7% year-over-year demand growth from China, 4% growth in Europe, and 3% growth in North America. Global production growth was up 7% in Q3 versus the same period last year driven almost entirely by increases in production in China, which increased 13% year-over-year. As a result, for the first nine months of 2017, the global aluminum market recorded a modest surplus of approximately 50,000 tons, newly balanced market. As I discussed last quarter, since the US has taken specific action upon WTO trade case and launching the section 232 investigation earlier this year, we've begun to see some initial positive supply side responses from China. The first response announced shortly after the WTO case was filed in January, as the winter heating season curtailment program managed by the Ministry of Environmental Protection. Under this program, aluminum producers as well as alumina and petroleum coke producers in certain provinces in China will be required to curtail 30% of their production during the winter heating season lasting between mid-novembers and mid -March. Given the timing of this program, we have yet to see if and to what extent the cuts will be enforced. But we have certainly begun to see the price of alumina and petroleum coke rise significantly in anticipation of these cuts. The second response announced shortly following the initiation of the section 232 investigation was initiated to the National Development and Reform Commission, and requires the curtailment of a legal, un-permitted production in several provinces. In order to restart this curtail capacity, producers will need to obtain new licenses or purchase new licenses from curtailed legal capacity. Given the essence that supply side reform in China, experts are not predicting a 2017 global market deficit of up to 525,000 tons and almost 2 million metric ton deficit in the world excluding China. The implementation of the supply side reforms in China remains uncertain and we believe the Chinese over production still need to be addressed with the concrete action and clear remedies. While these cuts are helpful, Chinese production still will expand in 2017 and much of this production remains uneconomic without continued Chinese government subsidy. We continue to believe that the industry must remain vigilant in pursuing remedies resulting from the ongoing section 232 investigations and WTO trade action or otherwise to ensure all participants are operating on a level playing field. And with that I'll hand it back to Mike.

Thanks Pete. Pardon me if we could turn to Slide 6 please. The couple of details on the operations. Some of these I've already gone through so I go through it reasonably quickly. As I said earlier, we had generally a few very good months of safety specifically in the US plant and we are especially proud of the performance over the summer there. As you know, all of our plants are in parts of the country they get very, very hot during the summer. Hot and humid I should add. And we had zero recordable incidents over the summer month due to heat stress which really is admirable result and we are very proud of the folks who produced that result in our US plants. Production as I said was generally good. That's smallest figure that you see at Hawesville was produced by a small number of cells during the middle of the quarter that weren't operating. This was due to some crane issue that we had in the middle of the quarter and crane damage caused the repair of failed cells to get bugged down for a few weeks. That problem is now solidly behind us. Production metric as I said were quite good across all the plants, I have not really have anything to add there. Let me just give you a little detail on what went on in conversion cost. So you see that increasing in Hawesville there about half of that is raw materials principally coke and pitch and the other half beginning investment so which I referred and beginning to prepare the plan for restart one and more potline. At Sebree that entire increase that you see there is raw materials. And in Mount Holly that improvement there about a third of that improvement is the early benefit of our recent SAP conversion from the old business system at Mount Holly and the remainder is really spread over a variety of items. And with that I'll turn it over Shelly.

Thanks Mike. Let's turn to Slide 7. I can walk you through a few high level points on third quarter results. On a consolidated basis, global sales were up 3% quarter-over-quarter reflecting an increase in shipments and increased value added product sale. Higher shipments in Q3 primarily relate to our reversal of the timing impact we discussed last quarter. On a lag basis the LME and regional premium were fairly flat with what we saw in Q2. But our realized price per ton was up about 2% reflecting the increase from value added products. Looking at operating results, adjusted EBITDA was $48 million this quarter, and we had adjusted net income of $0.15 per share. Adjusting items this quarter primarily related to the mark-to-market of our remaining forward sales contracts. And one time non cash gain related to the settlement with Ravenswood retiree. Okay, let me take a moment here to give you some background on this gain. Accounting rules required that the original accrual for the retiree settlement we booked on undiscounted basis because the agreement has not yet been fully approved by the court. In Q3, the agreement was officially approved at which point accounting rules required their liability be adjusted to reflect the discounted amount. This resulted in reduction in the liability and $5.5 million non cash gain. During Q3, we had a $5 million realized loss related to our LME hedges that settled during the quarter. As we discussed on our last call, we don't adjust EPS, the realized losses on our hedges. So our bottom line both reported and adjusted reflects the loss incurred on hedges that settled in Q3. In Q4, we will settle the loss of the hedges. You will no longer see these losses in 2018. Turning to liquidity, cash increased by $43 million to $174 million as of September 30 and availability under our revolving credit facilities was essentially flat at $137 million. We are very pleased with the strong cash flow generation in the quarter and I'll talk about this more detailed in a couple of slides. Okay, let’s go to Slide 8 and I can walk you through our Q-to-Q bridge of adjusted EIBTDA. During Q3, we produced $48 million of EBITDA as compared to $34 million in Q2. As we anticipated on our last call, we had $14 million increase in EBITDA driven by the effect of lower lagged alumina prices partially offset by higher coke and pitch prices. We have about $6 million improvement and driven by higher shipment volume and value added product, partially offset by $5 million increase in other costs primarily a result of higher SG&A. Based on the forecast we provided in the beginning of the year, we anticipate that SG&A spending will be about $10 million per quarter. Q3 was higher than average due to several ongoing projects including the relocation of our IT department; it would be closer to large town pool. As we discussed on our previous call, we are in the middle of the multi year upgrade of our SAP systems which can cause some lumpiness in our SG&A cost by items that are capitalized. As Mike mentioned, raw material prices continued decline and alumina prices have risen dramatically. For Q4, we expect the EBITDA impact of raw material cost increases to be around $20 million. This is made of up about $15 million of higher alumina cost and $5 million for other raw material primarily carbon related. For alumina, a $15 million includes both impact of the price increase to about $340 per ton on a three months lag basis, as well as about $4 million for additional transportation cost due to river issues that Mike talked about. Based on what we know at this point, we don't anticipate any further cost related to the transportation issue beyond this $4 million in Q4. On the revenue side, we've seen aluminum prices continue to up nicely and expect the increase in a two month lagged LME will raise about $30 million in additional EBITDA for Q4, more than offsetting the cost increases. Okay, let’s turn to Slide 9 and will take a quick look at cash flow. We started the quarter at $131 million and were able to convert almost all of the $48 million EBITDA in cash on the balance sheet. Capital expenditures during the quarter were $5 million bring it to a total of $24 million year-to-date. For full year 2017, we continue to expect CapEx to be around $30 million. We also paid $4 million for LME hedge settlement during the quarter and if LME prices remain near quarter end level, we would expect to pay an additional $6 million for hedge settlement in Q4. As I mentioned earlier, the court formally approved our proposed settlement with Ravenswood retirees in September and we made the first installment of $5 million. Our next payment on this settlement will be in September 2018, at which point we will pay $2 million per year over the next nine years for a total of $23 million. Lastly, we had $11 million cash inflow from working capital reduction in Q3. For the fourth quarter, we are not anticipating any material changes on working capital other than normal quarter-to-quarter swings due to timing of clashing in payment. And with that I think we can open it up for Q&A.

Thanks Shelly. Greg, if you can go ahead and kick up the Q&A please.

[Operator Instructions] And our first question comes from the line of Jorge Beristain with Deutsche Bank. Please go ahead. Your line is open.

Hey, guys. I just wanted to clarify again a little bit that commentary on the alumina. So basically because of the lag effect you are kind of locked already for upcoming 4Q results. I just wanted to understand though based on where we are seeing market rates of alumina if you kind of talk about when will start to see the impact possibly into 1Q results and maybe why you are penciling in for 1Q?

Yes. Thanks, Jorge. You are absolutely right. So we are locked I think we have enough information based on the historical pricing and the pricing mechanism that you just cited. And as we said the way -- it's a little bit different every quarter, I'll call it as an inventory effect but in generally lengthens it out to something close to three months, two and half to three months where it generally lengthens and out so and Shelly said we can with reasonable accuracy predict Q4. Q1 is a crap at this point in time depending where the index heads here. If you were to stay at the current rate, it would have material significant effect. Shelly, if you want to go ahead.

Yes. So Q4 vendor line price will be that lag 340 but year-to-date Q4 actuals which will drive Q1, again as Mike said if stayed at this level we are on average of 460 roughly quarter-to-date. Obviously we are early in the quarter right now but significant impact.

So 340 to 460, 120 bucks you can do the math we use, Jorge, we don't want to predict prediction for next quarter. We don't generally do something like that but you can just use the shipments tons of proxy for production this past quarter were 185,000 ton, 1.92 tons of ore per tons of metal and do the math, it could be significant if the market stays where it is.

Right. That's what I try to understand. Puts and takes that we should aware of in terms of maybe lagging the index a little bit or maybe it's having some inventories or if there will be anything else that would mitigate sort of the raw market price effect that we would get off of the index.

No. The only -- not, not inside alumina itself. If I understand your question. The only mitigant of course is the same favorable lag that we'll continue to experience in the metal and the aluminum price itself. If the aluminum price stays where it is so the actual price that Shelly referenced that we can use to predict Q4 was average aluminum price --

Just under $2,100

Just $2100 mean over just shy $2,200 today. So we'll have that same headwind to get this right that we have on alumina, all things equals, spot prices today for your question if I understood it would persist for the rest of the next quarter, next two months. We have a tailwind on the metal side.

Got it. And if I could just maybe ask about this Santee Cooper situation, it did not seem like the judge threw favorable comments, I think he was almost of the position that he would be fine with your plan to filing for chapter 11. Could you just kind of discuss if you were to go for to be allowed to exit their monopoly pricing and you said get market power, would that have a negative impact on consumers because it seems like the utility's position if they were to sort of expectedly low your rate they would have other customers have to pay more.

Not one, thank you, not one bit, again the math goes as follows just to be constructive a little bit or the structure goes as follows and without being precise on the math given that it's private contract of course. Today, we are paying them two revenue streams. One revenue stream is the transmission fee on the power that we are importing from outside of their system, that's three quarters of the power we are using today or 150 megawatts. And the second revenue stream is the demand charge i.e. capacity charge or demand charge or fixed charge on the power they are selling to us directly. We are assuming that bit -- not assuming we know that, they don't make -they neither make a profit or loss on the energy that itself that they sell us. We could pay the energy cost. So we are paying the demand charge. So two energy streams. What we are proposing and have been proposing for the past several years is that we like to import all of the power acquired through on the plant, so 400 megawatt. We would pay them that same per unit per megawatt hour transmission fee to import all the power and that fee compared to the two revenue streams in aggregate we are paying them today would be essentially equal. So rate payers that the power company and obviously the rate payers because the rate payers are the power company, it's obviously state agency would at par with where they are today.

And next we turn to line of Novid Rassouli with Cowen & Company. Please go ahead.

Thanks for taking my questions guys. Michael on the release you guys had mentioned the distorted relation you are seeing LME and key raw materials. I was wondering if you could just expand your thoughts here. And I guess give us a sense of whether you are expecting aluminum price to rise or raw materials to fall. I am just trying to get sense of, do you think LME moving up from here to kind of normalized that ratio is unreasonable. Any of your thoughts there would be helpful.

Thanks Novid. That's a tough one. I don't want to duck it but you really what we do know is that because of the structure of the industry, the cost structure of the industry I should say, that the current relationships can't persist. Because the industry as a whole or even the better parts of the cost curve can't bear this kind of relationships, where coke is right now and where alumina is right now. Those are the two principal drivers. Where the adjustments going to be it's usually -- it's usual in business center in life, it's probably it could be sum of both. It really I mean metal price it really does depend, really does depend, not to try it dump it down or over simplify it under development in China here. I mean everything else again at the risk over simplifying it is really just no ways but you've seen the price here start to react to perhaps a growing consensus with all the dangers of consensuses that maybe these types are for real and maybe this market deficits as Pete said the non China deficit is significant, it's a couple of million tons. And if China now is going to through these actions get to something close to a balance you could see -- we think you could see some more upside in metal price. That's not prediction; there were a lot of ifs in there. Clearly if -- and we think as certainly not feel safe but we really do believe what we said that the government, the administration is committed to this. It's clear this one of the important things that the administration talked about in the early days. And we take them at their word. They are committed to this. So I guess the way we look, one way to look at is, one way or another that situation i.e. excess subsidized illegal capacity all of the above has got to get worked out one way or another.

Got it. And then just switching gears over to China. So you spoke about alumina being plentiful. And so if we see the kind of bauxite mining and alumina refining restrictions that we've seen in China and there is actually longevity there, does that preclude alumina from moving back down to kind of the 350 level that you said is would be supported by the current LME to alumina ratio or maybe you could just give us your sense of that if these regulations are here to say.

We think, yes, that's a great question. We really think that the alumina situation here, I talked about the timing but let me expand or spend a time little bit is really just due to the winter cut. So you see the winter cuts obviously and they have been well talked about coming on the smelting side which I supposed other than the strict trade press is alumina cuts. Obviously they cut refining capacity in anticipation of the smelter cut number one. And number two, it's outsized alumina versus aluminum because if you just look at the math and you put a dot in each map for a location of a refinery in China versus the smelter, you see a much greater concentration of the refineries, pardon me in the parts of the country i.e. the east and the northeast where there are pollution problem related to the winter heating degree day. So at this proportion alumina is coming off just given where those refineries reside. Ultimately, we believe that wherever the smelting capacity settles i.e. where the cuts settle, the refining capacity in China because that ward doesn't - that alumina didn't go anywhere else will adjust to feed that smelting capacity. It would just get a little bit of timing dislocation now.

And do I dare ask you how long you think this dislocation will take to complete? You kind of led me to the question there Michael.

No, it's okay. That's a good question. Is it months and months and months and months, it could be, is it a year? No. It can't be because the situation can't persist. But could be months and months and months I mean at a similar dislocation for a different set of factors driven by different set of factors. As you recall happened last year and then we were quite confident as you may remember me saying that the situation had to work itself out of it, in fact the price fell precipitously almost as soon as the year turned. We are not predicting anything in terms of timing similar to here because of different set of facts and circumstances. But the relationship just can't hold to your point, it got to go one way or another.

And next we turn to line of David Gagliano with BMO Capital Markets. Please go ahead.

Hi, thanks for taking my questions. I just wanted to drill down a little bit more on a couple of topic. I'll take alumina later. First on Hawesville on the restart commentary. Could you just remind us again what the -- first of all the annual production capacity of these potline is?

50,000 tons per line, so there is 100,000 David producing now 150,000 -- it's ratable, 50,000 tons.

Okay, thanks. And then on the cannibalization some of the cells, I know its early days, you mentioned start, restart cost higher than typical, what -- can you say what are the magnitude, what the restart cost would be?

Yes. I mean we talked about this in the past. So depending upon which line we started and when we restarted it, the restart cost for each line before Sebree build, restart cost being, deferred maintenance and hiring and training all that is several, several million of dollars. And if you put the restart cost in, if you have to rebuild say 100 cells per line that's $10 million investment worth a year. Let say you are talking about two lines. You talked about, pardon me, about a couple tens of million of dollar and then you might increase that by again depending upon where we settle out without getting into the way the cells rebuild in the current technology versus the -- because it is more and more expensive material I guess is one easy way to say in the upgraded technology. You could be looking at 40-ish percent increase there. So you could -- if you are just thinking -- if your question David is aimed at capital requirements or cash requirements, you could be looking at -- if we were to restart to potlines simultaneously which is by no means, it's certainly not required and it's by no means an obvious conclusion. You could be talking about $40 million -$50 million investment.

Okay. I have fully idle line.

Correct. Now to remind you to those potlines are capable of producing high purity and the newest line 5 is not capable of producing high purity. So that's why as I would describing this earlier, I talked about one line or two. I would never say never that the plant would operate at all five lines again because that's when you get best leverage of your fixed cost, your best cost structure. But I think the way we are thinking about it now and that's what we would ask you to think about in the near future meaning let's make it a year even is one or two lines we started.

So that was my other question. So you decided it extend out to 12 months sort of lead time.

Yes. I mean the way the timing work if that's what you are asking David is so we go over the -- we will take a next couple of months to improve these cells to put into this technology into service, so let the pot operate for a couple of months and then cut it out literally to cut the pot out, tap all the metal out and then do it an autopsy to look at inside of the pot to see how the new technology held up against the stress of the smelting process of course. And then assuming we are going in industry condition, they taper and go obviously we would let our investments let's you guy know. At the time we test fire starter pistol, you are probably looking at 6 to 8 months. I mean just ordering cattle blocks so those are the -- that's material that line the cells, that's probably the longest lead time item in the market right now, that's sort of 6 to 7 even maybe 8 months of lead time. We do have a little bit of inventory on hand but not much. We spend it out as you would expect. So I mean if you want me to take to the very end, you might be seeing production towards the end of 2018 and certainly going into full production in 2019. Full production or whatever however many problems we were to restart.

Okay, perfect, thank you for that. And then sorry last one on that. Will those be high purity lines you are looking at restarting or --

Yes.

Okay, thanks. And then switching over to alumina, I don't want to beat the dead horse, I just given all the volatility, given I think a lot of your time in calibrate the model based on where we are now kind of that sort of math, one quarter lag API alumina price is roughly 295 bucks a ton, Shelly mentioned 340 number earlier, I am just wondering what alumina price actually flowed through the cost to good sold in the third quarter.

Right. Dave that would be consistent with your 295 based if you look back to the Q2 average price and that roughly what flow through our Q3

340 was for Q4

Got it, perfect, thank you.

Sure. Look, this is -- you are not beating dead anything, this is critical and I think it's probably it's complex and as you look at all the moving parts of how our cost structure works as it goes forward, it's important for us, to us that everybody have a good understanding of this. So please don't be shy.

I am not shy, thank you. A little shy, thank you.

And next we turn to line of John Tumazos with John Tumazos Fairy Independent Research. Please go ahead.

Thank you. I don't mean to be too shy but I don't know a lot about river locks. How longer they take for the army core of engineers to fix? Would it be like a two week thing or two months thing?

30 years. And here is the answer, thank you John for that straight man, straight person question. That was excellent. So you can just go ahead and Google Ohio River locks 52 and 53, you will find hundreds of articles in the last couple of weeks. In fact, there was hate to say site anyone mania, there was a New York Times maybe even in front page but a prominent New York Time, yes, it's a front page article when this got really ugly a couple of weeks ago. And talking about as you would suspect the aging infrastructure of our company especially given that the administration is talked about our country. Thank you Shelly, especially given that the administration has talked about infrastructure. So reason for the flip answer 30 years is that, a, the army core of engineers had designed and proposed a replacement for these locks in 1988 and so that's how long it has been known that we have problem here. Over the last year, our operations people took, our COO took me through a recounting of sort of some of the minor mishaps over the last year. But they had some reasonable problems but nothing like have happened over the last month. We are literally for days and days and days at a time the locks were closed. Just to give you a sense at one particular bad time, got to remember here, I believe there were 130 tugs stuck behind each of those tugs is guiding six barges so think about how many vessel that is -- are literally queued up. It went back into 34-43 miles, I can't recall, 46, thank you Shelly, 46 miles behind this locks. Just Google and you can see where these locks are. So John that's perhaps more than you wanted to know. If that's the answer to your question. Oh pardon me. There is more salient answers to your question is now are almost completing the core is hopefully permanent fix which is - that's why I said which is slated for the fourth quarter at late next year, late 2018. The traffic is slowing again but that's why we got all these contingency plans in place just in case for the obvious reason.

And this could strain Hawesville and Sebree both.

Yes. They are both on -- they are both east of this problem.

And next we turn to line of [David Livshiz with Macquarie]. Please go ahead.

Two quick questions. First in terms of potential of restart. If we understand market conditions today three months from now, is that something that what makes you go ahead or not go ahead in terms of market conditions to go forward. It sounds like alumina is still 450 or 460 is that mean no go or if it's a 350 like we are okay like what makes you make that decision.

350 definitely. I mean 350 in the current metal price that's a sensible if you just do the simple math relationship between those two commodities and its relationship we think is the right one in the medium to long term and it's a relationship at which our cash flow would be based are. Our EBITDA per ton which is one of the key metrics that we use here as you might suspect. And especially David the incremental marginal EBITDA per ton because you can't bring out those tons and really are you paying for some additional labor but mostly just additional cost power in Alumina and carbon, the materials that you are actually using in smelting the ore into metal and so absolutely. Now growth has been up to current conditions that would be a deep breath that would be a tough one. I wouldn't want to give you the definitive answer either because I don't know but I would be an obviously yes, David, it would not by any means.

Okay. And my -- would be there any thought of waiting to see how the winner cuts play out like for lay until the spring and sort of seeing how this all sort of plays out before you made any decision.

I think effectively -- the answer is the fact of yes, I think effectively we will because the heating season is going to go on over the next six months and so by the time we finish 4 to 6 months, so by the time you finish our R&D project here I call it we will be into Jan and Feb and by that point in time we will kind of know where things -- if it's not settled where things seemed to be heading in China. We'll have more -- we essentially will have more conviction anyway. And hopefully the market is well one way or another. And so yes I think it all kind of come together we believer for us anyway as it relates to our question during the first quarter of 2018.

And then my final question is in terms of if [NOS] and all the others cost would stay where they are, how would that impact first quarter?

So cost -- calcium petroleum and coke I think is what you are specifically talking about because our conversion cost in all of our NOS that's one that are integrated into smelters in US and leasing in Netherlands and even our shares of it China, those don't change of course. The coke is at least 100 bucks a ton up today so that's $50 per ton metal at about 50% usage and alumina we just talked about we've given you -- we gave you the --

I am just wondering in terms of like being dollar basis from a coke --

Yes, so it's up versus where we are today, where we realize in the third quarter probably, looking at my colleagues here, a 100 bucks, 80 bucks.

Call 50 to 100

And then David as you probably know a typical smelter, Pete has given a thumbs up here, a typical smelter uses net, I should give the net number not but the net carbon number not the gross so he is correcting me here. So it's about 42% let's call it, tons of carb out NOS per ton of alumina. So you can use that math tons, so the price increase that we just cited that range, time that math, times our production in metal to get to the dollars in millions impact in the carbon prices that's what you asked.

And we have a follow up from the line of David Gagliano with BMO Capital Markets. Please go ahead.

Okay. So just another sort of calibration type of question here. Lot of moving parts simple cost everything as usual, I mean I guess the basic question I am trying to figure out here is lag everything set aside, everything stays the way it is as today, OI I mean everything flows through six months from now and even in the current and everything exactly the same in terms of prices, would essentially be free cash flow positive or free cash flow negative.

Oh sure, positive.

Okay, that's a good answer, okay, that was a definitive answer, don't be shy, I like it, thank you.

That was an easy one.

Okay, so current alumina where it is, aluminum where it is everything.

Yes, absolutely, like marking everything to spot David. Oh, yes, absolutely

And speakers we have no further questions in queue.

We would like to thank you all again for the time and look forward to talking to you again in a couple of months and obviously a follow up between now and then. Take care.