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Edited Transcript of CENX earnings conference call or presentation 21-Feb-19 10:00pm GMT

Q4 2018 Century Aluminum Co Earnings Call

Monterey Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Century Aluminum Co earnings conference call or presentation Thursday, February 21, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig C. Conti

Century Aluminum Company - Executive VP & CFO

* Michael A. Bless

Century Aluminum Company - President, CEO & Director

* Michelle M. Harrison

Century Aluminum Company - Senior VP of Finance & Treasurer

* Peter A. Trpkovski

Century Aluminum Company - Finance Manager

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Conference Call Participants

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* Jeremy David Kliewer

Deutsche Bank AG, Research Division - Research Associate

* John Charles Tumazos

John Tumazos Very Independent Research, LLC - President and CEO

* Lucas Nathaniel Pipes

B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst

* Paretosh Misra

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2018 earnings conference. (Operator Instructions) And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Peter Trpkovski. Please go ahead.

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Peter A. Trpkovski, Century Aluminum Company - Finance Manager [2]

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Thank you, Tanya. Good afternoon, everyone, and welcome to the conference call. I'm joined 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'll 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'll hand the call to Mike.

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [3]

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Thanks very much, Pete, and thanks to all of you for joining us late this afternoon.

If we can turn to Slide 3, please, we'll get going. Just to make a couple of quick comments about the macro environment before we get into the quarter and some of the other information.

Commodity markets, in general, obviously continue to look for direction. This is certainly true of our markets. The issues in our market are generally consistent with all the other factors you're seeing out there in terms of the global economic uncertainty, whether it's slowing growth in China caused by trade tensions or other factors, geopolitical uncertainty. We've got Brexit, New Middle East, Iran, other factors. Again, you know all this. And the direction of U.S. interest rates, of course, the pronounced knock-on impact they have on commodities prices.

Recent trends in these matters have been generally positive, as you've read, over the last couple weeks. That said, I think we can all agree that the situation is highly changeable. And in that respect, we're managing the company with what we feel is an appropriate degree of caution.

Pete, in just a minute, will give you some more specific trends in our sector, but in a nutshell, the fundamental conditions are encouraging. The 2019 global deficit in Primary Metal will be at least 1.5 million tonnes. That's similar to the 2018 deficit. The forecast backing up that deficit assume only nominal demand growth in China and in the rest of the world. So we see more upside risk to that deficit than downside. The supply growth remains muted, and inventories continue to come down throughout the supply chain.

It's especially important during these uncertain times that we maintain the stability of our plants, and our operations people have done a great job in this respect. Safety performance has been exceptionally good over the last quarter or 2. Production metrics and efficiencies in the plants have been consistently favorable. We've seen very tight management of controllable costs, and I'll give you some details by plant and all of this in just a couple minutes.

Craig is going to give you a lot of detail on the financial performance in the fourth quarter and as usual in this call, our expectations for 2019. But in summary, I think you'll see the fourth quarter performance came in just a bit better than we had forecast when we talk to you last. As we expected, the financial results were burdened by the continuing abnormally high realized alumina price and by a metal price that generally sell throughout the quarter. These trends will continue in the first quarter. As you know, we've talked about this at some length.

As you know, our alumina -- realized alumina costs, i.e. flowing through our P&L, are based on prices we paid some 3 months ago. So the recent fall in the price will only be reflected in our reported results beginning in the second quarter. That is important for you to understand, and you'll get this once you run your numbers based on the information that we have in the slides here. It's important for you to understand that beginning in the second quarter, EBITDA would be positive even at spot commodity prices. That was even true before the run-up in the LME that we saw today. And in addition, cash flow will no longer be burdened by the very high spending on the Hawesville restart.

Bottom line, financial performance will begin to improve in Q2. Again, Craig will give you some more detail on this and again, that even assumes no change in current conditions, i.e., no change at the very high current alumina price. And when that price does return to its normal fair value, and it will, obviously the financial results will improve significantly. At the same time, the company's liquidity remains strong. And again, I'll stop here and when I turn it over to Craig, he'll give you lots more on all this.

Moving along. The restart of the 3 lines at Hawesville has been a almost unconditional success. Most gratifying has been the exceptional safety performance, and I just -- I can't emphasize enough, for those of you who know about a process like this, how complex it is. It involves the removal, rebuild and reinstallation of 330 individual reduction cells, a myriad of associated capital projects. All of this is occurring in close proximity to 2 potlines that are fully operational, and this is a real testament to operations management, the success here. We couldn't be more proud of those folks.

The project's also been completed according to budget and slightly ahead of schedule. And so the next decision will be the timing of the rebuild of the 2 lines that have never ceased operating. As we told you, these have been for at least the last 2 years, well past their expected lives. Our intent remains to take one of these lines out of service for rebuild during the next month or so. The 3 lines have been performing very well, but we want to just make sure that we can maintain some stability for a modest period of time just to mitigate any risk. We also need to complete the hiring process of 5 full line operation to get the plant at full capacity. We'll require about an additional 100 folks. And obviously, we want to get a little bit better picture of where the alumina markets may be heading. Craig will give you a picture of what all this means from a production and cash standpoint in 2019 in just a couple minutes.

Moving along. As you saw a couple months ago, we announced we reached an agreement on the extension of the power contract for Mt. Holly. It's essentially a carbon copy of the arrangement we've had in place for the last 2 years. So those of you who follow the company are familiar with it. 75% of the power that we take is off-system from natural gas generation. The remaining 25%, we continue to be required to take from the local supplier.

The weighted average pricing remains uncompetitive. The market power is quite attractive. If we were able to get the market power, the price we pay at Mt. Holly would be in the attractive part of the second quartile on the global power cost curve, the smelters. The problem remains that the local power comes at more than double the price of the market power, and we continue to be forced to pay a second transmission we owe to the local supplier.

We're obviously quite disappointed we couldn't get to a full breakthrough at this point in time. This is the only issue, to remind you, that stands in the way of restarting the second potline and bringing the plant back to full production. For those of you who follow this issue, you know that the environment relating to the local power supplier remains highly complex and changeable. And so we're monitoring events and looking for the right timing.

Lastly, the company continues to have really good opportunities to increase our share in value-added products markets. In most cases, we already possess the required production equipment, and we certainly have the technical expertise to grow in these markets. You saw a tangible example of this development a couple months ago when we announced the expansion of our billet capacity at Sebree. This did require the start-up of some mothballed production equipment and hiring of several dozen people for the casthouse there. It's a great development for this excellent plant, and we're looking for more opportunities at Sebree and at the other plants. We continue to work with a variety of customers and trialing new products, and we're confident this will continue to produce incremental value-added margin over the years to come.

Lastly, one quick comment on the industry structure before I turn you over to Pete to talk about the industry. As you know, a significant amount of surplus on economic capacity continues to produce around the world. Those of you who had the chance to read the recent comprehensive OECD report know that it confirms the position that we've long maintained. And for those of you that haven't that follow the sector, I'd highly recommend that you read it or at least the executive summary of it.

It concludes, again, as we've been saying here the last couple of years, that most regions of the world are providing support, which is encouraging, sustained, uneconomic and unnecessary production of primary alumina. It's clear the issue won't go away by itself. It must be addressed by the state actors fostering these imbalances. And in this environment, the U.S. administration's response remains critical and highly appropriate. The remedy needs to remain in place until global overcapacity is solved, and this means all participants need to be subject to either a tariff or a quota. To us, it's difficult to understand how anybody who has objectively read that OECD report could come to a different conclusion.

And with that, I will turn it over to Pete.

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Peter A. Trpkovski, Century Aluminum Company - Finance Manager [4]

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Thanks, Mike. If we can move on to Slide 4, please, I'll take you through the current state of the global aluminum market. The cash LME price averaged $1,968 per tonne in the fourth quarter, which reflects a 4% decrease from Q3. Aluminum prices have averaged approximately $1,850, 5-0, per tonne thus far in 2019 and are currently sitting just north of that. In the fourth quarter, regional premiums averaged approximately $0.195 per pound in the U.S., down 6% quarter-over-quarter and approximately $130 per tonne in Europe, a 16% decrease from prior quarter. Spot premiums are around $0.194 per pound in the U.S. and $130 per tonne in Europe. In the fourth quarter of 2018, global aluminum demand grew at a rate of 1% as compared to the year ago quarter. The primary driver of this is the slowing growth in China of just 2% as compared to the year ago quarter. Global production growth was up a modest 2% in the fourth quarter versus the same period last year. This was driven entirely by increases in China, which was up 4% year-over-year despite slowing growth and additional winter heating season cuts. As a result of these supply and demand trends, for the full year 2018, the global aluminum market recorded a deficit of approximately 1.5 million tonnes.

Looking forward, for the full year 2019, we expect to see a similar global supply deficit of approximately 1.5 million tonnes. As Mike mentioned, the main difference we are seeing is a balanced China market and the rest of the world supply deficit of 1.5 million tonnes. This continued supply deficit issue resulted in the continued destocking of inventories and support LME prices over the long term.

With that, I'll turn the call back to Mike.

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [5]

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Great, Pete. Thanks. If we could just turn to Page 5, please. Couple quick comments as promised on the operations before I turn you over to Craig.

Safety performance, first and foremost, as I said, generally, was very good over the last couple of months and into 2019. Again, one more time, especially noteworthy is the performance at Hawesville, and this performance was a result of a huge amount of forethought and planning before the project began. The team deconstructed all of the processes and identified the high-risk areas. It significantly expanded the training program, especially for new hires, and they really did maintain rigorous attention to detail during the implementation. The results have been really gratifying. We suffered no serious injuries during the year. And the few incidents we did have, immediate action was taken and the plant ended the year on a high note which has continued into 2019.

Moving down the page. Production volumes, as you can see, evidence of a stable operation. We see the return of Sebree to full production for the entire quarter. As you remember, we completed the restart of that third potline in August. You see the significant growth coming out at Hawesville due to the restart, obviously. To put Hawesville's status in perspective, if you were to take the December monthly volume and annualize it, you get an annual run rate of about 150,000 metric tonnes. So you will see another quarter of meaningful growth at Hawesville. And as I said, we do need to decide when we start to rebuild the line we intend to take down very shortly.

Production metrics, as you can see, all stable. We had nice improvement in current efficiency and power efficiency at each of Grundartangi and Sebree during the quarter. And lastly, we had really good performance of controllable expenses. The operations teams, I can say, are doing a really responsible job on keeping a tight control of their costs. At Grundartangi, that improvement came mostly in the areas of labor and maintenance. Sebree, what you see there is largely due to the result of the volume coming back to full production. Remember, these are per metric tonne data, so you got a denominator impact there, I guess, I'd say rather than a numerator impact.

Same factor is part of the story at Hawesville. You see the production volume, in essence, catching up to the necessary build and labor and other controllable costs that we had to put in earlier in 2018, as we began the restart. And in Mt. Holly, that was a decided action after the finalization of the power contracts. We made a conscious decision to catch up on some deferred maintenance items in several important areas of the plant. Strategy here is to invest in Mt. Holly where possible to maintain that plant for the eventual day when we can restart the second potline.

With that, I'll turn you over to Craig

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Craig C. Conti, Century Aluminum Company - Executive VP & CFO [6]

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Thanks, Mike. Let's turn to the Slide 6, and I'll take you through the high-level results for the fourth quarter. On a consolidated basis, global shipments were up 9% quarter-over-quarter, driven by the return of Sebree to full production and the Hawesville restart as Mike detailed earlier. Realized prices were down 7% as a result of lower-lagged LME prices.

Looking at operating results. Adjusted EBITDA was a loss of $18 million this quarter, and we had an adjusted net loss of $41 million or $0.43 a share. In Q4, the primary adjusting items were $4.3 million related to the Sebree equipment failure and $29.1 million for net realizable value inventory adjustments.

Let me give you a little detail on the Sebree adjustment. As a reminder, we expect to fully recover all losses from our Q2 line outage from our insurance policies, net of our $7 million deductible. As we mentioned last quarter, we will continue to call out the associated P&L impacts in cash receipts as they occur. In Q4, we occurred -- we incurred about $4 million of Sebree restart-related costs. We also received about $8 million worth of initial payments on our overall insurance claim netting to the $4.3 million adjusting impact for the quarter.

Our liquidity remains strong with $196 million of funds available via a mix of cash on hand and revolving credit facilities. As expected during Q4, our cash balance decreased by $34 million, primarily as a result of continued investment in the Hawesville restart. I will share more Q4 detail on the cash bridge shortly.

Availability under our revolving credit facilities is solid at $157 million. This is down $14 million from Q3 to Q4, primarily as a result of some additional borrowing at year-end and a seasonal increase in power letters of credit as we went into the cold months. Our credit facility was fully repaid in January upon receipt of one of our largest customer payments that is due shortly after quarter-end.

Okay. Let's go to Slide 7, and I can walk you through our quarter-to-quarter bridge of adjusted EBITDA. The $47 million decrease versus Q3 adjusted EBITDA of $29 million was largely driven by lower LME prices and regional premiums as we forecast on our last call. On a lagged basis, LME was down $175 a tonne, and the U.S. Midwest premium was down $20 per tonne, which, in sum, drove $38 million of decreased EBITDA during the quarter. Seasonal power price increases and investments related to the Hawesville restart drove the majority of the remaining EBITDA decrease versus Q3.

Looking ahead to the future, it's important to point out that alumina prices have dropped significantly in 2019 from our Q4 realized price of $500 per tonne to $380 per tonne at current spot prices. That $120 per tonne reduction in alumina equates to a $230 per tonne decrease in aluminum production cost. As a reminder, alumina impacts our P&L on a 3-month lag, so we will see the favorable EBITDA impact of this cost reduction beginning in Q2, as Mike pointed out earlier.

Looking ahead to Q1 specifically. The lagged LME is down $130 per tonne, and both the lag U.S. Midwest and European delivery premiums are down about $30 per tonne each. These 3 items translate to a decrease of $30 million to $35 million in EBITDA from Q4 levels. We expect our realized alumina price to be approximately $500 per tonne in Q1, which is largely flat with our realized price in Q4. So as a result of lower realized selling prices and flat realized alumina costs, we expect to see a net decrease in Q1 EBITDA of $30 million to $35 million.

Okay. Let's turn to Slide 8, and we'll take a quick look at cash flow. We started the quarter at $73 million in cash and ended December with $39 million. During the quarter, we had $28 million of spending associated with the Hawesville restart, and we spent $7 million for all other company-wide CapEx. Again on Sebree, we received an advanced payment on our insurance claim of $8 million which was offset by $4 million of restart spending for a net cash inflow of $4 million. As usual in the fourth quarter, we made a provisional tax advanced payment for our Iceland business and remitted our normal semiannual bond interest payment. Each of these items were an outflow of $9 million.

As I mentioned earlier, we had $9 million of additional borrowings on our revolver during the quarter. And while this was outstanding at year-end, this facility was fully paid down by mid-January. Finally, we saw marked improvement in working capital in Q4, which helped generate $23 million of cash. The improvement was largely driven by a reduction in inventory.

Let's turn to Slide 9, and I'll give you a quick overview of some highlights from 2018. As I mentioned last quarter, 2018 was a transitional year for Century and an active year for the industry overall. The Section 232 tariffs effectively helped level the global playing field and drove our decision to restart 150,000 tonnes of annual capacity at Hawesville. The restart project is on budget, on schedule and will be completed in early 2019. We reached a new 5-year labor agreement at our Sebree plant. This was completed a year ahead of schedule. Alumina supply outages, most notably Alunorte in Brazil, caused alumina prices to reach historically high levels. Averaged over the year, the alumina price as a percentage of LME was 22% versus a more normalized level of 17%. Despite the headwinds in the raw materials markets, we achieved a total year adjusted EBITDA of $86 million.

As we have done previous years, we would like to provide you would the tools to forecast our business in 2019 from a cash and EBITDA standpoint using the commodity prices of your choosing. To that end, let's turn to Page 10. The next several pages will be split between Q1 and Q2 through Q4. The reason we are making this distinction is most evident as you consider where we expect alumina pricing to be throughout 2019. It's important to note that the vast majority of the improvement we are forecasting in alumina prices for the back 3 quarters of the year is already reflected in the current spot index price. The Q1 realized alumina prices you see on the slide reflect the high prices from late last year due to our lagged pricing impact as we discussed earlier.

Midwest and European premium assumptions are relatively flat throughout 2019. We expect power costs to decline slightly during the year as compared to Q1, representing normal seasonality. Coke and pitch, the 2 key raw materials used in our carbon anode production are expected to be largely flat from Q1 levels throughout 2019. As a reminder, in the appendix of today's presentation, we have included an updated view of the key EBITDA sensitivities analysis we have discussed in the past. These sensitivities can be used as a guide to understand how the movement of key input and output prices impact our business over a calendar year.

Okay. Let's turn to Page 11, and I'll take you through the first 2 pages we have prepared to give you some further insight into 2019. We expect our 2019 shipments to be about 850,000 tonnes or about 100,000 tonnes more than 2018. We largely attribute both to the incremental impact of restarted lines at Hawesville. Our assumption for the revenue pricing lag remains relatively unchanged from 2018 in that we continue to expect a roughly 2-month lag in both the U.S. and Iceland. Our value-added premium is expected to be about $200 per tonne worldwide. Please note that this is expressed as a value over the premium tonnes themselves, not overall tonnes produced.

Power is similar to previous years, with our Kentucky smelters using market-based, Indiana Hub price contracts and Mt. Holly using Henry-Hub-based natural gas price contracts for 75% of the current production level. Alumina and carbon components will continue to flow through our P&L on a 2- to 3-month lag while on a cash balance -- while on a cash basis, alumina will flow through on a 1-month lag and carbon components with virtually no lag.

The bottom 2 sections of Page 11 show our plant cash costs and net plant cash costs. The net cash costs are presented on a basis that is directly comparable to the LME. Please note that we have provided a bridge from our gross to net plant cash cost in the appendix of today's presentation. The cash cost reduction from Q1 to the back portion of 2019 is largely driven by the alumina cost reduction I mentioned earlier. The net plant costs shown in the final box on the slide include the benefit of all premiums and exclude interest, CapEx and SG&A.

Turning to Page 12. I will cover some of our other cost assumptions -- our cost expectations for 2019. SG&A will be $41 million on a book basis, while only $33 million on a cash basis. Interest costs will be $22 million on a book basis and $21 million on a cash basis. Our CapEx is expected to be in the range of $10 million to $15 million for maintenance-related spend and $20 million to $25 million for investment-related spend. Our major planned investment items include the rebuild of a baking furnace in our European anode manufacturing plant, continued investment in billet casting capacity at Sebree and the completion of the restart at Hawesville. Depreciation is forecast to be in the $85 million to $95 million range. From an income tax perspective, we expect both our book and cash impacts for U.S. income taxes to be less than $1 million, while Iceland will be about 20% of 2019 income on a book basis but less than $1 million on a cash basis. As a reminder, Iceland taxes are settled 1 year in arrears. Finally, we expect our cash flow breakeven cost to be $1,800 per tonne. Please note that this is on a direct LME comparative basis.

This concludes our prepared remarks. We'd like to thank you for your time and attention. I'd like to turn the call back over to Tanya to begin the question-and-answer session. Tanya?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will go to the line of Jeremy Kliewer with Deutsche Bank.

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Jeremy David Kliewer, Deutsche Bank AG, Research Division - Research Associate [2]

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Just a couple of questions on your 2019 guidance. With regards to Iceland, it looks like your plant cash costs have come down about $100 per tonne, this being Q2 to Q4. And you guys are largely using the same kind of assumptions that you were using last year. So I was just wondering what the big moving pieces are for that $100 per tonne change or roughly $30 million of annual savings at your Grundartangi plant?

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Craig C. Conti, Century Aluminum Company - Executive VP & CFO [3]

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So Jeremy, just to make sure I understand the question, that's from Q1 to Q2 to Q4?

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Jeremy David Kliewer, Deutsche Bank AG, Research Division - Research Associate [4]

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No, your Q2 to Q4 of your 2018 guidance was roughly $1,950 to $2,000 per tonne of plant cash costs and your 2019 guidance for the same time period is $1,850 to $1,900. So your plant cash cost has dropped about $100 per tonne. However, your major inputs, alumina and your carbon costs, stuff like that, have largely remained the same. So I was just wondering what is the other big moving pieces there.

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Michelle M. Harrison, Century Aluminum Company - Senior VP of Finance & Treasurer [5]

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Yes, and so Jeremy, a handful of things. So we do have alumina down just a little bit. In Iceland, we do purchase carbon anodes. We bake them at our facility in Europe and so little bit different exposures there than in the U.S. So we did see some improvement in carbon prices as well. There was also a labor component that we saw improvement year-over-year. And then one other thing that we'd note is that Grundartangi's power prices are LME dependent, and the LME in the prior year forecast was higher than what's in today's presentation.

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Jeremy David Kliewer, Deutsche Bank AG, Research Division - Research Associate [6]

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And then with regards to Sebree, you guys announced the, I guess, the additional billet casting and some of the secondary melting towards the end of last year. So why isn't, I guess, the additional production coming through in 2019? And it's about 70,000 of the 90,000 tonnes of billet should be there and then only about 5,000 tonnes of the remelt capacity appears to be there versus...

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [7]

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No, remember -- good question, but maybe you've got a misunderstanding, Jeremy, of the release that we put out a couple of months ago. So that was 90,000 tonnes of incremental billet production, but taking away that was an increase in 90,000 tonnes in the final production of the plant. It was a much smaller number, basically, based on the remelt. Before the remelt, which is a small number a couple of tens of thousands, it's simply a replacement of standard products with billets. So it's just an upgrading of the plants' product mix, I guess, I'd say.

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Operator [8]

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(Operator Instructions) Next we will go to the line of Lucas Pipes with B. Riley FBR.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [9]

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I wanted to follow up a little bit on the 2019 guidance, and you provide this cash flow breakeven estimate of $1,800 per tonne. And kind of just triangulating off of that figure, then I think you use that $1,900 price assumption elsewhere. Is it fair to kind of conclude a roughly $150 million EBITDA run rate or so for Q2 through Q4, again, annualized run rate? Or would you maybe say my math is off somewhere?

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [10]

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Lucas, thanks, it's -- so let's just -- before I answer -- we'll answer your question in a second, just to make sure everybody is understanding the basis of the presentation of the various numbers. So the breakeven is a little bit different. The breakeven is a number that, as you correctly said, is sort of bottom-bottom line. And it's meant, I guess, if I were looking at it as a financial analyst to do a -- analyst to do a very quick "how many tonnes did they produce" and "where would the breakeven, in essence, be on directly LME equivalent basis?" If you want to answer your question the way you would do it is you would build it up. So you would take Pete's -- and Craig took you through it. Cash cost estimates for the U.S. and Iceland, you use whatever LME assumption you like and you calculate, I guess, I'd call it an EBITDA for each of Iceland and the U.S. From that you'd subtract SG&A. And if you go in all the way to cash flow, CapEx, interest blah, blah, blah. And there you get your -- the number, I think, you're seeking that the EBITDA number. To answer your question, if you were to crank using your number of $1,900 and the assumption that we have in there -- if you've had a chance to look at the appendix, we're using the assumption just for this purpose of $350 for average API -- alumina price for the quarter, you get something a little bit shy of the $150 that you cited but in that zip code.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [11]

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Got it, got it. Okay, no, that's very helpful. And maybe after we have some of the modeling out of the way, I appreciate all the color there and the clarifications. Can you share your thoughts on the direction of the market? There's been a lot of commentary in the industry about kind of global overcapacity and a lot of smelters losing money especially in China. When would you expect to see a supply response on the aluminum side? And why haven't we seen more as of today?

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [12]

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Thank you for the question. We completely agree with you. I mean, we've been waiting to see it. And you're quite right, we haven't seen tangible or very much evidence of it yet. And so our thesis has been exactly what you're suggesting, which is the price has fallen reasonably -- meaningfully over the last, let's call it, 3 months. Why that is, is anybody's guess. I think most people would attribute it to the same reasons that financial markets, in general, and certainly risk assets in an oversized fashion fell in the latter stages of 2018 is, let's just call it, macroeconomic concerns slowing, global economy [trading], blah, blah, blah. And you saw metal really taking up risk assets, including base metal take an outsize hit. That's starting to come back now as you've seen over the last couple of weeks including today. You have seen some -- as I said, we haven't seen it tangibly. You've seen some capacity coming off, production coming off around the edges, I guess, we would say, Western Europe, some in Spain, some in Germany, not meaningful. You saw an announcement, a quite significant one, the other, I guess, it was just perhaps yesterday or the day prior from one of the largest individual smelters in the non-China world in South Africa. About a significant portion of the employee population -- 40% of the employee population coming out. There was no related announcement on production capacity. But given our knowledge of how these plants are run, it's -- even if a plant is, let's say, not the most efficient one from a labor productivity standpoint, it's hard to imagine how one takes out 40% of the employees and maintains production. So I guess with apology for that long-winded answer, you're seeing a little bit of it but not the wholesale or more meaningful response -- economic response. And I guess the reason for that if you were to ask for a speculation, frankly, it's the same reason we've been pointing to, Lucas, as what the problem is here is that a lot of this production is buttressed by, let's call it, noneconomic actors. Ultimate shareowners or other people providing risk capital that don't have the same outlook or attitude towards that kind of thing that a quoted company like ourselves would have. And so this is the problem. And I'll say it one more time that OECD report, which really is a very -- it's quite detailed, but I think it has an executive summary at the beginning of it, and it really couldn't have done a better job of setting forth the data and then the conclusions that we've been talking about over the last couple of years.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [13]

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That's very helpful. And on the alumina side, I know this is in your slide deck just an assumption of $350. What is your kind of gut feeling on the alumina price in terms of market direction? And what are some of the catalysts that you're keeping an eye on?

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [14]

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Yes, that's a great question. So right now we think it's basically sideways for the time being. It's going to trade, and it has. As you saw, you had the very large fall from $500, as Pete said, is where it's going to -- the alumina that we purchased months ago, obviously, that cash is already at the door. We've suffered the indignity in that, and that's going to flow through our financial statement in Q1, but that's behind us. And so you've seen it -- since that fall, you've seen it kind of trade up and down within a relatively tight -- for alumina recently, a relatively tight, like $15 band give or take. We strongly believe, strongly believe with evidence to, backs up our beliefs -- I'll get to that in a moment, that the fair value today basis the current aluminum price would be in the very low $300s. We know that because we've been a counter -- we are a counterparty to recent transactions that have occurred with obviously sophisticated sellers. All the sellers in this market are sophisticated, that have priced the material on an LME percentage basis for later in this year at a price that at the current LME would equate to that kind of price, i.e., very, very low $300 a tonne. And I think if you ask most industry participants, you know, obviously, before the tragedy, the terrible human tragedy that occurred in Brazil a couple weeks ago, where people believed it was fairly headed -- fairly valued and headed, people would have said low $300s to probably through $300s for a period of time. And so that's kind of a wide range between what we very strongly feel is the fair value and where it sits today. And obviously, the catalyst to which you refer, I'm sure you -- perhaps you're asking a loaded question is whatever development -- when they have out of Brazil and really the market's expectation more important for -- when that -- when not if but I think when that might come. For now the market is supplied on a physical basis. But you know, of course, the marginal unit with that capacity out and significant capacity out, the marginal unit comes at a higher cost and therefore a higher price. That's what moves the index up.

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Operator [15]

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Next we go to the line of Paretosh Misra with Berenberg.

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Paretosh Misra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [16]

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Can you talk about the production progression at Hawesville during the year from Q1 to Q4? When do you expect to hit the full production rate?

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [17]

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Sure, thanks. So where we are right now is, as we said -- as Craig and I each said, we are within, quite frankly, weeks -- if not week, but certainly within weeks of concluding the restart of line 1, which is the last of the 3 potlines that were curtailed in late 2015. And so at that point in time, you'll have a 5-line operation. As we said at the beginning of that -- the restart project when we announced it last year, as soon as we finish rebuilding and restarting those 3 lines, we have turn our attention and restart and rebuild, pardon me, the 2 lines that are well past their prime and have been for some time. Those lines haven't been rebuilt in many of those cells in 8, 9, 10 years. As I think you know, there's a normal economic, in-service life of a reduction cell is, let's call it, 1,800 to 2,000 days. So they're way past their prime. So we'll take down the first lines in the month of March. And then what we haven't decided on yet and that's why the forecast that we gave you is just assuming that the line just to make it simple right now assuming just theoretically, illustratively that the line was down for the entire year. That's what that production's forecast at Hawesville assumes, that 190x thousand tonnes, assume that you took it down and then didn't restart it. And so of course, that's not going to happen. We haven't yet, as I said, decided on an exact rebuild schedule yet. We'll be making that decision over the coming weeks, if not months. So we'll be in a better position, Paretosh, to tell you exactly how that extra capacity will come back on. But if you're modeling out what's in our slides right now, it's pretty straightforward. You're at a 4 -- in essence a 4-line operation to make it simple, Craig, I guess, for the entire second, third and fourth quarters.

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Craig C. Conti, Century Aluminum Company - Executive VP & CFO [18]

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That's right.

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [19]

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Just, that's very simple. We wanted to give you the most: a, conservative estimates, i.e., assuming that the line was down for the full year, that's just theoretical; and b, from a modeling standpoint, make it easier to, I suppose, add from there rather than subtract from something else that we would give you, if that makes sense. Craig, you have anything else to?

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Craig C. Conti, Century Aluminum Company - Executive VP & CFO [20]

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No, I would say, I mean -- so we have on Page 11, that's 195,000 tonnes for the year in 2019. And just to fill in the math that filling in from 117,000 tonnes of output in 2018. And as you recall, we started the restart midway through 2018. So you're not getting a full year of restart in there. The 78,000 incremental tonnes is what we're showing you today for 2019.

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [21]

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And we'll have an update on this for you when we, certainly, by the time we announce, I guess, it's not for another 2 months, but certainly by then.

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Paretosh Misra, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]

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Got it, that's very clear. I appreciate that. And then your cash flow breakeven aluminum price at $1,800 versus $1,875, that's what it was last year, at least in the last 3 quarters. So just in terms of what has improved, it seems like the cash tax a bit lower and then you get the benefit of higher volumes at Hawesville, so some better fixed cost absorption. Alumina and maybe Iceland power cost lower, is there any other thing, big...

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [23]

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You did pretty well there, but I'll let Craig...

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Craig C. Conti, Century Aluminum Company - Executive VP & CFO [24]

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You got 2 of the 3 biggest drivers. So you got the increased tonnes, right, and that's a major driver, coming out of Hawesville is what you talked about. Cash taxes year-over-year are a reduction that we expect there. And I think the larger one of all the ones that you mentioned is -- actually you didn't mention, the largest would be the Midwest premium increase, year-over-year. So we did see a significant increase from where we were last year.

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [25]

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Even though, of course, the Midwest started to build early in 2018, you see, obviously, it's there for the full year. As you'll see -- and when you look at the appendix, our forecast or the estimate that we're using to build out these cost estimates and breakevens, it's below the spot Midwest just for some conservatism, but you do have that favorable year-over-year comparison.

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Operator [26]

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Next we go to the line of Jeremy Kliewer with Deutsche Bank.

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Jeremy David Kliewer, Deutsche Bank AG, Research Division - Research Associate [27]

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Just a quick follow-up. On your views for alumina, have you thought about backward integration or going for more contracted prices similar to what you announced back in 3Q?

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [28]

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Yes, yes, so absolutely. And we -- it's not that we're thinking about it. It's we continue to think about it and look at various options, both, perhaps, Jeremy, what -- not to read your words too closely, but in terms of actual ownership of assets and structural backward integration in various means or at least mitigation of the volatility of the index pricing. And as we've told you, we've continued to -- fancy words. As we told you we intended to, we have continued to synthetically create the way the market used to price itself 100%, which is LME-referenced alumina via 2 methods: one is direct contracting with counterparties who are still interested in selling LME percentage. And then the second is, as we've told you, taking partial contracts that are priced in fixed dollars, not index, floating index but fixed dollars. And through simple derivatives, i.e., forward selling of aluminum. It's not modest quantities. I'm converting those to LME percentage. So that's a long-winded, again, answer to you answer, yes. And we continue to believe that despite the fact that with blinders on over the last year, it's almost a year ago to the day that Alunorte was forced to curtail half of its production. With blinders on, you -- one could conclude you want to be 100% captive backward integrated, whatever vernacular you want to use. We think the truth is somewhere in between like in most things. From a risk mitigation standpoint, you want some exposure to it, but we clearly, and as I've -- we've described in the past, this is one of our major strategic objectives here is to increase our ownership structu.rally or synthetically of alumina.

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Jeremy David Kliewer, Deutsche Bank AG, Research Division - Research Associate [29]

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That's great color. And then for that 2,000 tonnes or so of alumina that's kind of linked to the LME, is that a sliding scale? So in 2020 when you pick up production or perhaps pickup production at Hawesville another 50,000 tonnes or so, will that increase proportionately? Or is it kind of that 200,000 tonnes is what it is and the remaining alumina supply will be linked...

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [30]

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Yes, good question. That is what it is for '19. For '20, we're still constructing '20. So I actually -- it would be speculating how it's going to come out in '20. In '20, I would think it would be at least that much. We're certainly not shooting for below, but I wouldn't speculate it at this point in time. We've got -- as we've told you some already done for '20 and in terms of a long-term 5-year contract, and we've got more to go. So we'll update you on that. But clearly, I hope you get the sense that we're focused on and working towards that end.

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Operator [31]

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Next we'll go to the line of Lucas Pipes with B. Riley FBR.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [32]

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Most of my follow-up questions have been asked at this point, but maybe I'll sneak a quick one in. The $150 million -- slightly less than $150 million EBITDA that was referenced earlier, was that kind of Q2 through Q4 annualized or...?

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Craig C. Conti, Century Aluminum Company - Executive VP & CFO [33]

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Yes, yes.

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Operator [34]

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And next we'll go to the line of John Tumazos with John Tumazos.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [35]

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So the Chinese output's been hard to figure out. They produced 9.5% more aluminum metal in the fourth quarter than a year ago. Alumina Limited on their call last night theorized that the Chinese produced more because of the trade dispute from the U.S. to bargain from a different position. In January, the Chinese output fell from last year, maybe due to lower aluminum prices, by 0.8% and world output fell by 1.1%. Do you think aluminum prices, as of January, already fell enough to cut supply and turn the market around?

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [36]

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Yes, that's a great question. I mean, you saw it bounce pretty, like reflectively when it went through $1,800 and started to toy with $1,780, $1,770. I forget what the low point was. I mean, John, that's a tough one. On China, we agree. The data seem to be all over the place. We obviously watch the U.S. imports come in to the U.S, which are down, which tells us that something's working out there. And -- but we tend to -- the month-to-month production figures coming from China, I don't know, maybe it's easy for me to just dismiss it. It's hard to like discern it's a reliable trend.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [37]

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Their exports in January were 1/3 more than a year ago. Full year last year rose 21% to another record.

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [38]

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Yes, that's all downstream. That's all coming from downstream.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [39]

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They don't need the metal they're producing.

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [40]

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There is no question. There is -- if you're looking for a fight on that, you're not going to get it here. There's no question. John, I wish I had something better for you. I really...

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Operator [41]

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(Operator Instructions) And speakers, we have no questions in queue. I'll turn it back to you.

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Michael A. Bless, Century Aluminum Company - President, CEO & Director [42]

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We again, thanks very much for the excellent questions and your attention. And we look forward to speaking with you over the coming months. Take care, all.

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Operator [43]

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Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.