Century Aluminum Company

Hello and welcome to the Century Aluminium Company's second quarter 2021 earnings conference call. My name is Charlie and I will be coordinating your call today. If you would like to ask a question during the presentation, you may register to do so by pressing star followed by one on your telephone keypad. I will now hand you over to your host, Peter Trupkowski, to begin. Peter, please go ahead.

Thank you, Charlie. Good afternoon, everyone, and welcome to the conference call. I'm joined here today by Jesse Gary, Century's President and Chief Executive Officer, Craig Conte, Executive Vice President and Chief Financial Officer, and Shelly Harrison, Senior Vice President and Treasurer. After our prepared comments, we'll be happy to 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 compliance 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 to Jesse.

Thanks, Pete, and thanks to everyone for joining the call today. Let me just begin by saying how excited I am to have the chance to lead Sentry into the future. Sentry is an excellent company, and we'd be remiss not to pause for just a brief moment to thank Mike for his years of excellent leadership and for leaving such a strong foundation for us to work from. Okay, for today's call, I'd like to start by speaking about the current market environment and give some highlights from the second quarter before Pete and Craig take you through the details. I'll then finish the call with some key focus areas for the company going forward, both in the near term and long term. So, starting on page three, it goes without saying that we currently find ourselves in a robust market for aluminum, driven by high consumer spending paired with strong industrial expansion and GDP growth in most of the world's leading economies. While we are mindful that the speed of the recovery has been aided by significant global fiscal and monetary stimulus, We do believe that the long-term growth trend for aluminum remain intact, driven by energy transition into renewable generation, distribution, and electrical vehicles, among other areas. All in all, we continue to believe that demand will remain strong into the back half of the year, and we will see global year-over-year growth in the highest single digits. Demand growth has been especially strong in our U.S. market, with year-over-year growth expected to be in the mid-teens. a U.S. infrastructure package would provide further support. We've seen demand especially strong in extrusions, with billet demand and spot premiums nearing all-time highs this summer. While the U.S. billet market prices are set on an annual basis, which means the vast majority of our 2021 billet production was priced before the current run-up in prices, we do expect that billet demand should continue to remain strong into 2022. With our recent research project in Mount Holly and the Cask House optimization project in Seabury, we're well situated to take advantage of the strong U.S. bill of demand in 2022, and we should be able to give you an update on our contractual pricing for the next year on our third quarter call in November. This significant demand growth, paired with supply disruptions caused by inclement weather and energy shortages in China, Export tariffs in Russia and the recent announcement of production disruptions in Canada have led to an especially tight physical market in the U.S. and Europe and provided significant near-term support to LME prices as well as material increases in regional and spot product premiums. Given the global nature of these supply disruptions, we started to see the physical premiums move more in tandem in the U.S. and Europe. In fact, since the Russian export tax was first announced on June 24th, The European duty-paid premium price increases have actually outpaced Midwest premium price increases at 40% for ADPP to 20% for Midwest premium. Perhaps more significantly for the long term, the results resulted in substantial drawdowns in inventories in these markets, reversing increases from early in the pandemic and returning inventories towards long-term equilibrium levels last seen before the financial crisis. This physical tightness is just another example of why domestic supply chains for key raw materials are imperative, and why programs like Section 232 are so important to bring back domestic industries and jobs. On the input side, we are seeing some price inflation across our key commodities. Most significantly on the energy side, we're rising oil, gas, and carbon offset prices in Europe, paired with drier weather in the Nordic region, have raised Nord Pool and Micellar energy prices. Craig will provide the detail and financial impacts, but it's important to note that these markets are trading in significant backwardation, which should point to return to more normalized energy prices in 2022 and beyond. On the raw material side, the aluminum market continues to be constructive, but we have seen increases in coke and pitch prices in both the U.S. and Europe. More structurally, we continue to monitor increased regulatory focus on carbon intensity throughout the world and its impact on primary aluminum supply growth. This is manifesting itself most significantly in China, where production is approaching its announced limit of primary aluminum capacity of 45 million tons. The central government has begun implementation of an emissions trading scheme, and many provincial governments have started to restrict carbon-intensive supply growth through their replacement capacity programs. that China appears to be taking some action to rein in supply growth in the primary aluminum sector. Given past experience, however, we will stay tuned before counting on this. In Europe, the EU recently announced the details of its carbon border adjustment mechanism, which will apply to primary aluminum. While we do not anticipate that CBAM will have significant near-term effects due to the initial phase being only reporting in nature, it does put in place a framework that could disincentivize carbon-intensive units into Europe in the future. While the ultimate effect of all these supply-side factors remains uncertain, it does create the potential for structurally slower supply growth over the coming years, which should be supportive for long-term aluminum prices. Turning to our own operations, we have solid results for the second quarter, in line with our expectations, and Craig will provide the financial details in a bit. In Iceland, we are very pleased to announce a new 182 megawatt power contract extension with Landsberg. The contract was a result of long-term constructive negotiations with our supplier and reflects the excellent business environment in which we operate in Iceland. Of course, the energy to be provided under that agreement will be 100% renewable energy, securing Grunertangi's place as one of the lowest carbon footprint smelters in the world. With this extension, all of Grunertangi's power requirements are now contracted through December of 2026. Importantly, the Grunertangi extension will also increase the power to be provided by Landsbergen over the term of the contract by 21 megawatts. The first tranche of 11 megawatts will be immediately available and will replace energy that we were previously buying in the spot power market in Iceland. This is very important in order to allow the smelter to continue to operate at peak amperage in line with our capacity creep program. The second tranche of 10 megawatts will become available to us in the back half of 2023 and would enable further expansion into value-added products at the smelter. To this end, we continue to work hard on our potential expansion into billet production at Kruender Tangi. We believe that record high billet premiums in Europe show that the market is calling for additional billet production. and we believe the market is particularly strong for low-carbon green billets, like the billet that could be produced at Grunertangi. This power contract extension secures the additional energy necessary to move forward with our planning, and we would expect to have further updates for you on our Q3 or Q4 call. Just before we leave Iceland, I'd like to note that we have continued to see growing demand for our low-carbon product, Naturao, especially in the European marketplace. We now expect that, for the first time, we will receive green premiums for all natural oil sales in 2022. We believe these premiums, while relatively modest compared to our other value-added products, are demonstrative of where the marketplace is going and is an exciting development, especially with additional carbon regulation like CVAM on the horizon. Moving to the U.S., we were very pleased to welcome South Carolina Governor Henry McMaster and U.S. House Majority Whip Jim Clyburn to the Mount Holly ribbon-cutting event. Both Governor McMaster and Whip Clyburn have been key allies with employees at Mount Holly, and we're grateful for their support. Just to remind everyone, once complete, the Restart Program will return the plant to 75% of its capacity, or about 170,000 metric tons of production on an annualized basis. In order to reach this point, we will ultimately reline all of the pots on Line 1, which has been operating continuously, and also reline and re-energize half of Line 2, which has been shuttered since 2015. As we've previously discussed, the majority of the reline activity will take place this year, with the remainder of the relines occurring in 2022 and 2023 as sales fail. I'm pleased to say that we energized the first cells on Line 2 earlier this week, and we continue to forecast that we will reach 75% of total production capacity by the end of the year. This is the result of tremendous effort by the Mount Holly team executing the expansion project during a very challenging and complex pandemic environment. Like many others in the pandemic, however, we have experienced some delays in the project due to supply chain and hiring issues. mainly from suppliers of materials necessary to complete the pot relining and difficulty in hiring the required amount of new employees to restart and run the additional pots. We've also seen moderate cost inflation in some of the project costs, including labor, copper, and steel. These delays have affected the project in a couple of ways. First, while we continue to expect that we will reach our 75% production goal by year end, due to these delays, we now forecast that the majority of incremental volume gains we originally expected in Q2 and Q3 will instead occur late in Q3 and Q4. This will negatively impact volume most acutely in Q3, but also have some impact on Q2 and will have some impact on Q4. Second, we also now expect that some of the reline activity that we had originally planned to occur in 22 and 23 will now instead be completed this year. To be clear, this will not be additional relining, but just to bring forward a relining CapEx from 22 and 23 that will then reduce relining CapEx in those same years in the future. At Oswald, we continue to bring cells back online following the instability suffered in Q1. This process remains on schedule and in line with our previously issued estimates. Like Mount Holly, we continue to expect Ozville to exit the year operating at its full 80% pot complement. It goes without saying that we are focused on putting pots back online in both Ozville and Mount Holly to bring additional production into this tight U.S. market and to enter 2022 with significant forward momentum. And with that, I'll turn it over to Pete.

Thanks, Jesse. If we move this slide forward, please, I'll give you a brief overview on our markets. In the second quarter, global aluminum demand was up 12% from the prior year. This increase was mainly driven by the world ex-China, which saw demand up 32%, while China was mainly flat year over year. Global production was up 8% in the second quarter from prior year, with 10% supply growth in China and 5% growth in the world ex-China. Sequentially, global supply growth was only up 2%. Taking a closer look at our regions, we are well positioned in two of the shortest markets globally. Over the past five years, the U.S. has seen at least a 4 million annual ton deficit, and in the EU, specifically in Western Europe, the market has seen around a 3 million annual ton deficit. As you saw last quarter, demand continues to outpace supply growth around the world, and the global aluminum market is now projected to be in balance in total for 2021. Along with falling stock inventory levels to pre-pandemic levels, the aluminum LME price looks to be structurally supported by strong fundamentals going forward. Turning over to slide five, please. we continue to see strengthening on pricing for LME and premiums. The cash LME price averaged approximately $2,400 per ton in the second quarter, which was up 15% or $300 per ton sequentially. Currently, we are near a 10-year high LME price of approximately $2,600 per ton, which reflects the structural macro support we discussed. In the second quarter, regional premiums averaged $0.26 per pound, or $570 per ton in the US, which is up almost 60% sequentially. And we averaged $240 per ton in Europe, which is an increase of just over 40% sequentially. Current spot price for the US Midwest premium is at a record high of $0.34 per pound, or approximately $720 per ton. Growing demand and tight supply and prices in Europe are $360 per ton. Finally, pricing for value-added products have also continued to improve with up charges for spot billet prices also at record highs in the range of $600 to $700 per ton. And with that, I'll hand the call over to Craig. Thanks, Pete.

Let's turn to slide six, and I'll take you through the results for the second quarter. On a consolidated basis, global shipments were down about 2% quarter over quarter as we advance our mock Holly and Hawesville rebuild projects. As Jesse mentioned earlier, the continued progress on these rebuilds will deliver valuable incremental funds in the second half of 2021. Realized prices increased substantially versus prior quarter as a result of higher lag LME prices and delivery premiums driving a 19% increase in sequential net sales. Looking at operating results, adjusted EBITDA was $34.4 million this quarter, and we had an adjusted net loss of $27.3 million, or $0.27 a share. In Q2, the adjusting items were $32.9 million for the unrealized impacts of four contracts, $24.7 million for early extinguishment of debt related to our Q2 refinancing, and $49.8 million for a tax recovery related to our historical investment in the Helvavik project. We expect to realize the cash benefit of the HelgaVic adjustment over the coming years via reduced cash tax payments. Liquidity at the end of the quarter was $110 million via a mix of cash and credit facilities. This represents an approximate $20 million improvement versus prior quarter liquidity levels. Turning to slide 7, as we forecast on our last call, the Q2 realized LME of $2,155 per ton was up $215 per ton versus prior quarter while realized U.S. Midwest premiums of $490 per ton were up $160 per ton over the same period. Realized Illumina was $330 per ton or about flat with prior quarter. Domestic power prices increased throughout the quarter, particularly in July. However, the price was still about 20% lower than Q1 due to the polar vortex-related price spike in February we discussed last quarter. Carbon prices continued their upward trend. Our realized cold price for Q2 was $390 per ton, a 30% increase over prior quarter. Looking ahead to Q3 specifically, The lagged LME of $2,375 per ton is expected to be up about $220 per ton versus Q2 realized prices. The Q3 realized U.S. Midwest premium is forecast to be $650 per ton or up $160 per ton, and the European delivery premium is expected at $250 per ton or up $75 per ton versus the second quarter. Realized Illumina is expected to be $350 per ton or up about $20 per ton versus prior quarter. Taken together, the LME, Illumina, and delivery premium pricing moves are expected to increase Q3 EBITDA by about $50 to $55 million versus Q2 levels. Power prices have continued to trend upward in the domestic IndieHub and European Nord pool markets. At current forwards, we expect a roughly 20% increase in quarter-over-quarter power costs, which equates to a $15 million reduction in EBITDA versus Q2. As I noted earlier, coke and pitch prices have continued to rise, and we expect that trend to continue into Q3 with an overall increase of about 10% on each. We expect realized coke prices to be $425 per ton in Q3, or about $35 per ton greater than Q2, and realized pitch prices to be $835 per ton, or about $75 per ton greater than Q2, driving a $5 million EBITDA decrease versus prior quarter in some. Finally, we continue to make significant progress on the Mount Holly restart and the fixes on the year-end equipment issues in Hawesville. We expect a $10 to $15 million EBITDA increase versus prior quarter driven by sequentially increased production. In sum, we expect all of these items taken together will equate to an approximate EBITDA increase of $40 to $50 million from Q2 levels. As we've discussed previously, we have in the past managed our exposure to various commodities by entering into forward contracts largely in support of our long-term investment in the Mount Holly restart. Based on current stock prices, we expect a $40 to $45 million realized loss for the quarter on our hedges in Q3. This result will be below EBITDA geographically and will impact adjusted net income. I'd like to provide a little more detail today on our forward sales positions and how they'll change in quantum over time. As Jesse discussed earlier, our strategy going forward is to remain exposed to LME and regional premium prices overall. Our hedging activities in 2020 and 2021 were designed to de-risk large investments, most notably the restart of Monholly in a volatile environment. Starting with L&E, we have only about 20% of our remaining 2021 volume sold forward, which is split evenly between fixed price customer contracts and financial hedges. In 2022, that same percentage drops to about 15% as our financial forwards are reduced by half. With respect to delivery premiums, which include both European and Midwest premiums, about 45% of our 2021 exposure is hedged. falling to approximately 25% in 2022. Let's turn to slide eight, and we'll take a quick look at cash flow. We started the quarter with $26 million in cash and ended June with $9 million. A few notable outflows for the quarter included $19 million for CapEx, the vast majority of which was Mount Holly restart related, $21 million for hedge settlements, and $16 million for paydowns of our domestic revolver and turnbull. The net impact of our early Q2 refinancing was an inflow of about $47 million, as we discussed on our last call. Working capital was an outflow of about $45 million driven by increased receivables from higher sales prices on rising L&E levels and various inventory builds supporting our ongoing restart work. Finally, today, I'd like to provide some perspective on how we expect to exit the year as the restart project at Hawesville and Mount Holly move toward completion. Please keep in mind that these comments are not a forecast but are simply a guide using the price environment as it exists today. We continue to make solid progress on the ongoing Mount Holly and Hawesville projects and expect that we will exit 2021 with our targeted 75% and 80% capacity production rates, respectively. As Jesse mentioned earlier, we have experienced some delays in the Mount Holly project due to supply chain and hiring issues related to the pandemic. As a result, the Mount Holly volume increase will be more heavily weighted toward the end of 2021, resulting in lower total volume for this year than originally anticipated. We're also now anticipating that some of the relining activity at Mount Holly we had originally expected to occur in 2022 and 2023 will now be brought forward to 2021. We expect that this will increase our CapEx in the back half of 2021 by approximately $25 million, which will then lower our CapEx in 2022 and 2023 by the same amount, as Jesse mentioned earlier. From an EBITDA perspective, it's clear that our core markets have continued to strengthen since our last conversation, and hence the outquarters could have even more potential than we discussed previously. I detailed our current thinking on Q3 just a few moments ago. Bringing the business forward to Q4 and beyond at today's spot prices would yield a result of about $150 million in quarterly EBITDA. With that, I'll turn the call back over to Jesse.

Thanks, Craig. Just before we turn it over for questions, I'd like to take a few minutes to discuss our key focus items for the second half and a few observations on our strengths and priorities for the business as we look to the medium and long term. We're very fortunate to have the opportunity to be bringing significant additional production online, both hostile and non-polar, into this favorable pricing environment. We intend to be laser-focused over the back half of the year on operational execution to ensure that we bring this production online as quickly and efficiently as possible and enter 2022 with each plant operating at our target production levels. Looking back over the past few years, our operational execution in the U.S. has simply not been good enough, and this will be a key focus item as we move forward and improve the performance of the U.S. plants. To this end, as you know, we've recently changed leadership in the U.S. operations, and Gunnar Guldagsen and team are already implementing changes to improve our execution in the back half and going forward. As we move forward to the medium and long term, we'll prioritize leveraging what we believe are several structural strengths that Sentry has in the markets in which we operate. The map on page 9 well demonstrates one of these strengths. Our production footprint is located squarely in the two shortest markets for aluminum in the world, both of which continue to experience strong demand growth but have seen a significant decline in supply over the past two decades. In the U.S. specifically, where Century is already the largest producer, we are also the only producer currently bringing additional production online to meet the growing demand. This puts us in an advantageous position going forward to benefit from strong and bring on the remainder of our curtailed capacity at Cloudville and Mount Holly should conditions continue to warrant. To fully take advantage of this environment, we intend to continue to face the aluminum markets and offer direct LME and regional pricing exposure for our shareholders. To that end, and as Craig detailed earlier, the majority of our existing hedge position will roll off at the end of 2021, and we do not intend to replace those hedges, which were largely put in place to support the Mount Holly Restart Project. Continuing to the product side, we have seen significant increase in demand and interest in sustainability in green products. We're very well situated to benefit from these trends via our natural oil brand, which has amongst the lowest carbon footprints in the world. And we expect that we will sell all natural oil production at a premium for the first time in 2022. In Iceland, our recent power contract extension secured the energy necessary to potentially expand the natural line into value-added products, and we'll come back to you with additional details on this in coming quarters. In the U.S., renewable energy penetration from solar and wind has already increased the share of renewables in our energy mix significantly, a trend that we expect will continue. This is a reminder both Cosmo and Seabree purchase energy from the MISO energy market and so benefit from the accelerating renewable energy transition across that marketplace. This arrangement also gives us the flexibility to enter into direct transactions with renewable producers, an objective that we are actively pursuing as wind and solar continue to enter the marketplace as the lowest marginal cost generation source, lowering our overall energy costs. Finally, as we combine the advantageous structural footprint of our smelters with the growing demand from our customers for green products, we believe there are opportunities in the U.S. to continue to expand our scrap and recycling capabilities and provide low-carbon billet to our customers. We've recently expanded our capabilities in this regard with the hiring of Matt Abboud, who joins us as SVP of Strategy and has a long history in running secondary aluminum businesses and marketing billet and other green products, both in the U.S. and Europe. We're working hard on these initiatives already, and we'll report back to you with additional details as they develop. And with that, Charlie, we'd like to open up the line for questions.

If you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, it's a star followed by 2. When preparing to ask your question, please ensure your line is unmuted locally. Our first question comes from David Galliano of BMO Capital Markets. Your line is open. Please go ahead.

Great. Thank you for taking my questions. I've actually got a lot of questions, but I'll try to keep it somewhat concise here. I guess no particular order. I'm going to try and focus in on the guide for the third quarter and sort of go back to what was said last quarter, which was I believe it's kind of 250 million of second half EBITDA at the time. I think that was the number, you know, with prices and everything where they were. Now we're looking at, I think, what's kind of an 80 million third quarter implied number. And, you know, I also heard a 150, but I didn't hear a timeline on the 150 quarterly EBITDA. So I'm wondering if you can just kind of reconcile what's changed given. I know we talked about changes here. You quantified some cost changes here. on a quarter-over-quarter basis, but I'm just curious, you know, kind of what's changed since the $250 million commentary in May? And if you can give me a sense as to what you're thinking about the fourth quarter so I can kind of get, where's $250 now, basically, is what I'm trying to say. for the second half.

Yeah, sure. Sure. So first of all, thanks for the question. I know where you're coming from and prepared to do that. So just to make it clear, you're right. Everything that we talked about on the call, that was sequential Q2 to Q3. So I'll put that aside for now. If we want to come back to that, obviously we can. So let's talk about what we said on the last call. And it was actually just for clarity, it was 270, right? It was the back half. So what I'd like to do for you is I'd like to take Q3 and Break up that 270. We'll say it was 50-50. I mean, that was a representative number of the spot at the time, and all kinds of things have moved. But I'll take that half of that 270, walk that to the 80 for the third quarter, and then what I'm going to do is take that 80 and build it to the 150 for the fourth quarter, okay? And I'm going to do that in about six lines for you. So let's start with Q3. If we take that 135 or half of the 270, walk that down to the 80 that we're thinking for Q3 now, the number one mover was energy cost. We lost about $25 million. IndieHub is up about $9 a megawatt hour. It's up to $38 per megawatt hour. Big move there. And the even bigger move was on the Nord pool side, up $25 per megawatt hour to 61 versus what we had sitting in that 135 last time. So then you bridge $25 million. Then Coke price. Coke price is up about 10%, about $40 to $425 when we're looking at the third quarter now. That was about $5 million. And then finally, the remainder of the 25 was volume. So about 18,000 tons less of shipments we're expecting in Q3. This is wholly driven by the Mount Holly timing that Jesse and I talked about earlier. Again, we get that exit velocity, so you're going to hear that here in the fourth quarter. But for the third quarter, those three items, 135 plus 25 for energy, plus 5 for coke, plus 25 for volume, will put you at 80 for the third quarter. Was that clear?

So far, so good. Got it.

Good. All right. So now let's take that 80, and I'm going to take that and build it up to the 150 for the fourth quarter. So LME, if we take a look at it, we're doing this all at spot. So obviously out in the fourth quarter, we're at spot. LME is going to be up $170 for a realized fourth quarter of 2545 using today's price. That's plus 20. starting from a base of 80. Delivery premiums are going to be up $25 million. Midwest premium, this is going back to Pete's comment, is going to be up about $100 to $750 per ton. EDPP expecting up $110 to $360 per ton, which is today's spot price, another $25. And then finally, $25 million from incremental volume. That's an incremental 18,000 tons that I'll be bringing on, and mostly in Mount Holly, but also in Mount Holly and Hawesville in the fourth quarter. So from 80, you've got 24 LME plus, plus 25 for delivery premiums, plus 25 for volume, gets you to 150.

And just to be clear, David, so in that guidance for that illustration for Q4, we will be building volume in Q4. So once we then move beyond Q4, there will be additional volume gains as we'll be running in that full run rate going forward in Al-Hawli and Hawthorne.

Okay, that's helpful. And then just I guess one question on that bridge to the fourth quarter. What did you assume for power? And just obviously you assumed energy is the same, obviously, so for quarter over quarter, right? Yeah, we did. We did.

So, yeah, and just to speak to energy a little bit. So we're just using the forward there, David. Right. When you do look at it, you know, we've seen the gas price come up quite a bit, you know, falling oil up over the past quarter here, including the forwards. But when you do look at those forwards, you do see that it does show a pretty significant backwardation, especially in the gas price, but also in IndyHub and in the North Pole pricing. And so long-term, we think that, you know, those markets should move back towards sort of the equilibrium level we've seen over the past few years here. But we are seeing that price spike in the forward month.

Okay, that's helpful. And then just as we continue into 2022 with those tailwinds, Exiting 2021, the other one I think that springs to mind is the commentary regarding, you know, billets and obviously contacts going off and setting a higher pricing. Can you frame the EBITDA uplift potential in 2022 if, say, for example, EU billet prices stay where they are?

Yeah, so we're just entering pricing season now. Obviously, we're looking at just U.S. bill of production. We don't have any bill of production at Grunertum yet, although, as we said, we're looking at that for the future. But if you just look at the U.S. market, You know, prices are up significantly from when we entered into the annual contracts last fall. We're just starting to enter that season now. But just to give you a sense, we've got about 300,000 tons of bill of production in the U.S., and you can look at where spot prices were trading in the fall, where spot prices are trading now, and you can, you know, allocate that across those tons to get a sense of how that might impact our EBITDA. No hedges affecting those billet premiums, just to be clear. Those are totally in hedge.

So, can you just help me out with that last part about the spot now versus back then? And I'm sorry, I said to you, I apologize, but anyway, it doesn't matter, but it does. But can you help me with that comment about spot now versus spot where it was? Because, you know, for two reasons. One, I don't really have a good sense, to tell you the truth, where spot is now versus where it was. And then two, how does the contract market differ from the spot market? If you can frame sort of the realistic price uplift.

Yeah, I mean, we'll come back to you with the details. We're just touching base with our customers now and going into that selling season. But you can look at spot pricing premiums around $0.25 today. multiply that out across the tonnage, and you can see pricing is quite high right now. How that allocates down into the annual pricing, which can be a little bit different, obviously, than the spot cargoes on the spot market, we'll see, and we'll come back to you in Q3. But there is some significant potential for EBITDA growth there, for sure.

And you said the spot increase was 25 cents a pound, is that what you said?

The spot is at 25 cents per pound. You know, that's probably somewhere between 15 and 20 cents from where it was trading last fall.

Right. Okay. All right. I'll turn it over to someone else. Thanks.

Our next question comes from Lucas Pipes of B Riley Security. Your line is open. Please go ahead.

Thank you so much, and good afternoon, everyone. They've asked a lot of my questions. I just want to make sure I understood the bridge from Q3 to Q4. All right. It's hard to understand everything that was said there. Could you just repeat the bridge from 80 to 150, Q3 to Q4? Yeah, sure.

Sure, no problem, no problem. So starting with 80, we would add 20 to that for LME. And just to give you the totals on that, that's LME being up $170 per ton to 2545 realized Q3 to Q4. We'd add $25 million for delivery premiums. Midwest premium is up $100 per ton. EDPP is up $110 per ton. And then finally, we would add $25 million for incremental production. So that'll be about 18,000 tons shipment increase from Q3 to Q4 for $25 million. So 80 plus 20 plus 25 plus 25, it did the 150.

Terrific. Very clear. So one of the other items that has kept steady here is Illumina. And from what I recall, you had longer-term contracts that protect you on price movements there for Illumina. But as we look out to 2022, could you remind us how that variable may change? We'd appreciate your thoughts on that. Thank you.

Sure. So you're right. Over time, there's a couple of different ways that we've purchased our aluminum over time, both on an API basis, which is the market-based rate, and also on an L&D percentage basis, which is just the percentage of the aluminum price. Going forward, that's something we'll continue to look at. So we're just, again, entering into the season to put those contracts in place for 2022. We do have some existing 2022 LME percentage contracts already in place, mainly discipline and quality. But we will start entering into and looking to secure the rest of that Illumina going forward into 2022 or the coming quarter. As we look to do that, you know, I do view the cost side a little bit differently. So very clearly on the revenue side, you know, we wish to remain exposed to the market and to provide that pricing look-through to our shareholders. On the cost side, from time to time, you know, we'll look at that. We'll see what we view as most advantageous, given the different market pricing, our markets for both those metrics, and we'll make those decisions.

Got it. No, that's helpful. I appreciate those thoughts. Jesse, maybe taking a step back, congratulations on the role. When you think about your priority list here, could you share that with us? What do you think is going to Number one, two, three on your mind as you look out at the helm of the company.

Yeah, sure. Thanks, Lucas. Very clear number one here, and you heard me speak about it a little bit in my prepared remarks, but just to reiterate, We do need to focus on operational execution in the U.S. We have these two rather significant projects ongoing in Mount Holly and also bringing back production at Oddville. And so we are going to be – that will be our number one priority over the back half is executing those, making sure we exit 2021 without those target production levels and really on solid footing going into 2022, which we continue to expect to be a very favorable market for us. So that's the clear number one. Then as we look forward and start to look at our other priorities, what we want to do is look where our strengths are. So in the US and in the EU, we find ourselves both in these very short markets. And we want to look and see where we can bring to our customers additional value. So that may be an additional production. So you may see us look at bringing on that additional production at Osgoode and Mount Holloway should market conditions continue to be favorable. That may be bringing on additional value added capacity. As David, I think, was already starting to look forward to those EU billet prices. They are very high right now. And so that may be an area for growth for us in the future. And then in the U.S. and Europe, frankly, we think we're very well situated to benefit from the sustainability and green trends that we're seeing out there. Europe is very clear, I think, especially when you look at both scope one, two, and three emissions. We are really amongst the lowest in the world. So we feel like we have real value to bring to our European customers there. But then in the U.S., we also have started to see increasing amounts of our energy mix come in from renewables, which is lowering our carbon footprint on our existing units. And we also think we've got some good opportunities on the recycling side to continue to bring additional lower carbon units to our customers. So maybe that gives you a sense of kind of how we're looking at it. Very clearly, though, over the back half, very focused on operational execution. We need to get these projects done.

very clear. Appreciate that, and all the best of luck. Thank you. Thanks, Lucas.

Our next question comes from John Tumazos of Very Independent Research. Your line is open. Please go ahead.

Thank you for taking my question, and congratulations. Mike said he hired a really great guy.

Thank you, John.

I have three thoughts or questions. Just on the surface, I guess Friday the Midwest premium CME Group future was 33.5 cents, and the LME was 117.3, so it seemed like $1.51 screen revenues. And the Illumina future was $2.93 per metric ton, And it seems to just not go up however much metal and Midwest premiums go up. It's like 11% of LME without counting premiums. And it would seem on the surface that after you get these startup hiccups gone and you run off some of your hedging later next year, 2023, 50 cents a pound on 2 billion pounds ought to be in the neighborhood or a billion dollars for your billion to market cap. My first question is, is that in the neighborhood? My second question is, would you covenant to allocate capital initially in good years to repay all the debt and all the liabilities and build a cash nest egg? So you're never tempted to hedge again. And then thirdly, after you've cleaned up the balance sheet and you're in a good spot, do you think it's reasonable to send the majority of the cash flow capital allocation to dividends or buybacks?

That's a good question, John. Thanks. I do agree that I do think the company is very well situated going forward. We do feel like there have been some structural changes in the aluminum markets where we are starting to see some discipline on the supply side, driven by whatever metrics you want to look at, but certainly I think carbon intensity, as some of the producers in some of the nation states around the world start to try to – bring down their carbon footprint and therefore put some caps on their supply-side growth. does create the potential for the first time in quite a while for some supply-side discipline and for the continued strong growth story and demand story on aluminum to start the carry of the day, which would give us and give Century, given our existing footprint with where our plants are located, some real good opportunities to print some really good numbers and bring in some really good cash flows. So I'd agree fully there. As we look to capital allocation, and again, I just want to reiterate, our focus today is going to be on operational execution and bringing these units online. But as we look to capital allocation, we'll look across a variety of factors, as you might expect, both between paying down debt or reducing our debt load, Also, we'll consider organic growth, which I'll come back to in a minute because I think we've got some really good organic growth stories within the company. We'll, of course, always look at M&A out there and see what's out there. And then, of course, we'll look at returning capital to our shareholders. But it's a little ways out, and so we'll come back to you with detail once we've started to print those numbers and bring in those cash flows. But for now, we're just going to focus on bringing the units online, making sure we do so in a cost-effective manner.

Thank you. And I encourage you, and I'm looking at how good 2023 is going to be, and I don't care if you missed this last quarter. That's in the past. I think if you put a press release in one-inch letters on your homepage tomorrow morning saying, we're never going to hedge again, and we're going to not use leverage and return capital to the people that own it, your stock could go up $10 tomorrow. Good luck.

Congratulations.

Thanks, John. Thanks.

As a reminder, if you would like to ask a question, please press Start followed by 1 on your telephone keypad now. We have a follow-up question from David Gaglino of BMO Capital Markets. Your line is open. Please go ahead.

Great. Thanks. John took my capital allocation question, although he did it in a much more eloquent way. But the question I have is just on a couple of clarification questions. What is the production target as you exit on a quarterly basis with the changes? As you exit 2021, as we think about 2022, what is the production target?

Yeah, so with the announcements we've made, that's taking Hawesville to 80% capacity and taking Mount Holly to 75% capacity across all the tons across the Forest Milchers, just to give you a round number, it's about 900,000 tons of annual production capacity. And then you can obviously just divide that by four and you got it.

Okay, okay, good. And then on... And it is kind of minutiae. I don't disagree with John's comment earlier. But in terms of the near term in the third quarter, I got all the negatives from 135 down to 80. But I thought premiums went up since May and other things went up. Is it because everything was hedged? Is that why we didn't get any positives on the price offset to kind of help offset some of that move or is there something else going on?

Well, just remember, when we gave that forward-looking guidance, we assumed spot premiums at the time of the call. So just for instance, LME was 2450 spot at the time and realized it actually will come in a bit below that given our lagged contracts.

So I'm sorry. So does the $80 million for the third quarter, I mean, obviously that's based on, you know, two-month lags, I think, right? if I'm not mistaken.

Yeah. Yeah. So go ahead. Yeah. Let me, let me give you the, the, the quantum. So, so you're right. L and E. Well, let me, let me back up. I think to where Jesse started, because that, that, that was definitely the right direction. So when we, when we talked about this number on the, on the last earnings call, we just took spots instead of spot existed from the first day of the third quarter out to 1231. This is what EBITDA would look like. And that number at the time, David for L and E was 2450, right? So when I look at Q3 right now, obviously what spot's gone, what I have priced, and as you know, you've been following us for quite some time, sitting in Q3 right now, the majority of Q3 is priced for me. I think that number is going to be about $23.75. So I lost, actually, $75 per ton on LME from that $135 down to the $8. Now, but to be fair, I picked it up on Midwest Premium, right? So I was down about, I was $75 better there. Those two offset to zero, hence why I left it out.

Okay. Understood. Understood. That's it for me. Thanks.

And, David, just one follow-up to your question on billet prices. So I forget exactly what I said. You know, it's going to be in that $0.10 to $0.15 range where spot was last fall versus where spot is today. But, again, just to reiterate, you know, the annual pricing will not tend to match exactly the spot pricing. So we'll see where it comes in, and we'll give you additional sense of that on the Q3 call.

Okay. And did you say 300,000 tons or 380,000 tons?

300,000 tons of billet capacity. It's maybe 5,000 tons under that, 295. Okay.

Perfect. Thanks. Yep.

There are no further questions on the lines at this time.

Okay, well, we really appreciate everyone's time. We look forward to coming back and speaking with you again after Q3. And thanks very much.

This concludes today's call. Thank you for joining. You may now disconnect your line.