Ladies and gentlemen, thank you for standing by and welcome to the Century Aluminum Company Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today, Peter Trpkovski. Thank you. Please go ahead.

Thank you, David. Good afternoon, everyone and welcome to the conference call. I am joined here today by Mike Bless, Century’s President and Chief Executive Officer; Craig Conti, Executive Vice President and Chief Financial Officer; and Shelly Harrison, Senior Vice President of Finance and Treasurer. After our prepared comments, we will take your questions. As a reminder, today’s presentation is available on our website at www.centuryaluminum.com. We use our website as a means of disclosing material information about the company and for complying with Regulation FD. Turning to Slide 1, 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 will hand the call to Mike.

Thanks, Pete. Thanks to all of you for joining us this afternoon. If we could just flip to Page 3 please, I will give you as usual a quick summary of the last couple of months. Before we get started though, we are extraordinarily sad to report a fatality at Mt. Holly that occurred in December. The incident happened outside the cast house in the loading area. Those of you who are familiar with these facilities can picture that where that location would be. The victim was a longtime employee and a cherished colleague and friend. She is sorely missed by her family, by her colleagues and by the entire community. This tragedy reinforces our commitment to take an unbiased look at absolutely everything we do and commit to improve where needed without condition. It requires dedication and leadership from every part of our organization and personal commitment from each and every individual. We all know we must hold ourselves to the highest of standards and demonstrate our promise to keep ourselves and each other safe. Not just talk, but we need to demonstrate that each and everyday. Okay. And with that, let’s dive in. Pete in a couple of minutes will give you a summary, as he normally does of the industry fundamentals. Let me just make a couple of points to put the rest of my comments into context before I get going on the rest. You all follow the macro data, so I’ll keep it pretty quick. Obviously, world manufacturing indices are approaching levels that frankly, we last saw in early 2018. At that time, the LME price, as you may remember, was over $2,500 a tonne. Manufacturing activity in our key markets in the U.S. and in Europe remains especially robust. You have seen the most…

Thanks Mike. If we can move to Slide 5 please, I will take you through the current state of the global aluminum market. The cash LME price averaged $1,900 and $18 per tonne in the fourth quarter of 2020, which was up approximately 12% or $211 per tonne sequentially as we continue to see a strong recovery on the global economy and in particular, the manufacturing sector in that quarter. As industry conditions continue to improve the LME price has averaged $2,020 per tonne so far in the first quarter of this year, and sitting around a 2.5-year high of $2,150 per tonne today. In the fourth quarter, regional premiums averaged approximately $0.13 per pound in the U.S., which was flat sequentially, and $136 per tonne in Europe, an increase of 12% sequentially. Current spot prices are approximately $0.155 per pound in the U.S. Midwest and approximately $155 per tonne in Europe. In the fourth quarter of 2020, global aluminum demand was up approximately 5% as compared to the fourth quarter of 2019. In the world, excluding China, we saw demand flat when compared to the prior year quarter. In China, we saw a demand growth of 9% as compared to the fourth quarter of 2019. Global production was up approximately 6% in the fourth quarter as compared to the fourth quarter of 2019. We saw approximately 10% production growth in China, while the rest of the world was flat. Looking at some of our key raw materials, the alumina price index averaged $282 per tonne in the fourth quarter, which was up 3% sequentially, while Indiana Hub prices were slightly down or $0.22 per megawatt hour lower sequentially. Spot prices are approximately $300 per tonne for the alumina price index, and with the cold snap coming in much of the United States this week, power prices have already begun to come off their peaks from levels that we hadn’t seen since that Polar Vortex of 2014. And with that, I will hand the call over to Craig.

Thanks, Pete. Let’s turn to Slide 6 and I will take you through the results for the fourth quarter. On a consolidated basis, global shipments were down 4% quarter-over-quarter, primarily due to timing of European product deliveries. Realized prices increased substantially versus prior quarter as a result of higher lag LME prices and delivery premiums bringing net sales about flat with the prior quarter. Looking at operating results, adjusted EBITDA was $800,000 this quarter, and we had an adjusted net loss of $30.6 million or $0.32 a share. In Q4, the adjusting items were $13.6 million for the unrealized impacts of forward contracts, $5.5 million for our share of a litigation settlement, $2.4 million for the net realizable value of inventory, and $800,000 for the historical Sebree equipment failure. Our liquidity remains strong with $182 million of funds available via a mix of cash on hand and credit facilities. This represents an approximate $13 million improvement versus prior quarter liquidity levels. Okay, let’s go to Slide 7 and I can walk you through our quarter-to-quarter bridge of adjusted EBITDA. As we forecast on our last call, higher lag LME prices and delivery premiums drove the majority of the EBITDA increase versus Q3 levels. The Q4 realized LME of $1,730 per tonne was up $180 per tonne from the very low levels realized in Q3, while realized U.S. Midwest premiums of $285 per tonne were up $40 per tonne over the same period. Realized alumina was $290 per tonne or $15 per tonne greater than prior quarter. As we discussed previously, the majority of our alumina contracts are priced with an LME reference and the realized prices will largely track in line with lagged aluminum pricing trends. Average domestic energy prices were essentially flat versus prior quarter due to the relatively…

Certainly. [Operator Instructions] Your first question comes from the line of Lucas Pipes with B. Riley Securities. Your line is open.

Hey, good afternoon everyone.

Hi, Lucas.

Hi, Lucas.

I wanted to follow-up on that very last point regarding the cash flow breakeven. So essentially, outside of the change in LME price assumption, really it would be exactly the same as in the prior year of $1,675?

No. I mean, the LME is going to be the biggest driver. So, when you look at cash cost, which is probably the easier way to do this, I think Lucas year-over-year, LME is going to be the biggest driver. But if we were to take it in total for the company, net cash cost for Century Aluminum is up $150 versus prior year, okay. $70 million – or $70 of that is driven by the LME. Another $50 or $60 is driven by power, right. So when you are looking at the cash flow breakeven, you have to look at the power piece as well. Now to bring that back down from a gross to a net basis, you look at the delta and premiums year-over-year, which for the company is about $20. So that gets you to the $150 year-over-year cash cost which is a good proxy for the LME breakeven.

I mean, Lucas, it’s Mike. If I can just pile on there, the LME will be what it is. It’s a circular reference, as you know, because of the linkage of most of our ally – pardon me, alumina and as Craig correctly says, a good chunk, majority of the Nord Pool power. On the market power prices, the other piece, we try to be agnostic there and we try to be consistent. So we use the forwards. The forwards obviously have some element of the price in them today, both Indy Hub and MISO Power and Nord Pool. But we’re going to stick with our – we’re going to stay consistent and just use those forwards. And so if those turn out to be elevated, maybe there’s some room there for that to come down. But we felt we ought to just stick those in there for now and then see what happens.

No, that’s very helpful. I really appreciate that additional detail. And as a separate question, high-yield markets are wide open, seeing what I would consider very attractive rates on some new issuance out there. How do you think about that market? Obviously, you have put in place a secured piece of debt and all the right reasons to do that at the time. But kind of when you think about the market today, are there opportunities on that front to optimize that would appreciate your thoughts? Thank you.

Yes, good one. Yes. No, great question, Lucas. Thank you for the question and you are right on. If you think about the piece of paper that we had out there as of July, the first call period is in July of this year and that’s at a call price of 105. So clearly, we’re looking at this opportunistically both up to that call period and then after that call period. So it’s something that we’re staying very close to and I would agree with your assessment of the market. So we’ll come back if anything changes on that front.

You can read the indenture, Lucas, if you haven’t already. So as Craig correctly says, we’ve got a fixed call price normal for these instruments, a little bit better than normal. Normally, you’d see half of the coupon is a little bit better on the anniversary of the first year after the issue. Right now, if you wanted to redeem it, it’s got a traditional treasury-based make-whole formula. And just obviously, given interest rates, even though they’re coming up, so we’re looking at it, there’s a pretty easy breakeven that you can calculate as to how far up our new issue yield, either as a combination of either the treasury or the credit spread would have to go between now and – or over the next, what, Craig, 4 months?

Right.

4 months. And so that’s kind of the math we’re watching on a daily basis. And the treasury works obviously for you and against you. It works for you in that it lowers the cost of the redemption right today, but in essence, it’s going to continue to drive up, all else being equal, what you could refinance at, at some point in time. So we’re – it’s iterative and we’re watching it. Good question.

Very helpful, very helpful. Yes, that’s something for us to keep an eye on as well, so thank you for that.

Absolutely, absolutely. And to your inference, probably if we haven’t done anything before July, we’ll talk to you before then, but keep an eye on that space in July.

Great. Terrific. One last one for me, and I’ll turn it over. Just wanted to get your read on the inventory situation, last year, kind of 2020, obviously terrific rebound, but what we heard often and commented on ourselves was that production was also pretty strong during a period of lost demand. How do you see inventories positioned today, both on the exchanges and off? Would be curious to get your read on that? Thank you.

Yes. So obviously, that – I think what you’re referring to, you redirect me please, if we get it wrong. There was a chunk of 3 or 4 months’ worth of swelling in inventories given, as you correctly say, that March, April, May, going into June, demand had fallen off a cliff and started to recover until the spring was underway. And as you well know, these smelters, basically the world kept producing. And so the world built a couple million tons of inventory that it turned out it didn’t need, it goes without saying. And those have been coming down nicely. A lot of those remain locked away in financing transactions, it goes without saying. But inventories have been coming down nicely. And if you look at even total inventories, irrespective of where they are, whether they’re locked in a warehouse or in an LME warehouse or a non-LME warehouse or in the supply chain, and you look at that versus current run rate of consumption, of demand, it looks frankly pretty favorable. We’re watching it closely, but to the extent that demand is where it is or even is going to increase, I think the math says that the inventory should continue to fall. Pete, you want to say anything else on that one? You’re the market guy.

Yes. Just look at maybe the days inventory, maybe to put in context of the question, we didn’t jump to the levels you saw back in 2009…

No, no, we did not say anything...

With the global financial crisis, but we did see a little bit of a peak, 3 months that Mike was talking about on the onset of the pandemic and the health crisis. But then you saw on the yields of that just I’ll say a massive recovery in the manufacturing sector. And so orders were being accelerated, demand was picking up, especially in the U.S. and European sectors. And so we saw that some of that inventory start to kind of slow back down.

Downstream demand, just – you were asking about prime, of course, but downstream demand remains I’m trying to not use a melodramatic superlative, it’s crazy. I’ve never, in 15 years in the business. I haven’t seen this. Even in ‘06, ‘07. We can’t – we’re producing, obviously, every ton that we can, but we have at this point in time, at times have had to sort of I wouldn’t say allocate, but choose amongst a stable of very good customers because they can’t get the metal. You’ve got secondary cast houses now being impacted by the weather as you may have read. A lot of those cast – Texas has a huge, huge, both extrusion and secondary cast, as does Mexico. So the situation is pretty interesting right now.

Very, very helpful color. I really appreciate it and continued best of luck. Thank you.

Thank you. Thank you so much, Lucas.

[Operator Instructions] Your next question comes from the line of David Gagliano with BMO Capital Markets. Your line is open.

Hi, thanks for taking my questions. I will try and keep them quick here. Just on the three buckets that you called out in the first quarter bridge, the $15 million sort of spike in power cost that’s coming on. The other I think $15 million to $20 million global increase in power costs, and then there was kind of $5 million on Mt. Holly start-up costs. I think those are the three. I haven’t gone through the bridge math yet for the rest of the year and the cash cost guidance or the numbers in the presentation, but within those numbers, what’s the assumption for how those reverse or do those reverse and how much of those reverse moving forward? That’s my first question, within each of those buckets.

Yes. Sure, David. So it’s Mike. So the first – I’ll take your three buckets. The $15 million is already reversed. We’re really convinced it’s a one-time thing. If you look at the Indy Hub prices, and frankly the prices at our nodes have been better than Indy Hub, those aren’t public. But if you even look at Indy Hub, it’s come straight down. And the predictions are, if you look at the forecast, it’s going to be back in sort of the 50s by the weekend and then back in the 30s next week. So it’s really – it was terrible, but it was really a 1-week thing, really maybe more like 8 or 9 days. So last Friday, Saturday when it started creeping up and then it shot up. So the answer on the first bucket is, it all goes away. It all reverses, it’s gone. The second bucket is, again, there’s no – all that is, is an increase from Q4 to Q1, that second bucket that Craig talked about. It’s just the fact that power prices were frankly, I would comment, it’s not unseasonably – they were good in Q4, both Indy Hub and Nord Pool. And then Q1, we – other than the 1-week aberration there, we expect them to be sort of normal Q1. And so our expectation is that come Q2, those prices generally ease back down in a normal year. And our expectation is that they would do the same. And that expectation, David, I’ll – hold this thought for a second because I’ll make a summary comment at the end. That expectation is embedded in the plant cash costs that Craig took you through. And then yes, Mt. Holly is just a burst of expense. Most of it is capital, as Pete said. It’s a burst of expense that’s – most of the items that you don’t capitalize under GAAP tend to be at the beginning of these projects and flow through as expense. The only other comment, going back, I apologize, to that second bucket, is I make all those same comments again for both the Indy Hub and Nord Pool. But as Craig said, on Nord Pool specifically, it’s a bit strange here. From a reported earnings perspective, EBITDA and all the rest, the variance in Nord Pool impacts our earnings, but it doesn’t impact our cash flow because we’ve hedged that Nord Pool. We don’t like the volatility, and so we’ve taken that risk out. So while you’ll see it, and Craig will call it out for you every quarter in the EBITDA or the operating profit I guess we should say, from a GAAP standpoint, there’s no cash impact.

Okay. That’s helpful. Thanks. And then – so just the Mt. Holly piece, I know it’s tiny, whatever, it’s small relatively speaking. Does that go after the first quarter the $5 million goes to zero after Q1?

Yes.

Okay. And then just on the cadence of the Mt. Holly ramp, I mean I think it’s roughly a 25,000 ton year-over-year increase. It doesn’t sound like there was anything embedded in the first quarter bridge that was flagged for volume growth. So I’m assuming that’s 25,000 tons, if that’s right, is sort of 2Q through 4Q. When does that ramp? So what’s the cadence at Mt. Holly?

You’re going to see the material tons come in over the back half of the year, David.

Okay.

Because you’re just starting to rebuild those cells now, and well, I’ll stop there.

Okay, alright. That’s all I needed. Thanks.

Thanks, David.

Your next question comes from the line of Paretosh Misra with Berenberg. Your line is open.

Thank you. Thanks for taking my question. Is there any opportunity for you to pass through some of this high power cost to customers as kind of power surcharge or is it just too early to think about that route? And I’m asking because you mentioned demand is very strong here in the U.S.?

Yes. Thanks, Paretosh. That’s a great question. I mean in terms of the primary piece of it, that’s just not the way the business works. As you know, the business is LME plus local delivery premium. In this case, it’s a Midwest issue, so plus Midwest plus product premium. And so I’m going to – I’m creeping up on an answer to your question. Most of our – the current situation, demand situation, is reflected in the product premium of course. Like most suppliers, most of our contracts are long-term contract, 1-year contract, meaning we don’t do – the majority of the business we do, the prices, the premium would have been set during the commercial season, so-called mating period in the kind of October-November timeframe. So longwinded answer to your question, we will see some benefit on that demand through spot premiums, but that’s a small portion of our business.

Got it. Got it. And then for Europe, the increase in Nord Pool power prices, any thoughts as to why the prices have been higher this year or something has changed in that market or what’s going on?

No, it’s seasonal. I mean there is you’ve got cold weather there, too. And really, Nord Pool, it trades – this is one of the reasons, Paretosh, why. We think we understand Indy Hub. We’ve got to price in, I suppose, an every 7 or 8-year excursion like the polar vortex, but we think we understand the factors there. Nord Pool, the factors are myriad. You’ve got the emission allowances that are required in the EU that trade on their own basis and the fair market value of those are embedded in the Nord Pool prices. So you got that going up and down. You’ve got German coal prices going up and down. You’ve got weather in Scandinavia that significantly, significantly impacts. These are all sort of very short-term things. And then longer term of course, you have demand and you have longer term structural changes like interconnections between the various zones in Nord Pool, but it’s just a panoply of factors. Some, as I said, mission allowance is politically driven. So we – that’s one of the reasons we just said, look, we can take the opportunity, which we did last year, to create a first to second quartile power price. Our references are the other hydro-based smelters, Norway and Canada. And we said we can create a power price that’s competitive with those, and we took it. We took the risk off.

Understood. And just, again I guess a strategy question in alumina. If you could just talk about how you talked about alumina costs this year as to why you picked an LME-linked cost structure as opposed to buying basing on some kind of spot alumina price?

Yes. I mean, this is the time to ask a question like that, so absolutely. Look, all one has to do is look back at the spike in the API, the spot price to which you refer, starting in 2018 I suppose it was, when the large Brazilian Smelter, Alunorte, went out and prices went from the $300s to the $400s to $500. And then there was some problems with, as you might recall, with sanctioning or threatened sanctioning, sanctioning for a while of Russian suppliers and the price went to $700, 30% of LME. And so for that reason, frankly before, as we had said over and over, we didn’t like the API anyway. We don’t think it represents a true discoverable transparent market price. There is too few suppliers, too few buyers. It’s not a transparent market. There’s no liquidity there. So we believe that buying on a percentage LME basis, obviously it’s a natural hedge, so you give a little bit back at high times, high LME times, but you’re protected at low times. And so that’s the reason. And we were able to contract at prices we think are within the range that we’ve always talked about, the fair value of alumina, so we thought it was the right thing to do. Still think so.

Great, thanks. Thanks, very useful and good luck with everything Mike.

Thank you, Paretosh very much.

Your next question comes from the line of John Tumazos with Very Independent Research. Your line is open.

Thank you. I was studying the website of your customer Hammerer Industries for the green aluminum, and they make a very wide variety of products from railcars, to truck parts or cars…

They do indeed. It’s a really interesting company.

They seem to be making every aluminum category except beverage can and foil packaging.

Right. Yes, they don’t roll.

And they make construction products, too. So the packaging products might be the ones that would best consumer advertise to get some loyalty for green metal, I would think. So can we conclude from the Hammerer Industries example that the green premium applies to all end markets? And can you sell more than 150,000 tons of the green premium?

Yes, that’s a great – John, the answer to the first is absolutely. Listen, yes, there is a great to pick market for green given consumers and whatnot. But think about cars and think about construction, LEED-certified buildings into the European equivalent and all the rest. This happens to be an European OEM, they’re based in Austria, but they do business throughout the world and so absolutely. And we’ve got plenty of firepower left. That 150,000 is over 5 years. So it’s only 38 years, so it’s 10% or less, 9% of Grundartangi’s annual production, pardon me. Now some of that, as you know, we divert to foundry alloy because that’s a really good high-margin business for us. But even taking the foundry away, it’s still only maybe sixth, seventh of Grundartangi’s annual, or less, production, eight and so longwinded answer, yes. We’re really excited and we think, as I said, we can’t talk about any of them now, but as you would expect, we’re talking to other customers. This is a great lead customer. It’s a really interesting, nice business they have.

Congratulations.

Thank you, John.

There are no further questions at this time. I will turn the call back over to the presenters.

We thank you as always for your time and good questions and interest and look forward to talking with you in a couple of months. Everybody, take care.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.