Century Aluminum Company (CENX) Q3 2024 Earnings Report, Transcript and Summary

Hello everyone. Thank you for attending today's Century Aluminum Company Third Quarter 2024 Earnings Conference Call. My name is Sierra, and I will be your moderator for today. [Operator Instructions] I would now like to pass the conference over to Ryan Crawford.

Thank you, operator. Good afternoon, everyone, and welcome to the conference call. I'm joined here today by Jesse Gary, Century's President and Chief Executive Officer; Jerry Bialek, Executive Vice President and Chief Financial Officer; and Peter Trpkovski, 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 Slid 1, please take a moment to review the cautionary statements shown here with respect to forward-looking statements and non-GAAP financial measures contained in today's discussion. And With that, I will hand the call to Jesse.

Thanks, Ryan, and thanks to everyone for joining. Before we get started today, we are very sad to report a safety incident that resulted in the fertility of our Mt. Holly smelter. The loss of the team member is devastating to all of us at Century, and it is especially painful given our collective commitment and focus on safety. Our late colleague's family will remain firmly in our thoughts and prayers. This event reinforces the need for us to critically examine how we operate and conduct ourselves and commit to making needed improvements without condition. It will require dedication and leadership from every part of our organization and a personal commitment from each and every one of us. Okay, I'll start the call today by reviewing the strong current aluminum and aluminum market conditions before turning to our excellent third quarter performance. I'll also discuss the additional benefits we will receive under the new section 45X guidance before Jerry takes you through the detailed financial results. I'll then wrap up and open the call for questions. Century produced excellent results in the third quarter, generating adjusted EBITDA of $104 million, which includes the impact of the updated 45X guidance. Overall, improving realized aluminum prices, both at the LME and regional premium level, and falling carbon prices drove increased profitability in the quarter and will continue to benefit our fourth quarter performance. As a reminder, LME prices roll through our results on a three-month lagged basis. So the benefit from recent spot prices, about $2,600 per ton, will not positively impact our financial results until Q1 of next year. Turning to Slide 4, global aluminum prices were largely range-bound during the third quarter before Western Central Bank actions and Chinese stimulus drove both the LME and regional premiums higher. In late September, China announced a number of monetary and fiscal stimulus programs that drove an immediate improvement in global aluminum prices, which rose to average $2,600 per ton in October. Turning to Page 5, global aluminum demand has already been at record levels in 2024, driven by strong global trends towards electrification and light weighting. Overall, we estimate that 2024 global demand growth of 3% will accelerate further in 2025 as Western markets begin to improve on the backs of central bank action and Chinese demand growth continues to accelerate as stimulus programs and funds are dispersed. Meanwhile, aluminum supply remains challenged, with China approaching its 45 million ton production cap and limited announced new projects outside of China. We believe demand growth will continue to outpace supply in 2025 and for years to come, moving the market back into deficit. With inventories already near multi-year lows, these supply deficits should continue to create a favorable aluminum price environment in the coming years. Turning to the bauxite and aluminum markets. The spot Atlantic aluminum price today stands at $715 per ton, an all-time record. Alumina prices continued their upward march in Q3 and into Q4 as a number of market disruptions paired with lower alumina inventory levels globally have created a very tight market. There have been a number of supply disruptions this year in Australia, from the Quinana refinery curtailment to force majeure events and regulatory issues in bauxite permitting at a number of other Australian refineries. We've also seen refinery disruptions in India, driven by both regulatory and operational challenges. On the bauxite side, China has become increasingly reliant on the seaborne bauxite market, given a 16% decrease in year-to-date Chinese bauxite production, following continued declines in domestic ore quality and increased safety and environmental inspections from regulators. Both the bauxite and aluminum markets have recently been impacted further by supply disruptions out of Guinea, where one of the largest exporters announced a halt to bauxite shipments earlier this month following export permitting issues. To our knowledge, this issue remains unresolved and highlights how sensitive the bauxite and aluminum markets remain to geopolitics. With Guinea alone accounting for roughly 30% of global bauxite production and around 70% of Chinese imports. Remember, Century no longer has exposure to spot aluminum prices following the acquisition of our controlling interest in Jamalco, with all of our smelters aluminum requirements sourced directly from Jamalco, or into a long-term LME link to supply contracts. Needless to say, we are very happy to have Jamalco or our asset portfolio in markets like this. Turning to Page 6. You can see that in the U.S and Jamalco our major raw material price inputs continue to be constructive. Natural gas storage levels remain well situated heading into the winter season, with inventories significantly above last year and near 5-year highs, leaving the forward curve well below $3 throughout the coming winter months. Gas prices at these levels should be supportive for continued low Indy Hub energy prices well into next year. Turning to operations. We saw strong performance across our smelters in the third quarter. Operations at Sebree and Mt. Holly remained stable in Q3, which is a testament to our operating teams during these very hot end of summer months. With respect to our Hawesville facility, we have received a number of significant third-party inquiries regarding potential redevelopment of the site. The site has several unique attributes, including its energy infrastructure, that make it attractive for potential acquirers, including, among others, its potential for AI data center development. While we still believe the site is significant value as an option for restart and higher aluminum price environments, we've engaged financial advisors and launched a formal process to evaluate strategic alternatives and potential value to help us in our overall evaluation of the site. We will keep you updated on progress here. In Iceland, low rainfall and snowmelt over the summer months have left reservoirs below normal levels and led power suppliers to announce curtailments, including Grundartangi, through May of 2025. We currently expect these curtailments will reduce our power consumption by about 30 megawatts in Q4. Volume at Grundartangi should be flat in Q4 versus Q3, as these curtailments were implemented in the third quarter. The financial impact of the curtailment is included in our outlook on Page 11 and our updated full year volume guidance is in the appendix of this presentation. At Jamalco, the refinery is fully recovered from the impact of Hurricane Beryl in early July. The team did an excellent job quickly restoring the plant to normal production levels and completing required repairs on the port facilities, which returned to normal service in mid-September. I'd like to congratulate the Jamalco team for their exceptional management through the hurricane and its aftermath. Completing the port repairs quickly, safely and without injury is really quite an achievement. Turning to Page 7, late last month, the Department of Treasury published final regulations implementing Section 45x which provided additional clarity on the eligibility of certain of our costs for the 10% production tax credit. We are pleased with the final rules added direct and indirect materials as eligible costs for the production tax credit, as we and others have requested in our comments. For aluminum production, the most significant costs that are now eligible are coke, pitch and other operating supplies. From these newly eligible categories, we realized an additional benefit of $22 million in 2023 and $13 million year-to-date in 2024. Jerry will walk you through the details in a moment. The final regulations left open the question as to whether alumina will be an eligible production cost. Reserving this question for further consideration with updated guidance to be published at a later time. We will continue to work with the Treasury Department regarding inclusion of alumina as an eligible cost for 45X, as there is strong justification that alumina should ultimately be eligible for the tax credit. If alumina is included, that would increase our 45X credit by about $30 million annually. Jerry, will now walk you through the details on 45X, the quarter and our two-part outlook.

Thank you, Jesse. Let's turn to Slide 8 to review third quarter results. On a consolidated basis, third quarter global shipments were approximately 169,000 tons, slightly higher than last quarter. Net sales for the quarter were $539 million, a decrease of $22 million sequentially. This was driven by lower third-party alumina sales due to support repairs at Jamalco, partially offset by higher realized metal prices and regional delivery premiums. Looking at Q3 operating results, adjusted EBITDA attributable to Century was $104 million. The $70 million sequential increase in adjusted EBITDA was driven by additional 45X tax credits, higher realized prices, and lower raw material costs. Adjusted net income was $60 million, or $O.63 per share. The name adjusting items were add backs to $7 million for hurricane Beryl related costs at Jamalco, that we told you about last call, $3 million for share-based compensation, and $2 million for the unrealized impact of forward derivative contracts. Liquidity was $279 million to end the third quarter. This consisted of $33 million in cash and $246 million available on our credit facilities. Our liquidity position remains within our target range, but decreased last quarter primarily due to inventory bills at Jamalco and the timing of alumina shipments while port repairs were being completed. We expect those to reverse in Q4 as a full quarter of normal shipments out of the Jamalco port will return inventories to target levels, increasing liquidity. Turning to Slide 9 to explain third quarter sequential improvement in adjusted EBITDA. In total, adjusted EBITDA for the third quarter was $104 million. Realized LME of $2,451 per ton was up $5, and European delivery premium of $335 per ton was up $52. Together, higher metal prices and regional premiums contributed an incremental $31 million compared with the prior quarter. We also realized favorable raw material costs adding $7 million of EBITDA. The favorable market prices and raw material costs were partially offset with slightly higher lower prices, a headwind of $3 million. The new 45X rules from the treasury department addressing carbon and other operating suppliers result in an additional $22 million credit for the full year 2023 and an additional $13 million credit for the 2024 year-to-date. These tax credit amounts are additive to the 45x tax credit that has already been recorded each quarter since the original guidance was released in December 2023. In total, this brought our Q3 adjusted EBITDA to $104 million. With that, let's turn to Slide 10 for a look at cash flow. We began the quarter with $41 million in cash. Adjusted EBITDA contributed $104 million. Capital expenditures totaled $23 million, which was largely driven by cash outlays with completed Jamalco port repairs following Hurricane Beryl. Hurricane Beryl also impacted working capital during the quarter, causing a delay in alumina shipments from our Jamalco refinery that will correct in the fourth quarter. Finally, the total 45X tax credit booked in the quarter increased the tax credit receivable on our balance sheet until the direct cash payments are received. Through September 30th, we have a 45X receivable of $133 million awaiting payment from the U.S. government. At the end of quarter three, we have $33 million in cash. Let's turn to Slide 11 for insights into our expectations for the fourth quarter. For Q4, the lagged LME of $2,430 per ton is expected to be down about $20 versus Q3 realized prices. The Q4 lagged U.S. Midwest premium is forecast to be $425 per ton, up $5. The European delivery premium is expected at $340 per ton, or up about $5 per ton versus the third quarter. Taken together, the lagged LME and delivery premium changes are expected to have a $0 to $5 million decrease to Q4 EBITDA compared with Q3 levels. We expect power prices to remain constructive and to have a zero to $5 million EBITDA increase in Q4. Collectively, we expect our other key raw materials to be about flat. Volume, operating expenses, and other administrative costs will be similar to last quarter. All factors considered, our outlook for Q4 adjusted EBITDA is expected to be in a range between $70 million to $80 million. As Jesse mentioned before, current spot aluminum prices above $2,600 per ton will not begin to positively impact our financial results until Q1 2025. And now I'll turn the call back over to Jesse.

Thanks, Jerry. Before we turn the call over to questions, I want to spend a little bit more time on Section 45X and our Jamalco acquisition, which together with the operational improvements our team has driven over the past several years, serves to increase the stability in Century's businesses and earnings power. With the inclusion of carbon and other operating supplies as eligible for the production tax credit, we now expect If we are to increase the total amount of aluminum that is eligible for the production tax credit, we now expect our total full year 2023 45X benefit to be $79 million and estimate our total full year 2024 45X benefit to be around $73 million. If alumina is ultimately included as eligible, we expect each of those amounts to increase by another $30 million or so total over $100 million in benefit on an annualized basis. Please note, these production tax credits for critical minerals do not phase out over time. It would be increased [indiscernible] by any additional production that we may bring online in the U.S. The effect of these credits is to significantly increase the quality and competitiveness of Century's businesses. When paired with our world-class workforce, our privileged positions in very under-supplied U.S. and EU markets, as well as a globally competitive captive supply of alumina from Jamalco, you can see the quality of the earnings power of the business that we have been working towards for quite some time now. We are really proud of what the team has created here at Century and believe this is a business that can now perform very well through the cycles. We look forward to your questions today and we will turn the call over now to the operator.

[Operator Instructions] Our first question today comes from Lucas Pipes with B. Riley Securities. Your line is now open.

Thank you very much, operator, and good afternoon, everyone. I have a fairly long list of questions. I'll try to keep them short. But first, Jesse, could you speak a little bit to the process that you have started for [indiscernible]. When did you kick off that process and when would you expect to complete it? Thank you very much.

Sure, Lucas. Yes, as I mentioned on the call, we've been looking at this for a little while now. We did receive a number of inbound inquiries with interest in the site. And given the interest level that we saw, we decided it made sense to start a process. Now, of course, repurposing an industrial asset is a bit different than some of the other transactions you've seen in the market. There's a number of items that will need to be diligenced by the buyers and valued. And so, we'll just have to watch and see how long that takes. But what we can say for now is there is significant interest, and the process will ultimately help us determine value and make the right decision.

All right. Well, we'll stay tuned for that. I want to touch on the LME link supply agreements for alumina really quickly. And, Jesse, could you remind us kind of what supply agreements you have in the market today, when they expire, and then from there I might have a few follow-ups. Thank you very much.

Sure. Yes, we generally source all of our supplies, I said, either from Jamalco or from these long-term supply agreements. The supply agreements we don't disclose details of, but they are with very creditworthy counterparties, and I think there's over 2 years left on those contracts before we'll need to renegotiate them.

So this would include both Concord and [indiscernible], or might there be a difference between the two?

We won't break down the individual contracts, but as you can see from our results, the collective nature of -- when you put them together, I guess, is the way to say it, along with our own internal [indiscernible] supply, we don't have any API exposure.

And that should also hold through for 2025?

Yes, in 2026 as well.

All right. Very helpful. Thank you very much for that. In that context, strong aluminum pricing supply stability on the alumina side price stability. Why not move forward with capacity restarts here now?

Well, that's a good question, Lucas. So, as we've said for a while now, we want to look and make sure that when we do make the decision to bring capacity back online, the market is ready for it. So, for one, we do see strong LME. So that’s a positive and we’ve seen rising and watch premium prices as well over this quarter. But with respect to incremental volume, we would have to go out into the market and source alumina. So there we would be exposed to spot alumina for that new volume that we're bringing on. So, just to be clear, no spot exposure for our existing operations at current levels, but that -- if we were to bring on additional, we'd have to go out and find that alumina in the marketplace and obviously it's spot prices that’s a bit of hurdle.

I appreciate that color. I'll turn it over for now. Thank you very much.

Thanks, Lucas.

Our next question comes from Katja Jancic with BMO Capital. The floor is now open.

Hi, thank you for taking my questions. Maybe just going back to the alumina supply agreements, I think when I look at your filings, you have an agreement that is supposedly valid through the end of this year for 600,000 tons of alumina. Is that just -- does that just roll over or what's the situation with that? Can you talk a little bit about that?

Yes, that contract has been extended now, Katja. So that extends out for a couple of years from now.

And is that the same terms as it was in the past or any changes there?

Yes, similar terms as what's been there in the past.

And maybe moving to the value added premiums, I think now is the time when you're negotiating for next year. Any update on that side, how it's looking for next year?

No, as we've seen for the past couple of years, what we call the mating season extends a bit longer into the fall than it used to maybe 5 years ago. So, we're still out there in the market right now negotiating those contracts and expect to have an update on the Q4 call.

And one last one, if I may, you mentioned that repurposing an industrial asset comes with -- it's a little different than some of the other assets. Can you talk a bit more about that? Like, what are some of the potential challenges in repurposing these types of assets?

Well, I think it's just as simple as I think some of the other transactions in the market, you've seen it's been one data center used for one type of data center application to maybe an AI hyperscale or something like that, where you can just imagine you're turning over a data center building with racks, the server racks, et cetera. Whereas if you have an industrial asset, obviously you used it for its industrial purpose. At [indiscernible], we made aluminum. And so while there are assets that have significant value, like the electrical equipment and power infrastructure, there are other areas of the site that would need to be modified in order to work for such a purpose. And so I think, as we move forward with the process, that's 1 area that the buyers are due diligencing. And we'll need to be evaluated in terms of sort of timing to a transaction.

So, if I'm understanding correctly, this would be, in a way, a sale of the whole asset potentially.

We haven't settled on any structure, nor have we settled on any transaction yet, Katja, but that would certainly be one potential outcome of the process.

Okay. Thank you.

Our next question today comes from John Tumazos with Very Independent Research. Your line is now open.

Thank you very much for taking my question.

Hey, John.

When does the LME-linked contract expire? Who, if you can say, is the supplier? And could you tell us if your alumina costs in Jamaica resemble world averages like what Alcoa or other companies publish?

Sure, John. Let me try to take those in order. If I miss one, just redirect me. The LME contracts are long-term. They're in place as a variety of them, but all of them are through at least 2026. With respect to the Jamalco cost structure, as we said in the past, we are very excited about this asset. We think its cost structure will ultimately be globally competitive. And what we said, as we implement some of our CapEx programs, we do think it can be a second quartile asset which would put us right in the range of some of our competitors that you’ve mentioned. And we are already underway. We've been at it a year now and getting that cost structure down and certainly looking good in today's market price environment.

Congratulations what you've done with alumina, that was absolutely superb.

Thank you.

Thank you all for your questions. [Operator Instructions] Our next question is a follow-up from Lucas Pipe with B. Riley Securities. Your line is now open.

Thank you very much for taking my follow-up question. Just one more on the alumina side. As a percentage of LME, what was it roughly this year? Would it be stable next year or could there be any adjustment given the recent surge in aluminum prices? I want to echo John's comment. Congratulations on the acquisition of Jamalco and the structure of all the contracts you've done. But I wanted to follow-up on this. Thank you.

Sure, Lucas. Yes, I think your question relates to the commercial contracts, whether those could change. And no, those are fixed percentages that were entered into before the current run up, and so they are quite attractive compared to current levels.

Very helpful. Thank you.

Now …

Sorry.

No, I was just going to say no readjustment in those contracts. They're fixed.

Thank you for that. Maybe trying to put it all together, obviously you've provided an outlook for Q4 that is still reflecting somewhat weaker price environment. Looking out to Q1 or 22025 EBITDA in the current price environment. Could you help kind of frame up the sensitivity and what the earnings power might look like? I would appreciate your color. Thank you.

Hi, Lucas. So, you all can just go to our sensitivities in the appendix and mark, go ahead and mark whichever of the revenue side or cost side items you want. But just to walk you through it, Lucas, so as you see on page 11, the outlook was based on an LME around 2,400. So with spots above 2,600, that's about $200 per ton of incremental EBITDA, which is about $90 million of incremental EBITDA on a run rate annualized basis. And then Midwest premium as well has risen from these levels. In the outlook, it's about $425 per ton. It's up a couple pennies from there, so that's maybe another $20 million or so. So at spots you got an additional $100 million or so, in annualized EBITDA from what's in the guide. So, you can take that $25 million a quarter, it puts you above $100 million quarterly run rate EBITDA.

I appreciate all the additional color. Jesse, to you and the team, continued best of luck.

Thanks a lot, Lucas.

Thank you for your questions. There are no longer questions in queue, so I'll pass the conference back to the management team for any further or closing remarks.

Thank you, operator, and thanks to everyone for joining the call. We really appreciate all the questions, as always, and look forward to talking to you in the new year. Thanks.

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your line.