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spk01: Ladies and gentlemen, welcome to the Century Aluminum Company first quarter 2021 earnings conference call. My name is Bethany and I'll be coordinating your call for you today. If you would like to register to ask a question during the Q&A session, please press star followed by one on your telephone keypad at any time. I will now hand the call over to your host Peter Trypkowski to begin. Peter, over to you.
spk05: Thank you very much, Bethany. Good afternoon everyone and welcome to the conference call. I'm joined here today by Mike Bluss, Century's President and Chief Executive Officer, Craig Conte, 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 one, 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. And with that, I'll hand the call over to Mike. Thanks, Pete, and thanks to all of you for joining us this afternoon. If we could just flip to page three, please. And before we start on the review of the quarter, I'd like to just provide a brief overview on our various efforts supporting and advancing the sustainability of our business. Hopefully, at this point, most of you have had a chance to go through our sustainability report. If not, it's up on our website, so I'd encourage you to have a look when you have a couple moments. First, those of you who have long followed the company are well familiar with our focus on safety, and this will always remain our highest priority. Our new corporate safety director has made great progress reinvigorating our systems and processes. We're now engaged in delivering enhanced safety leadership training to all the U.S. plants, and the early returns are really encouraging. We'll have a lot more to report to you as we go forward. In addition, we're making very good progress in our various decarbonization efforts. As we reported to you back in February, we're in discussions with multiple potential customers regarding our low-carbon natural product and this follows the agreement that we recently signed with Hammer Industries. In addition, again, as we've discussed, we're looking very closely at adding billet casting capacity at Grindertangi, and this development would allow us to provide the European market with much-desired green billet. As you also know, we've made recent investments at Seabree to enable us to buy scrap from the market and reprocess it. We're seeing increased interest from customers looking for recycled content in their billets. And we're now looking at incremental scrap processing capacity at Seabree as well as at Mount Holly as we return that plant closer to its full capacity. I'll talk about Mount Holly in just a couple of moments. We've also made good progress finalizing the terms for the solar field to be constructed by a third party that will be adjacent to Seabree. As a reminder, we'd be the sole contractual offtaker and would thus enable this investment. This is really exciting for us from multiple vantage points. and we intend to pursue similar structures. Bottom line, we've got a lot of exciting stuff going on, and we look forward to updating you regularly. In just a couple minutes, Pete will provide some detail on the industry environment, but let me make a couple points just to put the rest of my comments into context. Conditions in the sector remain favorable from multiple vantage points. Global inventories are now falling. That's including in China, as you've seen, if you look at the data. Stocks are now at pre-COVID levels and are historically tight, especially when considering the pace of current demand. Forecasts for the next couple of quarters show a basically balanced global market, and we see potential upside as the pandemic continues to abate, especially in developing economies. We're obviously closely watching the supply side. The current metal price provides an environment for consideration of potential capacity additions. However, in most of the Western world, we think it's very unlikely that we'll see new greenfield projects. We believe the industry has learned the lessons of the past. We could see some small restarts, or more likely perhaps the deferral of closures, either ones that have been announced or that are being contemplated. But we're confident these would likely be around the edges. It goes without saying the swing factor remains China. That market is currently just in balance. If you look at the data, they're importing some months and not others. You've obviously seen the discussion of a major policy shift driven by the central government's climate goals. And we do believe that illegally added capacity that puts provinces above their emissions targets will need to be curtailed before a new capacity is added. It's hard to know at this point exactly where all this shakes out. but we do think this development will put some governor on a rate of net capacity additions in China. Again, Pete will give you some data in just a moment. Just to move on, we've made good progress on the operations during the last couple months. Just to give you a couple examples. As you remember, we suffered two major equipment issues at Haasville during the last days of December. One was a freeze-up caused by some very cold weather, and the other was the failure of some key high-voltage equipment. These events resulted in the loss of some production, and in addition, we took a number of cells offline in February and March to mitigate any further risk, and importantly, to hasten the plant's return to stability. That stability was achieved in early April, and we're now in the process of bringing all the cells back online to get back to a full four-line operation. We're also completing some maintenance projects aimed at providing further long-term stability to the plant. We also reached a new agreement with the local union at Hawesville. It was ratified by the membership on the 16th of April. Five-year labor contract provides good stability for the plant. We've got a great young workforce at Hawesville. This requires some extra near-term effort and investment in training and skills development. That said, we're really encouraged by the potential of this group. At Mount Holly, the new power contract was approved by the Sandy Cooper Board. as well as by the appropriate state authorities, and the contract commenced as scheduled on the 1st of April. As a reminder, it's a three-year deal. It goes through the end of 2023, and it gives us the opportunity to build back the 75% of the plant's capacity and get some very much needed high-quality billet back into the U.S. market. It also gives us a chance to work with Sandy Cooper on longer-term structural alternatives for power supply. As a reminder, we've been talking about this for quite some time. No cells at Mount Holly have been rebuilt since 2015, and those cells constituting that entire 75% of production need to be rebuilt. This process is well underway, and Craig will remind you of the schedule for the forecast spending, as well as, importantly, the incremental production we see coming on later in the year. We're really excited to be bringing back this capacity at a time when the market demand is so robust. Those of you who know Mount Holly know that it has a justly earned reputation as a high-quality billet producer, and we're convinced customers are anxious for the incremental supply. As we ramp up here through the year, we have more billet casting capacity than we currently have hot metal production, obviously. And thus, we're being opportunistic in buying some scrap and primary metals to melt and mix with Mount Holly's own prime in order to begin to deliver incremental production to the market. as quickly as possible. Lastly, very quickly, Craig will take you through the specifics of the recently completed debt refinancing, so I won't go into any detail here. The rationale was obvious, to lower the company's weighted average cost of capital, and it also came with a decrease in current cash interest expense. We lengthened the maturity and increased the company's near-term liquidity. Of course, the company's liquidity will otherwise improve markedly beginning in Q2, as we begin to realize recent metal prices. And Craig will give you detail on this and our expectations for cash flow in the coming quarters in just a moment. And with that, I will give you back to Pete for a quick look at the industry. Thanks, Mike. If we can move on to slide four, please, to give you a couple of comments on the global aluminum market. In the first quarter of 21, global aluminum demand was up 16% as compared to the first quarter of 2020, when the pandemic had begun to slow down the economy. In the world excluding China, we saw demand of 5%, and in China, we saw demand growth of 27%. Global production was up 6% in the first quarter of 21, as compared to the same quarter last year. However, global supply growth was flat sequentially. We saw 10% production growth in China versus the same period last year, but no additional supply growth sequentially. In the world excluding China, we saw 1% supply growth versus the same period last year and less than half a percent growth sequentially. As demand continues to outpace supply growth around the world, the global aluminum market is now projected to be in balance for 2021. Along with falling stock inventory levels to pre-pandemic levels, the aluminum price looks to be supported by strong fundamentals going forward. Okay, turning to slide five, please. You can see the major improvement on pricing for LME and premiums here. The cash LME price averaged approximately $2,100 per ton in the first quarter, which was up 10% or $175 per ton sequentially. Currently, we are at a three-year high LME price of $2,450 per ton. In the first quarter, Regional premiums average $0.16 per pound, or approximately $350 per ton in the U.S., up 25% sequentially, and $165 per ton in Europe, an increase of 23% sequentially. Current spot price for the U.S. Midwest premium is at a record high of just over $0.26 per pound, or approximately $575 per ton, a growing demand and tight supply. Prices in Europe are approximately $240 per ton. Finally, pricing for value-added products have also continued to improve. An example here is the US Midwest spot billet prices are also at record highs of approximately $700 per ton. And with that, I'll hand the call over to Craig. Thanks, Pete.
spk06: Let's turn to slide six, and I'll take you through the results for the first quarter. On a consolidated basis, global shipments were about flat quarter over quarter. Realized prices increased substantially versus prior quarter as a result of higher lag LME prices and delivery premiums driving a 14% increase in sequential net sales. Looking at operating results, adjusted EBITDA was a loss of $19.7 million this quarter, and we had an adjusted net loss of $52.5 million, or $0.54 a share. In Q1, the adjusting items were $92.7 million for the unrealized impacts of forward contracts, $3.9 million for the net realizable value of inventory, and $1.4 million for the historical Seabury equipment failure. Liquidity at the end of the quarter was $90 million via a mix of cash and credit facilities. This amount increased $50 million to $140 million by the end of April. As we forecast on our last call, the Q1 realized LME of $1,940 per ton was up $210 per ton versus prior quarter, while realized US Midwest premiums of $330 per ton were up $45 per ton over the same period. Realized Illumina was $325 per ton, or $35 per ton greater than prior quarter. As we discussed previously, the majority of our aluminum contracts are priced with an LME reference, and the realized prices will track largely in line with lagged aluminum pricing trends. As expected, the negative impact from power prices, primarily driven by the domestic February polar vortex pricing spike, was $33 million unfavorable versus Q4 globally. Realized poke prices of $300 per ton were up $50 per ton, or 20% versus prior quarter. Restart related spending as forecast at Mount Holly and slightly lower production volumes drove about $12 million of reduced EBITDA sequentially, while a non-cash mark-to-market on stock compensation drove $5 million of reduced EBITDA over the same period. Our Q1 results came in a bit lower than expected. This was largely driven by market price and non-cash accounting impacts occurring at the very end of the quarter. During the last week of March, our share price increased roughly 20% to about $18 per share, causing a sizable negative non-cash mark-to-market impact on our stock compensation plans. Coke and LME-linked power began escalating as well. On balance, the totality of the late Q1 market moves are favorable to Century over the mid and long term. However, the immediate impact to the first quarter was a reduction in expected EBITDA. Looking ahead to Q2 specifically, The lagged LME of $2,150 per ton is expected to be up about $210 per ton versus Q1 realized prices. The Q2 realized U.S. Midwest premium is forecast to be $485 per ton or up $155 per ton. And the European delivery premium is expected at $175 per ton or up $35 per ton versus the first quarter. Realized Illumina is expected to be $330 per ton or up about $5 per ton versus prior quarter. Taken together, the LME, Illumina, and delivery premium pricing moves are expected to increase Q2 EBITDA by about $55 to $60 million versus Q1 level. On power costs, with the Q1 polar vortex related spike behind us, we are seeing a return to more seasonally normal pricing levels. As a result, we expect a $15 to $20 million increase in Q2 EBITDA from declining power prices quarter over quarter. As I noted earlier, in late Q1, we experienced an increase in carbon cost, notably in petroleum coal prices. We expect realized coal prices to be $370 per ton in Q2, or about $70 per ton greater than in Q1, driving a $5 million EBITDA decrease versus prior quarter. Finally, we continue to make significant progress on the Mount Holly restart and the fixes on the year-end equipment issues in Hawesville. As we discussed previously, Q2 will be our largest investment quarter for both of these projects. This investment will be partially offset versus prior quarter by incremental production in Q2. The net impact of sequentially increased production and project spending will decrease EBITDA by about $10 billion. In sum, we expect all of these items taken together will equate to an approximate EBITDA increase of $55 to $65 million from Q1 levels. As we have discussed in the past, we, from time to time and largely in support of long-term investments, manage our exposure to various commodities by entering into forward contracts. Based on our current spot prices, we expect a $30 to $35 million relied loss for the quarter on our various hedges in Q2. This result will be below EBITDA geographically and will impact adjusted net income. We will continue to call this impact out on a quarterly basis as warranted. Let's turn to slide A, and we'll take a quick look at cash flow. We started the quarter with $82 million in cash and ended March with $26 million. A few notable outflows for the quarter included $7 million for CapEx, the vast majority of which was Mount Holly restart related, and our normal semiannual no interest payment. Working capital was an outflow of about $12 million driven by increased receivables from higher sales prices on rising LME levels and a modest inventory bill to support the ongoing restart work. Shifting gears to Q2 and beyond, in early April, As Mike mentioned and as you may have seen, we effectively refinanced our $250 million five-year 12% note, which was due to mature in 2025, for a new $250 million seven-year 7.5% note due to mature in 2028. In addition, we have further enhanced our liquidity by executing a seven-year $86 million convertible note at 2.75%, also due to mature in 2028. From a diluted EPS modeling standpoint, it will be important to include an additional 4 million outstanding shares for Century from Q2 onwards. While we can settle the convert in either cash or shares at our option, our accounting method will require reporting the new instrument on a fully diluted basis. From an interest cost standpoint, adding both of the new $250 million note and the $86 million convertible together results in an annual interest savings of $9 million versus the old note. From an operation standpoint, we continue to make solid progress on the ongoing Mont Holly restart. As a reminder, we will invest about $75 million over the course of the next two to three years to bring this melter to a 1.5-line operation, which will allow it to produce at 75% of capacity, or about 170,000 tons per year. This project will be completed in two phases. For Phase 1, which occurs throughout 2021, we will invest about $50 million of restart capital, over half of which will be spent in the second quarter, and expect total year production of about 140,000 tons as we ramp up the facility. This output will be about 20% greater than 2020. By the end of 2021, Mount Holly will be running the full 1.5-line complement. Phase two begins in 2022, and the remaining $25 million of capital will be deployed to rebuild continuously operating legacy components, which will be beyond their useful lives. We expect 2022 and 2023 production to be around the 170,000 ton per year level. Finally today, I'd like to provide some perspective on what the second half of 2021 would look like for Century at current spot prices. As both Mike and Pete detailed earlier, the conditions in our industry are favorable, and Sentry's ability to add capacity, particularly in the U.S., is a key differentiator for the company. Using the revenue and cost items we detailed on our last call, adjusting only for the reduced interest costs from our refinancing, provides a good look at the earnings power of our business at current spot pricing levels. At the spot L&E of $2,450 per ton, and the spot Midwest premium of $570 per ton, Century will generate about $270 million of second half 2021 EBITDA and about $160 million of second half 2021 cash flow. This concludes our prepared remarks. Thank you for your time and attention. I'd like to turn the call back over to Bethany to begin the question and answer session. Bethany?
spk01: Thank you. Ladies and gentlemen, as a reminder, please press star followed by one on your telephone keypad to ask a question. The first question comes from David Gagliano from BMO Capital Markets. David, your line is open.
spk03: Okay. You covered a lot of things there. That's very helpful, I think. But some of them went pretty quickly. So I'm going to try and just hone in on a couple of them. Just, I guess, on the hedges. You know, there's some disclosure in the 10-K about the hedges, and I know it was referenced, you know, kind of in passing, I would say, on the last call. And I was wondering if you could just give us a little more information on when the hedges were put in place, how much you have hedged, you know, as of now, both on LME and Midwest premiums, the duration of those hedges. And in terms of the cash flow comment for the second half, $160 million, Is that before or after hedge, and is that a free cash flow number before or after hedge? And what is the hedge impact associated with that number?
spk06: Okay, David, so this is Craig. I understand the question. I'm going to start with that half first, and we'll go back to the beginning, okay? So when we look at spot prices today, again, just so we're all on the same page, that's $24.50 of LME. That's $570 of Midwest premium, right? So to go back to what we said on the call, that's $270 of EBITDA for the second half for the company and $160 of total cash. Free cash flow, right? To answer your question really directly, that $160 does include the impact of hedges, okay? Now, when we go back and you think about how to use that go forward, what we put in the appendix are sensitivities, which will allow you to do what you've always done in terms of sensitizing the business for moves and commodities for EBITDA, also for cash. So what you would do for the second half of the year is start with that construct I just gave you, and you can sensitize that impact for any hedge assumption or any market assumption that you want to make. Now, let me go back to the first part of your question. You're correct. It is disclosed in our K, and it will be there again in our Q. We'll talk about what we're doing for the company. We have really three commodities that we're talking about. The first is LME. Well, four, I guess, if you include FX, which I will in this explanation. So you've got LME. You've got Midwest Premium. You've got Nordpool. And then we've got the Euro, right? So our LME hedges are primarily to support the linking of our Nord Pool cost to an LME-linked contract. We've talked about doing that. We've done that sporadically over the last year and a half. So that's one part of the LME. The second part of the LME is when we take a fixed alumina cost and link those synthetically to an LME price. And we would do that by, you know, buying, selling alumina and also selling forward the LME. We've talked about that in the past. That's the LME portion. On Midwest premium, the vast majority of that is in support of the Mount Holly restart that we talked about in the last column. And then, of course, more of the other side of what we talked about at LME, linking that to LME predominantly for 2021 and for 2022.
spk05: David, it's Mike. We'll let you redirect, but just let me add one other comment that may be helpful on Craig's walk from the – from the second half EBITDA at spot prices 270 down to your point, A, free cash flow, B, net of hedges at spot prices, of course. Of that delta there, the 270 down to 160, about half of it is the hedge impact, and the rest is just normal stuff that comes between EBITDA and free cash flow, you know, CapEx, interest expense. Small amount of taxes we pay in the U.S., normal taxes in Iceland, that kind of sort of normal. Thank you. Yeah, CapEx, Mount Holly spending, all that stuff.
spk06: Those items, David, to round out, that was good advice. And so to round that out, those are the same items that we talked about in the last call at pretty much the same level. Yeah.
spk03: That help you? Okay. Yeah, it helps. Thank you very much. That's helpful. Just to drill down a little bit further, I see – You know, the 10K, according as of December 31st, 2020, there were 194,000 tons sold forward, I guess, at fixed pricing on LME contracts, and then 318,000 tons on Midwest premiums. And those contracts extend on the LME through December 2024, and the Midwest premiums, I think, extend through December 2022. So my question is, you know, so obviously these extend into the out years. How much is hedged for this year versus the out years? And are you continuing to hedge and have those numbers – increased now that it's, you know, April, whatever, May, whatever. So we'll get into the disclosure for March, but what are the hedge positions as of now and how do they flow through in the next few years?
spk06: Right. So let me get to the crux of the first part, and I'll turn it over, maybe the second part, and go forward to Mike. So when you're looking at the difference between the LME and the Midwest premium hedges, let's start with Midwest premium. So 318 was the correct number that came off the key. It'll be a little bigger in the queue. You'll see it. But again, the Midwest premium, the vast majority of that was for the Mount Holly restart, right, when we sold forward that production. Now let's go back up to the LME, and I think the crux of your question is why aren't those numbers more similar? The reason for that is when we sold forward the LME to protect the Mount Holly investment, we sold that forward on a physical basis. So that's going to transact outside of our hedge book. So that's why it appears there's a little bit of a mismatch. So the part that we've sold forward physically for Mount Holly is already captured in the EBITDA sensitivities, and it's not going to be captured in the hedge book.
spk05: I guess, David, just to maybe infer part of your question on a perspective basis, I think Craig hit it on a perspective basis. I mean, all that stuff that he described, the hedging to protect the Mount Holly spend, We also did sell a little Midwest last year, just as, you know, sort of COVID was in its uncertainty. But prospectively, if we're going to be most likely selling additional LME, it's going to be for the purposes that Craig described that we've been talking about for some time. If we can, you know, when the Nord pool price in relation to the LME price is such, we can book a second quartile or better power cost. When we say power cost, there we mean power price as a percentage of LME, we'll do it slowly and gradually, but we're going to continue to do that. And then same thing on the ALA side. Although, as Craig has told you before, we're basically set for ALA in 2021. Okay.
spk03: I'll turn it over to somebody else. If I could just really quickly just Is there a way just to give a percentage of, you know, like a framework of how much you plan to hedge relative to your total volumes as you go forward?
spk05: That's a tough question. I mean, the Nord pool amounts don't aggregate to a whole lot. You're not selling a lot of metal to create that position.
spk06: But on the North Pole side, as we talked about last time, that's an 80% hedge for 2021, which will serve us really well.
spk05: So that says not much to come there. On ALA in 2022, it's kind of tough to answer that at this point in time. It depends what the ALA market looks like during the mating season in the fall when everybody's negotiating Illumina contracts and, you know, what kind of percentage LME contracts are available, if any, and where the API is and all that kind of stuff. Yeah, I mean, just one other good comment here. Consistent with what I just said on North Pole and sorry to belabor it, David, and Illumina, the real vast majority of what's on the books right now that you're seeing and that Craig talked about relates to Mount Holly. I mean, and frankly, just thinking about it, that kind of might help you get – to your question on, I don't know if we answered it fully enough, around when the hedges were put in. Because as you know, we didn't know whether we had a new contract or not for Mount Holly until sometime kind of mid-ish December. So it definitely wouldn't have been before then. And then we signed it up and we were in that transition period before we finished the documentation for the new contract that I talked about a couple minutes ago. So that's kind of your framework for when a lot of that LME got laid in.
spk03: He might be gone. OK, thanks. Oh, you bet, Dave.
spk01: The next question comes from Lucas Pipes of B Reilly Securities. Lucas, your line is open.
spk04: Well, thank you very much, and good afternoon, everybody. Thank you. Lots of moving pieces there as evidenced by the preceding discussion with Dave. I'll try to take another stab and kind of take a real high-level view, but just kind of maybe if we look out to 2022, Could you give us a sense for what EBITDA and cash flow would look like with those assumptions of, I think it was 2,450 for LME and 470 for the Midwest premium?
spk06: Yeah, so I think EBITDA would be relatively easy. When you get the cash flow, especially when we're talking about the hedge budget, it's materially different 2022 to 2021, so I wouldn't attempt that. But I think if using our items today, If we have 270 of EBITDA in the back half of this year and we're running at very near our capacity, especially with the restart work that's going very well in Hawesville and Monholly, you could double that. That will give you a 12-month running average for EBITDA, Lucas.
spk05: And the other thing I would note, Lucas, I agree with Craig's comment. That would be the starting point. It should only get better. obviously subject to other items like Coke prices and others, but that's small potatoes in the grand scheme of things. The other thing is the difference between EBITDA and cash flow, or let's just say it in plain English, the impact of the hedges will be much less. Because as Craig said, the vast majority of big company LME and the vast majority of Midwest, as David Gagliano correctly cited, or cited, I should say, from the disclosure in the K, most of that is in 21 and starting to come off in 22. And so that delta there is going to, between EBITDA and cash flow, the delta produced by the hedges is going to shrink up meaningfully.
spk04: That's That's helpful. I guess what I'm trying to get at is, because if I understood you correct earlier, both EBITDA and cash flow are reflecting the impact of the hedges. And so what I'm trying to get at is, in a world with no hedges, what would EBITDA and cash flow look like?
spk05: Right, right. So the answer is the same, but that's what we just said. So irrespective of what hedges reflect where, the bottom line is the answer what we just gave you is the right answer. But now, Craig, talk about the fixed price contracts, let's call them, and where some reflect quote-unquote in EBITDA, meaning they go through cost of sales, sales and It failed, I should say, and some are settled in that Gator-Lawson-Ford contract.
spk06: Yeah, and I think you just gave most of it there, but Lucas, to double down on that, right, is All that would go through EBITDA at this point that wouldn't hit that hedge in fact line, if you will, walking to total cash. And my comments from earlier would be the Mount Holly revenue piece. So to think about what that size is, we talked about 140,000 tons this year, getting to 170, then 170. And we've sold forward the majority of that. And I think Mike gave you a timeframe for about when we sold that forward. So- That will be coming through everything else that we talked about, though, the Midwest premium, the LME, that's the other side of our LME-linked Lumina contract, LME-linked Nordpool and Nordpool itself, and then, of course, the euro on those Nordpool hedges because that's the currency that those contracts will settle in. All of that will be going through the hedging pathway.
spk04: The health. That helps. I appreciate that. Thank you very much. And then I'll turn to my second question, and that's in regards to Illumina. Obviously, FME has been outperforming Illumina prices more recently, and I just wanted to get your perspective on kind of your medium-long-term strategy on Illumina pricing. Would it be to keep the current format, rethink it, Any evolution of your thinking in regards to aluminum input costs?
spk05: Thank you. Thank you, Lucas. It's Mike. That's a great question. And the answer is, I hope it doesn't sound like a non-answer, is it really, let me give you a short-term answer first and then sort of a more philosophical, is the wrong word, but longer-term structural perhaps answer. So, Short-term, it's really going to depend upon market conditions caught in September, October. It's the current – you know, percentage LME contracts don't necessarily price with direct reference to the, you know, then current relationship between the API divided by LME, but they certainly have some reference to it. That influences the market. And so we'll see if, to your very appropriate way of saying it, whether – Aluminat continues to underperform LME or whether to sort of revert to a more normal relationship. On a longer-term basis, we still believe that the right way to run this company, given our balance of opportunities, the growth opportunities that we have, you know, all the risks, obviously, that are evident in the business that we face, just like every other participant in the business, the size of our company and all the rest, capital structure. We still think that running the company, not fully, but mostly, all else being equal on a percentage LME basis, on a percentage LME basis, is the right way to run this company. But it's going to be heavily influenced by market conditions each year when, you know, the big LME pardon the jargon, the big Illumina contracts are struck in the fall.
spk04: Very, very helpful. And to tie this commentary maybe back to my earlier question, if in the fall LME has continued to outperform Illumina, would this end the life level of $570 million EBITDA, would that still be accurate or would we be looking at a much higher level at maybe Illumina? prices get reset lower?
spk05: Yeah, gosh, that's a great question. I guess the one way to answer it is, yes, it would be still applicable. It's going to, again, sound like a non-answer for which I apologize in advance. If our aluminum contracts were of a similar nature, but if we were not fixed price, but if we were API priced, of course, then I think where you're heading is correct. there could be upside. It's all about a balance of risk and opportunity. It's like any hedging decision.
spk04: But you would have the flexibility to make that decision once again. Oh, yes, for sure.
spk05: Oh, yes. I'm sorry. I missed your question. Absolutely, 100% flexibility.
spk04: Very helpful. I appreciate all the color and best of luck. Thank you.
spk05: Thank you for the questions, Lucas.
spk01: The next question comes from John Tomazos from Very Independent Research. John, your line is open.
spk02: Thank you, Mike. Aside from debt reduction, could you give us an idea of the big picture priorities? There's lots of wonderful alternatives trying to expand in Iceland, modernizing or expanding your U.S. smelters, raw materials. or building a new smelter or adding power, although people seem to be doing the solar for you.
spk05: Tell us what the priorities are. Thank you very much, John. And yes, I'll quickly, that is the case. And we believe from a capital structure and balance of risk, we prefer to let the folks who are expert in designing and building, installing and maintaining, running those things, do them. It's not our expertise. Building a new smelter would be appropriately where you put it at the bottom of the list. We just, without sounding overly enthusiastic, but we really are, when we look at the opportunities we have in the markets where we have hot metal today and have choices as to how, into what kind of product we cast it in the markets we serve, There are a lot of really interesting opportunities that come with a fraction of the price tag of a new smelter, even a new pot line, to build out our value-added products. Specifically, you know, I'll use the jargon with opposed to fully green or with, you know, green content, i.e. scrap reprocessed for our customers or for the general market. And so that's why, you know, you're hearing us talk about opportunities at Seabree, opportunities at Mount Holly, and a very large opportunity at Grindertangi. And we think that markets, our customers, we're convinced, interest in and demand for that kind of product is only going to grow. And so this is the right time. I think to your point, maybe, We've got the capital structure, you know, sort of in the right place for the next seven, five to seven years. And that sets us up pretty well. In terms of the, just coming, looping back to your new smelter, to maybe scratch that, it's just a little bit. I'll stick with my first answer, but we do have, as you know, some incremental hot metal capacity that we can bring back on the reasonably limited or modest investment. And right now, the easiest one, meaning we don't need any additional power contracts, is the fifth hotline at Osville. That's a purity line, 100% purity line. And then, you know, we're hopeful, bordering on pretty opportunistic, pardon me, that... that we can find a way to get to that last 100 megawatts of power at Mount Holly to bring the eventually, in the not terribly distant future, that last type of plot line back on.
spk02: So you want to run full and run green in your current assets?
spk05: I like it. We're writing that down now. Maybe we'll put that up on the website. We'll give you the TM.
spk02: So, Mike, if I could ask another, and I'm thinking back long term. I think when I was at DLJ, we were a co-manager on the IPO in 95 or 94. Gosh, that's prehistory. There's ancient times when crazy spikes were made in commodities markets or different markets. My hero, Julian Robertson, was short the Internet in 2001. It was killing him. In March 2001, he covered his internet shorts and shut his firm down. That was on top of NASDAQ. I'm thinking of July 2007 when aluminum peaked at 149.7 on the LME. Around the same day that crude oil peaked at 150, and Century issued stock around $50 to cover your metal shorts. Yes, sir. I don't know if it's fair to blame a little bit of the peak in that aluminum market to covering the shorts. And I don't care about the details of how many contracts you have this week or the 10K. But could you give us some comfort that Century isn't going to make a top in the aluminum market by covering your shorts and you're not going to have to issue equity?
spk05: That's the easy answer. That's the easiest question that you or anyone has answered. We can give you full comfort. Thank you, John, and that bit of history. But, yes, that's a straightforward question to which we can give a straightforward answer, yes or no. Yes, we can give you comfort there.
spk02: So is it your tactic to not hedge anymore, or are you going to shell out a little bit of money to close out some contracts? Yes.
spk05: Oh, no. I mean, I would say on the first, as we said, we, you know, Mount Holly was a tactical thing, fancy word. And a hedge anymore to create second or first quartile ALA or European power projects, absolutely, all day long. But that's not, you don't have to sell a lot of LME to do that structurally. I'm sure you know the math. So we close out hedges. That's not something that we've spent any time here talking about. And I think you should not sit around and wait for that eventuality to be a long wait.
spk02: If you just delivered, when would your hedge book be erased right now? If you didn't put on new positions and you just delivered, when would it all go away?
spk05: You want to, Craig?
spk06: Yeah, John, the short answer is 2024. There's a small tail that goes out that far for LME.
spk05: Very small.
spk06: Very small tail.
spk05: The vast majority of it, and that's not just the North Pole. It must be the North Pole. It's small potatoes. The vast majority of it is gone in the next six quarters.
spk02: Yeah, that's right. So, Mike, my concern is, is that politicians are overstimulating everywhere and that the biggest fraud in the history of markets are near zero interest rates, but they have to keep them down because their debts are greater than GDP now. And if they paid 5%, they'd all go broke. So I'm just worried about things being too strong in the near term, and someday it's all going to blow up But who knows when that's going to be.
spk05: Yeah, that's – I mean, John, you just – like, I can't personally pick apart your thesis there.
spk02: Obviously, you have some – So we know you're going to be right by being conservative. But the issue – you know, sometimes if you sell short, you do it a year early, and you get wiped out before you're right.
spk05: Yeah, that's not going to happen. The beauty of it is that that's not going to happen here because the vast majority of our – of our production is exposed to market prices. So, you know, yes, we've got some downside protection, but the vast majority of that upside we're enjoying there.
spk02: You see it in the... I was looking at the 2007 chart of your stock in Wincing a moment ago.
spk05: Thank you for that. Thank you for that history. You've got more century history than I do. I've got only back toes to it.
spk02: Oh, it's great to be your friend. Thank you.
spk05: See you, John. Thanks as always.
spk01: I would like to remind participants to press star one if you would like to ask a question. We have another question from David Gagliano of BMO Capital Market. David, please go ahead.
spk03: All right. Hello again. I remember those times too, by the way. So I do have a follow-up on the hedge again. But my first question really just in the near term, just to help us calibrate a little bit, I just want to clarify one thing. A lot of puts and takes, obviously, for the second quarter. And, you know, sort of a 55 to 65 million net increase versus 1Q. But there are also some one-offs in 1Q. So I'm really trying to figure out, like, what's the right starting point for 1Q? Is it the minus 20 million? Or are you talking about excluding some of these one-timers that happen in 1Q? Yeah.
spk06: Yeah, that's a very good question. Yeah, that's a great question. And the way I think about that is, you know, what we anticipated was going to happen in Q1 up until the last couple days of Q1 and what actually happened. So there were a couple things. You know, number one, that non-cash marked the market. is going to go away, right? So that $5 million is in there, okay? I think that's number one. But the other things that happen are going to stay. I think we talked about those. L&D late power costs is going to stay. So you're seeing in the second quarter the absence of the Q1 polar vortex, where you're only getting another $5 million, at least at our current view, on top of that for seasonal power prices. And then I think the third piece is something that was a trend that really emerged in that day's Q1 of continuing, which are cold prices, right? So there was a couple million dollars that we saw at the very, very end of Q1, which has expanded to about $5 million this time.
spk05: But David, you're right. There were some bad things that happened in Q1. Craig pointed out the polar vortex was cash, of course, and the share plan market market is just accounting. There's no cash there up or down. And, you know, those aren't likely to repeat. So, you know, maybe there's some things going the other way. But your point is well taken.
spk03: No, I'm just, I'm still, I'm sorry, I'm not trying to make a point. I'm just trying to figure out what the answer is still. I don't understand. Is it? Do we take, is it the minus $20 million? I heard a minus $5 million. Oh, oh, I'm sorry, David. So what's the right starting point for Q1? That's what I'm trying to figure out.
spk06: That's all I'm trying to figure out. Oh, I'm sorry. We were answering something different. Okay. Yes, you would absolutely start with a negative $20 million.
spk05: Yes. Okay.
spk06: Negative $20 million. Build out, you know, everything that we went through. I gave you all the pieces. It would be about a $55 million increase from there.
spk03: Okay. Got it. Perfect. Thanks. And then just, just again, sorry to come back to the head, but just, um, I guess philosophically or whatever. I mean, you talk about, you know, sort of hedging Allah and, and, you know, the first, second quartile and, you know, kind of what that could mean for aluminum hedges. And frankly, I don't know what it means. So can you just tell me what kind of hedge volume you're thinking about on a forward look basis? Again, I asked the question earlier, but just like a framework, how much do you think you'll be hedging on aluminum, you know, rolling forward? If, if any.
spk05: metal and lma i mean on um well midwest is totally different right there's no lme there so we could i mean midwest right now i would say you know we we look at the four years but but but very limited limited um on lme um the only time that you so on on um uh alumina um it's only if you have a fixed-price Illumina contract that you can convert into percentage LME, and we have that. Our fixed-price ALA over the next couple of years is very small, so those will be very small LME tons. Same thing on NordPool. I mean, if you were to fix — pardon me, fix is the wrong — if you were to convert the NordPool price into a percentage LME power contract, first or second quartile, as you say, You're stuck in small funds there. Each of those in the tens and tens of thousands. I want to emphasize one more time, the vast majority of the stuff on the books right now was done for Mount Holly.
spk03: Okay, thanks. That's helpful. And this is the last question for me. CapEx in total, 2021 and early read on 2022?
spk06: Yeah, it's about $75 million in total that includes Mount Holly. Of which 50 is Mount Holly, right? So I would say you would take that 25. Now, we haven't made a decision, just to be really clear on this, to make sure this answer, if I have to change this in a quarter or two, David, we haven't made a decision on Hawesville, the fifth-line hospital, as Mike said earlier, right? So let's take that out. 75 for this year, 50 of that is Mount Holly. We'll probably do another 25, 20 to 25 next year between sustaining and investment returns, and we've got another 25 coming on Mount Holly.
spk03: Okay, perfect. Thank you.
spk06: Thanks, David.
spk01: We have another question from Lucas Pipes of B Reilly Securities. Lucas, please go ahead.
spk04: Thank you, and thank you for taking my follow-up. And Dave just asked the thrust of what my follow-up was about the bridge from Q1 to Q2. But I wondered if we can maybe expand on that and go to Q3 from here as well. Obviously, you've provided detailed commentary, but this would be helpful to maybe get a little bit of a bridge here given the big move in pricing and so on.
spk06: Yeah, I would keep it at the second-half level for now because I understand the question. I think we've got to do a little bit more work and see the market mature. It's been moving really, really quick, as you know. But a good place to stick it in the ground, right, is to say, if we take the second-half outlook I gave you for EBITDA and cash, It's relatively level-loaded between the third and the fourth quarter. There's a little bit more incremental production coming on in the fourth quarter as we finish up Mount Holly and as Hawesville comes fully back online. But I take it divided by two is a good place to start until we get a little more clarity.
spk04: Got it. Got it. So we'd have to – I think you said $55 million jump in Q2 versus Q1. We'll call it $35 million or so, and then it goes from there to – What is that, 180-something, right?
spk06: It would be 270. I'm doing the math on the fly here. It would be half of 270 and half of 160. So if my math is correct, that would be 135 and 80 for the third quarter, given the assumptions, all else being constant, that we talked about here. And back to the second quarter, the first part of your question, I apologize for doing it in reverse on you. The range is 55 to 65 that we see right now. So 55 would be the lowest. And again, back to David's question to make sure we're all clear, that adding from a negative 20, this is an adjusted even number, adding from a negative 20 for Q1.
spk04: Got it. Got it. Very helpful. All right. I appreciate it. And again, best of luck.
spk05: Thank you. Thank you, Lucas.
spk01: We have no further questions in the queue, so I'll hand it back to you guys to conclude.
spk05: Thanks, Bethany, and thanks, as usual, everybody for tuning in. Great questions. We appreciate the dialogue, and we'll look forward to being in touch in a couple months, if not sooner. Take care.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect your lines.
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