Century Aluminum Company

Good evening. Thank you for attending today's Century Aluminum Company third quarter 2021 earnings conference call. My name is Hannah and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Peter Tripkowski with Century Aluminum. Please go ahead.

Thank you, Hannah, and 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 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.centry.gov. 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 to Jesse.

Thanks, Pete, and thanks to everyone for joining the call today. I'd like to start by speaking about the current market environment and give some highlights from the third quarter before Pete and Craig take you through the details. I'll then finish the call by walking you through our exciting new billet casthouse project at Grundertage. Okay, so starting on page three, we continue to see a robust market for aluminum in the third quarter, with prices hitting 13-year highs earlier this month. Price momentum has been driven by continued consumer strength, especially in the West, combined with energy-driven supply curtailments in China and, to some extent, Europe, and high transportation costs across the world. On the demand side, we have seen consumption return to pre-COVID levels and expect that 2021 demand growth will be nearly 10% from 2020 levels. This growth comes despite headwind in automotive and aerospace, given the semiconductor shortage, and lower commercial airline travel, respectively. Recovery in these lagging sectors in 2022 would help drive continued demand growth in 2022 and beyond. We have continued to see especially strong demand in extrusions, with billet demand and spot premiums remaining at all-time highs in the U.S. and Europe. As a reminder, because U.S. billet market prices are set on an annual basis, our 2021 billet production was priced before the current run-up in prices. However, we are now mostly through the 2022 commercial season, and we are pleased to announce that we are able to achieve near-record billet premiums for our 2022 annualized sales. While we're still finalizing the entirety of our book, we expect that we will achieve incremental billet price gains near the midpoint of the $0.10 to $0.15 range I provided on our last call. If you extrapolate that against our expected 250 to 275,000 metric tons of billet production in 2022, you will see that we expect this to be a substantial incremental EBITDA generator versus our 2021 performance. On the supply side of the equation, continued production curtailments in China are now approaching 4 million tons of annualized capacity due to compliance with the new Chinese dual control system for energy consumption, as well as flooding and other energy disruptions. As a result, China has remained a net importer in 2021 and is expected to remain a net importer next year as well. We have also seen much smaller production curtailments in Europe due to high energy prices. All in all, these supply curtailments have left the physical market exceedingly tight and regional delivery premiums near record highs in both our key markets in the U.S. and Europe. Pete will give you the details in a minute. These curtailments have led to continued significant drawdowns in inventories across the world, bringing inventories to post-financial crisis lows. We now anticipate continued production deficits into 2022 that could result in inventories falling below equilibrium levels. On the input side, we are seeing continued price inflation across our key commodities, most significantly on the energy side, where rising oil, gas, and coal prices have raised NordPol and MISO energy prices. Forward MISO and NordPol prices for Q4-21 and Q1-22 are now trading at elevated levels, reflecting rising gas and coal prices driven by shortages in the EU and Asia and rising LNG and coal exports from the U.S., While we expect the impact of these prices will be significant to our Q4 and Q1 results, we do believe these markets will return to more normalized levels in the second quarter of 2022 and beyond, which is reflected in the steep backwardation in the forward curves in both MISO and Nordpool. Craig will provide the detail on the expected impact of these elevated prices to our Q4 results shortly. On the raw materials side, we have recently seen price increases in alumina, mainly driven by supply curtailments in China and a fire in the Jamalco alumina refinery in Jamaica. While alumina prices remain within their historical price relationship to aluminum prices of 15% to 17%, they are elevated from price levels earlier in the year. Finally, as has been widely reported, production cuts in China have led to concerns of shortages of certain alloying materials globally, namely magnesium and silicon. Close to 80% of the world's magnesium production now comes from China. And earlier this quarter, they curtailed significant amounts of this production due to energy shortages. Fortunately, we have now begun to see some easing in these pricing for the past week or two as production has started to increase in China. While we're monitoring the situation closely, we believe we are well-situated to pass along the majority of any price increase associated with the shortage and have sufficient supply on hand to meet our needs well into next year. 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 industry and jobs. The Biden administration has continued to show its support of the Section 232 program for aluminum, with its recent agreement with the EU to implement a tariff rate quota on all primary aluminum imports from the EU to the U.S. Under the new agreement, a tariff rate of 10% will continue to apply to all EU imports of primary aluminum above a quota level of 18,000 metric tons per year, a level which means that the vast majority of imports into the U.S.' 's 6-million-ton market remain subject to the tariffs. We believe this agreement continues to show this administration's support for the domestic aluminum industry and its workers as we continue to invest and expand. Turning to our own operations, we've made good progress in the quarter on our expansion programs and generally had stable and consistent operations across our system. In the U.S., we continue to make substantial progress in our Mount Holly restart program, and I'm glad to say that the project remains on track. 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 have been shuttered since 2015. The majority of the reline activity will take place this year, with the remaining relines occurring in 2022 and 2023 if sales fail. As we discussed on our last call, we have experienced some delays over the course of 2021 due to COVID, 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. These risks, of course, remain as labor markets and shipping schedules remain tight, and we are reliant on supplies and hiring occurring on time to complete the project. This has pushed the bulk of our incremental volume gains into Q4 and brought forward some of the realign activities that we had originally planned to occur in 2022 and 2023 into Q4. At Hotsville, we've made good progress towards reaching our end-of-year goal to return to four full potlines of operation, about 80% of our capacity. This process remains on schedule and in line with our previously issued estimates. I'd like to take the time to make specific acknowledgement of the extraordinary efforts of our teams at all of our locations during the pandemic. During Q3, we experienced our highest levels of COVID infection across each of our operating locations as the Delta wave of infection traveled across the U.S. and Europe. Fortunately, these levels of infection have now receded towards pre-Delta levels, and all locations are operating well. In Europe, Gruner-Tange and Visagen continued their excellent performance that we've become accustomed to. We'll discuss our very exciting new billet cash house project for Grunertanghi at the end of the call. All in all, we remain focused on completing our restart projects at both Hodgeville and Mount Holly and entering 2022 at our targeted production levels across our system. We're starting to see some signs of progress in our recently implemented operational execution programs and hope to have that continued positive developments on that front in the future. And with that, I'll turn it over to Pete.

Thanks, Jesse. If we can move to slide four, please, I'll take you through the current state of the global aluminum market. In the third quarter, global aluminum demand was up approximately 7% from prior year. This increase was mainly driven by the world X China, which saw demand up approximately 16%, while China was an increase of only 1%. Global production was up approximately 4% in the third quarter from prior year. with 3% supply growth in China and 5% growth in the world ex-China. Sequentially, global supply growth was flat. Taking a closer look at our regions, in the U.S., demand was up 12% from prior year, while supply was down 2%. In Europe, demand was up approximately 16% from the prior year, and supply growth was up only 3%. We continue to see these two markets as the shortest markets in the world, and that will carry into next year and beyond. As we saw last quarter, demand continues to outpace supply growth around the world, and the global aluminum market is now projected to be in a one and a half million ton deficit in 2021. Most market participants estimate a larger deficit next year due to the tightening of power availability in China resulting in supply curtailments and delays in expansion projects. Global aluminum inventory levels have fallen to post-financial crisis lows of less than 60 days of primary aluminum consumption. These inventory levels, along with the global deficit, should continue to support higher prices going forward. Okay, turning to slide five, please. We continue to see the highest pricing for aluminum in over 10 years and near record premiums. The cash LME price averaged approximately $26.50 per ton in the third quarter, which was up approximately 10% or $250 per ton sequentially. Currently, spot prices are around $2,700 per ton. In the third quarter, regional premiums averaged 33 cents per pound in the U.S., which was approximately 30% sequentially, and averaged approximately $360 per ton in Europe, an increase of 50% sequentially. Current spot prices of the U.S. Midwest premium remain near record highs of approximately 30 cents per pound, on increasingly tight market and high freight rates, and prices in Europe are approximately $300 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 third quarter. Before I get into the details, I'd like to point out that on a go-forward basis, we will remove share-based compensation from our adjusted results. This decision was made by the historic fluctuations in non-cash mark-to-market adjustments and their distortive impact on earnings. We have shown the previous quarter both on an as-presented historical basis and an updated basis. The change between the two prior quarter views is approximately $500,000 of adjusted earnings and one penny of BPS. Please refer to our earnings release for additional details. Okay, on a consolidated basis, Q3 shipments were up 3% quarter over quarter, primarily driven by Hawesville and Mount Holly as the ongoing rebuild gained traction. Realized prices increased substantially versus prior quarter as a result of higher lag LME prices and delivery premiums, driving a 10% increase in sequential net sales. Looking at operating results, adjusted EBITDA was $70.3 million this quarter, which represents the highest quarterly level of adjusted earnings we've achieved in the last six years. We had an adjusted net loss of $5.7 million, or $0.06 a share. In Q3, the adjusting items were $35 million for the unrealized impacts of forward contracts, $7.7 million for the settlement of two separate historical disputes, and $4 million for share-based compensations. Liquidity at the end of the quarter was $127 million, composed of a mix of cash and credit facilities. This total represents a 17% improvement versus prior quarter liquidity levels. Turning to slide seven, as we forecast on our last call, the Q3 realized LME of $2,375 per ton was up $220 per ton versus prior quarter, while realized US Midwest premiums of $670 per ton were up $180 per ton, and European delivery premiums of $245 per ton were up $70 per ton over the same period. Real-life alumina was $340 per ton or about flat prior quarter. Both domestic IndyHub and European NordPool energy prices increased steadily throughout the quarter. IndyHub prices ended Q3 at an average of $43 per megawatt hour or up about 40% versus Q2, while NordPool prices averaged $81 per megawatt hour or up 60% versus prior quarter. Carbon prices continued their upward trend as well. Both Coke and Pitch quarterly prices were up about 12% versus Q2 on average. Let's turn to slide 8 and we'll take a quick look at cash flow. We started the quarter with $9 million in cash and ended September with $58 million. A few notable outflows for the quarter included $20 million for CapEx, the majority of which was Mount Holly restart related, and $37 million for hedge settlements. Working capital was an inflow of about 32 million versus prior quarter, primarily driven by payable timing. Let's turn to slide nine, and I'll give you some detail on the fourth quarter. This is a new slide we've inserted into our deck, which is intended to make the buildup of the next quarter a bit easier to follow. As always, please note that this is not intended as a precise forecast, but is solely intended to show how spotting forward prices, combined with volume increases, could impact our profitability. For Q4, the lag LME of $2,640 per ton is expected to be up about $265 per ton versus Q3 realized prices. The Q4 realized U.S. Midwest premium is forecast to be $740 per ton or up $70 per ton, and the European delivery premium is expected at $360 per ton or up $115 per ton versus the third quarter. Realized alumina is expected to be $375 per ton or up about $35 per ton versus prior quarter. Taken together, the LME, alumina, and delivery premium pricing moves are expected to increase Q4 EBITDA by about 50 to 55 million versus Q3 levels. We continue to make significant progress on Monholly and Hawesville. Both plants are scheduled to hit their targeted production levels by year end. we expect a $10 billion EBITDA increase versus prior quarter driven by sequentially increased production. Power prices have continued to trend upward, particularly in the domestic IndyHub market. At current forwards, we expect a 40% increase in domestic energy prices versus Q3, while more pool prices are expected to be moderately lower than the previous quarter. These forward values, combined with our realized quarter-to-date prices, equate to a $25 million reduction in EBITDA versus Q3. As I noted earlier, Coke prices have continued to rise, and we expect that trend to continue into Q4 with an overall increase of about 8%. We expect realized Coke prices to be $475 per ton in Q4, or about $35 per ton greater than Q3, driving a $5 million EBITDA decrease versus prior quarter. In sum, we expect all of these items taken together will equate to an approximate EBITDA increase of $30 to $35 million from Q3 levels for a Q4 pro forma total of about $100 to $105 million. 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 Monholly Restart Project. Based on current spot prices, we expect a $45 to $50 million realized loss on our various hedges in Q4. This result will be below EBITDA geographically and will impact adjusted net income. As Jesse mentioned earlier, despite rising Q3 COVID levels coupled with supply chain and hiring issues, 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 we discussed on our last call, we expect the bulk of the remaining capital spending for the Mount Holly restart to be incurred in the fourth quarter with only limited relining expenses extending into 2022 and 2023 as we finish the complete overhaul of the legacy operation. Before I turn the call back over to Jesse, I'd like to call everyone's attention to some new details we've included in the appendix of today's presentation. We have included analysis on our year-to-date and expected total year, performance on various operational financial items, as well as a breakdown of our value-added product portfolio with total capacity and expected total year volume. Additionally, we have outlined our pricing conventions and the components of our cash costs. Finally, we have provided a detailed schedule of our financial hedge volumes by commodity and by year. Our hope is that you will find these additional disclosures and tools both insightful and helpful. We intend to provide and update this data in our earnings presentations on a quarterly basis going forward. With that, I'll turn the call back over to Jesse.

Thanks, Greg. Turning to page 10, I'm really pleased to announce the commencement of construction of our new bill at Casthouse at Grunertangi. The new cast house, which will be fully powered with renewable hydropower from our partners at Landsbergen, will produce 150,000 metric tons of natural billet and will also provide an incremental 60,000 metric tons of foundry alloy capacity, bringing total foundry alloy capacity at the plant to 120,000 metric tons per year. All of this new value-added capacity will replace current standard-grade P1020 production, resulting in the capability to cast over 80% of Grunertangi's production as value-added product. This additional value-added product will provide a new source of incremental margin to our already excellent operations. The CASAS expansion will also enable the continued progress of our capacity creep program, which we believe will ultimately bring production at Grunertangi to above 330,000 metric tons per year from its current 320,000 metric tons production levels. This is important. All of this production will have the capability to be cast as natural, our low-carbon aluminum brand, which has total scope one, two, and three emissions of less than four tons of CO2 per ton of aluminum, amongst the lowest carbon footprints in the world and less than 25% of the industry average. Current record high billet premiums in Europe show that the market is calling for additional low-carbon green billet production, and we have already seen very strong interest from our existing customer base to purchase billet from Grindertage. The European market is currently about 1 million metric tons short of billet production and is expected to continue to grow at 5% annually over the next several years. This market short position is currently filled by a number of high-carbon footprint import sources, which would be replaced in part by our industry-leading natural billet, lowering our customers' carbon footprint. We believe that we will have no issue placing this billet to high-quality customers in the European market, and the natural billet will receive an additional green premium above high-carbon billet in the marketplace. We currently expect that the project will be completed in the first quarter of 2024, and construction is already underway. The $120 million of project cost will be 100% debt financed via a new eight-year green term loan facility from Arion Bank in Iceland. Due to the structure of the financing, we do not anticipate the project will have any near-term cash flow requirements other than interest due on principle. and expect that, once it's operational, the incremental cash flows from the project will more than cover all debt service, amortization, and repayment obligations over the term of the financing. This project fits directly with Incentory's strategies I discussed on our last call to leverage our structural position in the world's two shortest aluminum markets, in this case, Europe, and service our customers with reliable local production of the products they require. This project also advances our strategy to provide increasingly value-added and green products to the market, thereby increasing the value we deliver to our customers and increasing the marginal profitability of the tons we produce. We intend to vigorously pursue these strategies with all of our resources, both internal and external, to deliver further growth for our businesses and value to our shareholders. And with that, we'd like to open up the line for your questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Lucas Pike would be Riley Securities. You may proceed.

Thank you very much, and good afternoon, everybody. My first question is on the additional disclosures you provide in the appendix. I really appreciate that. And slide 17, I see about, if I read this right, about $200,000 hedged on the Midwest premium. I wonder, could you share kind of when those hedges were put in place and how you look to manage that exposure to the Midwest premium going forward? Thank you very much for your perspective.

Yeah, Lucas. So most of these hedges were put in place in association with the Mount Holly Restart Project, and so that gives you a pretty good sense of where those hedges were struck at. As we said on the last call and sort of as I look going forward, given our structural footprint in these markets in the U.S. and Europe, our intention generally going forward is to remain exposed to these pricings, both Midwest and LME. And if we do make any change to that in the future for any reason, it will probably be associated with a capital project like Mount Holly, and we'd be sure to let you all know when we do that.

I appreciate that. Thank you. And then switching topics to the bill of casthouse project, could you frame up the return expectations for a project like this? And I took a quick look through the release. I didn't see a capital figure attached to it. Maybe I missed it, but I would appreciate the capital requirements and then return expectations for that project. Thank you very much.

Sure. Yeah, we're really excited about this Cass House project. You know, and I think we've been discussing it a little bit with you all over the past year or so. Obviously, it was triggered, you know, our ability to enter into this was triggered with the extension of our Landsberg and Power contract that we talked about on the last call. And now we're excited to have commenced construction. The total project cost will be about $120 million. And as I said, that'll be entirely debt financed by our new facility with Arion Bank in Iceland. From a return perspective, you know, we won't go into the exact details, but as with sort of all projects like this, we obviously look at what the return is as we allocate our capital. And for this project, you could expect something for an unlevered IRR in the mid-teens.

Right, and just to add a little bit on that unlevered IRR in the mid-teens is we've used historical assumptions that are long-term historical assumptions. So, you know, Jesse had mentioned today where European bill of premiums are today. We certainly haven't used those in that mid-teen assumption. We've used long-standing historical run rates to get to that number.

That's super helpful. Really appreciate that. That's great to hear. Last question from me for now. I noticed an increase in the balance due to affiliates. Could you share, remind us what that is, what drove the balance up? And, yeah, I would appreciate your perspective on that. Thank you.

Yeah, sure, Lucas, good catch. That's pure timing, pure timing. The majority of that is going to be Illumina purchases. So you'll see that if you were to go out and look, you know, over more than a couple quarters, you'd see that balance move all around. So that's just purely timing, and you'll see it come back into line over the next quarter or two.

And so if this wasn't an affiliate, this would just be part of accounts payable?

It is accounts payable.

Is that the way to think? Yes. Got it. Okay. Very helpful. I'll turn it over for now. Thank you. Thank you very much. Thank you.

Thank you, Mr. Pipes. The next question is from the line of David Gagliano with BMO Capital Markets. You may proceed.

Hi, thanks for taking my questions. Let's see here. Some of the questions have already been covered. But just on the commentary around 2022 billet, I didn't quite catch the volumes that I know you mentioned previously. But can you tell us again, what are the volumes associated with that $0.10 to $0.15 increase?

Yeah, it'll be about 250,000 to 275,000 tons of production on the belt side next year, David.

Okay, perfect. And then if I flip back to slide, what is it here, 20, I think it is, with the value-add products, total 285,000 tons. Is there any, you know, what about the balance, you know, for, you know, non-billet products for next year in terms of expectations there.

Yeah, so just to go through the smelters directly, at Mount Holly, we should be around 170,000 metric tons of production. This is in total, David, and you can just subtract off the value-added products from here. At Osville, we should be about 200,000 metric tons of production. At Seabreeze, what do we say, about 210, 250 feet? 220 feet. Thanks. And then at Grinder-Tongue, it should be about 320,000 tons.

Okay. I know I didn't ask that question the right way. What I was really trying to ask was, so if I look at just the total fiscal year 21 outlook, It looks like value-added products, 385,000 tons. And I was just kind of doing a little mental math on that. So we've got 250,000, 275,000 accounted for for next year. I'm wondering if you can comment on the pricing on average expectations for the other, call it whatever the difference is between those two numbers, roughly 100,000 tons.

Yeah, so I think, David, you can just look to our, if you're trying to balance out the year, you can just look to the Q4 guidance, which should incorporate all of that. within the guidance that Craig gave you. I'm not sure exactly. I may not be following exactly what you're getting at. Yeah.

Let me try it again. For 2022, what I'm asking is for next year, right, you gave us commentary on 10 to 15 cent increase for 250 to 275,000 tons, right, a 10 to 15 cent increase for 2022. And what I'm saying is basically what do you think the increase is for next year for the remainder of your value-add products? relative to this year?

You're looking for pricing for the remaining value-added products for 2022? Correct. We'll give you that. As per normal, David, when we come back in February and round out the Q4 call, we'll give you that whole stack for 2022 going forward on that call.

Okay. No problem. Thanks for that. And then just, again, it's a bit of a clarification, but I think I know the answer here, but just to make sure everybody's clear on it, the outflow for the new cast house, there's not going to be any sort of capex on the cash flow statement. It's going to be, as you said, debt's going to go up and the cash outflow is going to be tied to the interest associated with that debt increase, correct, basically? Correct.

It will be. I mean, geographically, it's going to show up as capex, but it will be from a cash flow standpoint, David. The way to think about it is it's net zero. So as we draw down to build a facility, it'll be coming off of the revolving term loan, right, that we have in place. And it's an interest-only loan. So for the first couple, two and a half years, right? We're not going to be having any amortization on that. So you're going to see a drawdown on the loan, an increase in the capital spent for the company, which from a cash flow standpoint is going to be net zero, which I think is what you're asking.

Yeah. So can you just give us a sense on the timing of those Sure.

Yeah, sure. So, it's a $120 million project, as Jesse mentioned. The construction time is two years, right? So, this will probably change in six months, but I don't think materially. The shape of that spend is going to be about... $50 million of spend and hence a $50 million drawdown on the facility in 2022, and then $70 million of spend and hence the remaining $70 million drawdown in 2023 with metal to start coming out at the tail end of 2023. Okay, perfect.

Thanks. And then one last question for me. Really appreciate the additional disclosures, by the way, across the board, including slide 9, the current outlook. Now, since this is a new slide, and since I believe last quarter, there was commentary of about $150 million for the fourth quarter, and that is now $100 to $105 million. If I was trying to reconcile where there was a change versus the last quarter, I see the volume incremental is now $10 million. I believe it was $25 million last quarter. Can you just kind of give us a sense as to what the changes are in each of those buckets versus that $150 million expectation?

Yeah, sure. And I'll give you the two biggest buckets. The biggest bucket by far is power, and I'll break that down for you. So if you were to start at that Q4 pro forma 150 from last quarter, about 35 of that is power, okay? And just to put a quantum on it, the IndieHub price we'd assumed at the time, which is what the forward was, was about $38, right? Looking out to Q4 right now, it's $60, right? and Nord Pool is up another $5. So we had thought, you know, Nord Pool forwards when we talked last quarter were 60, now they're 65. So add that up, that's 35 million bad from that 150. The remainder, the majority of the remainder is Coke and Pitch. So Coke is up about $60 per ton versus the Q4 forwards when we talked last to $475, and pitch is up about 10% to $850. So to make it real simple, that $150 from last time, $35 worse in power, $10 worse in Coke and pitch, gets you back down to that $100 to $105 that we talked about in my prepared comments.

Okay, so the volume at Mount Holly and Hallsville, same number. It didn't change. Perfect. Perfect. Okay, that's it for me. Thanks.

Thank you, Mr. Gagliano. The next question is from the line of John Tumazzo with Berry Independent Research. You may proceed.

Thank you, and thank you for all the extra disclosure. It's very helpful. In your cost breakdown for the coming quarter, there was no change in alumina, but the quoted Illumina prices have changed. Should we interpret from that that you have an annual contract where the prices don't change quarterly and the price change will be January 1 next year for Illumina?

No, so great question, and you're right, John. So from Q2 to Q3, realized land in Illumina was relatively flat. It was only a few percent, and really that was due to timing of receipts. So one of the things that we have in the appendix today is our Illumina stack, and I don't remember exactly what page it's on, but let me find it so I can tell you so you can take a look at it. Thank you, Pete. So on page 16 in the lower right-hand corner, we actually spiked out how we're buying Illumina here this year. So it's 80% LME linkage, and we've talked about in the past where that LME linkage would be somewhere in the historical fair value of Illumina. We've quantified that in the past. 10% API and 10% fixed. Okay, so when we take delivery on one piece of that stack versus another, it's going to – and then, of course, as we consume it, as we keep, obviously, sometimes two to three months' worth of inventory on site, it's going to impact how it actually journalizes and what it looks like quarter over quarter. With respect to what it's going to look like in 2022, it will be a mix again, but we're still going through that stack and negotiating it out.

So there's no fourth-quarter impact, not because the market prices – We're stable, but because you're working from inventory?

Well, and it's the lags for how Illumina journalizes. So there's a couple things. Going into the fourth quarter, that number is going to be a $35 increase in weighted Illumina and landed Illumina. That's a couple things. That's when I'm consuming that Illumina, how I'm buying it in the stack that I just talked to, and then, of course, the lags.

And, John, you do see a little bit of that disclosure on slide 9 as well as to the impact of the Illumina in Craig's walk on slide 9.

Yeah, it's in, I guess, the 50. I guess it must be a netted item in the 50 to 55. Okay. Correct. Thank you for clarifying that. I wanted to make sure I understood that. the balance sheet cash flow and income statement interaction of the hedge accounting. It looks like the only impact is a deduction from revenue. In the income statement, U.S. 239.2 million, nine months impact. On the cash flow statement, 160.6. So, I guess that means 78.6 has already been deducted from revenue. And it's not – well, this is – let me – Yep. Go ahead. Yeah, I was just talking to you for one second, John.

I'm sorry. I think we got a little lag on – I'm sorry. We got a little lag on the line here, John. I apologize. So this is recorded as other income and expense for us. This is not a reduction in revenue.

So 123.5 million of hedge liability is short-term. I guess that means that it's over the next four quarters. And 23.9 is on the balance sheet as long-term, which I guess means that it's after September 30 next year. Is that right? That's correct. That's correct. That's correct. And you can reconcile that. 123.5 is short-term. and you said about 50 is in the fourth quarter, it would be in round numbers about $25 million a quarter the first three quarters of next year on average, and then dribble down a lot since only $23.9 million is long-term after September 30 next year. So we're sort of at the peak of it, and it diminishes over the course of next year. Is that a fair characterization?

it's a very fair characterization of some really good math that you did there. I think the easiest way maybe to see it is on page 17, right, where you look at the quantum of the hedges and you can see as those roll off. And then the other thing I would caution, and I think you got it by the way that you were talking about, John, is that there's a difference between realized and unrealized gains. So when you're going in that 200-plus million, impact that you're seeing today remember that that's a blend of things that are realized and unrealized and that unrealized number is going to continually get marked to market on the last day of the quarter so that number is determined as a snapshot point in time right so i think the best way to look at it is to look at the quantum of the hedges that we put on page 17 in the appendix but you you you got very close to that now you have a left-hand side short-term asset called derivative assets

which rose from $6.4 million to $33.7 million. Should we assume that that's something like a Treasury bond held for collateral? But you're a true hedger and not a spec. So the counterparty wouldn't be worried if the aluminum price went to $10, hypothetically, because it's just revenue foregone. There's no debt account that's hard bank debt or cash flow item. It's just revenue foregone because it's true hedge accounting.

John, that asset, it mainly relates to some power hedges that we've done in Northpool, which you'll also see on the volume slide on page 17.

So regarding aluminum, there's no collateral requirement because it's a true hedge and not a spec.

We do have collateral requirements to our counterparties, John, as you might imagine. But again, those are rolling off quite quickly now, as you see on the slide 17, but I think it's helpful if you just look at Q4, you'll see you're right to characterize it as the high point of the hedging. And then you'll see, especially on Midwest, you're going to reduce by about half, and LME as well, you're going to reduce by about half as we roll into fiscal year 22. And you'll see those pretty evenly spread then across the balance of fiscal year 22.

Is it fair, and forgive me, I never did a lot of commodities physically myself. Is it fair that the collateral for the aluminum is very small because we can't really see a big visible collateral account on your balance sheet as an asset or a liability?

The other side is going to be the liquidity of the company. So the collateral against this is either going to be posted cash or a posted letter of credit. So the way to look at it.

It's buried in your unused lines of credit. Okay.

It is, John, and maybe I should have started there. But think about the liquidity of the company going up 17% quarter over quarter. We're at 127 today, which is we're getting near historical good levels there. So I think, again, we're getting to the end of this hedging exercise.

So the collateral is going down because the liquidity is bigger, the unused credit is bigger.

Correct.

I'm just a rookie at this. Forgive my dumb questions.

Your questions are not dumb at all. They're very well-researched, so thanks for asking.

Thank you.

Thank you, Mr. Tumaza. The next question is a follow-up question from the line of Lucas Pipes with B. Riley. You may proceed.

You want to mute, Lucas? By chance, we can't hear you.

Sorry about that, and thank you very much for taking my follow-up question. John had just touched on it in one of his first questions in regards to Illumina and how you think about – the balance of your contracting for 2022. Illumina prices, we covered here more recently, and I wondered, do you have a kind of preferred approach to go about it, maybe locking in a bit more or floating, and if floating versus the LME, is there room to take into account the recent, well, more distant recent trading activity of Illumina versus LME? How would you frame that up? Thank you very much for your perspective.

Yeah, Lucas, thanks. We view the 2022 commercial season for Illumina sort of as we do every year. And the way we look at it is there are three different ways to purchase Illumina on the market. We have our sense of what those market rates are for each of those metrics, whether it be API, whether it be LME percentage, or whether it be fixed. And we obviously try to negotiate the best mix of that against suppliers' quotes for that book. And so as we look forward, you know, I think that you should expect to continue to see a mix like we have in the past. That mix may change slightly, but I think you'll always see us look to do some balance between LME percentage and API as we move forward. I think that's prudent for us to do given our position in the marketplace.

Okay. All right, I appreciate that, and best of luck. Thanks.

Thank you, Mr. Bites. The next question is a follow-up question from the line of David Galeano with BMO. You may proceed.

Okay, great, thanks. And it's actually related to the last question, so this should be pretty straightforward. It looks like, you know, on slide 17, for 2021, Illumina cash costs You know, sort of 80% of it was, you know, LME link, 10% was API and 10% was fixed. For 2022, as you just mentioned, as you think about that mix, should we expect those buckets to change materially or a similar mix between the three?

That's a good question. It's tough to say because we're still negotiating into those contracts, David. And so kind of what I was getting at is you see – When you go to purchase aluminum on the marketplace, you'll see different quotes for both of these, and some are more competitive than other relative to the type of pricing that you're receiving. So, in other words, you may receive better LME prices, percentage prices in some years than others as compared to API or vice versa. And so we try to manage that just to achieve the best outcomes given our view of the marketplace. I think in general what you saw last year is probably a little heavier LME percentage than you would see in a normal year. And so if we just take a normalized year in general, I think you would see more API in the balance of our book against a reduction in LME percentage. And then on the fixed side, generally that tends to be sort of opportunistic if we have the ability to grab a cargo here or there at pricing that makes sense. That's how we tend to end up with that fixed pricing. So, very simply, I think in a more normalized year as compared to 2021, you would see more API than we saw in 2021.

Okay. Okay. And then just back to some of John's questions to try and simplify it on my side from a purely modeling perspective. If, you know, the world stays where it is, which we know that's not going to happen, but theoretically, you know, in terms of the cadence of the realized hedge losses just in the next few quarters, is it reasonable to assume sort of a $25 million per quarter realized loss from 1Q to 3Q each of those quarters?

Yeah, that's a real tough one. As you know, David, I think you gave us a little out on the question there. But, I mean, I would look at it in terms of Midwest premium. right so the major driver as you would as you would anticipate in the realized losses midwest premium and that's cutting roughly in half going into 2022 so probably not a bad way to think about it and you know of course we'll have some more visibility to this when we come and talk in uh in february but and just add on david but in general without talking about the dollar quantum if we're just talking about the volume quantum of volumes you would expect those to be pretty evenly spread over over 22.

Okay, great. And then, again, same idea, the world stays where it is. Even with, you know, things having cooled a little bit, you know, as we look to 2022 and 2023, it's a similar question that we got, I think, that you got last time. It looks like you actually, you know, Century will start generating, you know, quite a bit of cash even with, you know, adjustments. So, actually, two questions. One, can you speak to the CapEx overall for 2022 and 2023, if possible? I know you mentioned part of it with the casthouse for the net zero number, but just the rest of the CapEx. And then also, you know, just any updated thoughts on capital allocation plans.

Yeah, sure. Just at a very high level, David, because, again, as we said, we'll come back with our annual items as we normally do on our February call and give you a lot more detail on the CapEx for 2022. But obviously, you know, just looking back at 2021, I think going into this year, we spoke about this year as being a very capital-intensive year as we work to bring the volumes at Hosville and Mount Holly back online. And so a lot of the capital... the majority of capital you saw this year went towards those projects. And as we mentioned, we continue to expect those contracts will be substantially complete by year-end. And so just as you look towards the quantum of CapEx for 22 and 23, you should see it return more towards historical levels, obviously just excluding the Grunertong cast-outs from that comment. And I forget there's a second part, David. Oh, capital allocation, thanks. What are your plans with all the cash? Exactly. Thank you, thank you, thank you. Well, we are building a new $120 million cast house in Iceland. As we said, that is debt financed, and we do think that the incremental cash flows from that will cover that debt service and the repayment of that project. I think that starts to give you an idea of the types of projects that we're interested in from an organic perspective. As we look forward, we'll continue to look towards projects that offer similar level of returns and that fit within that overall strategy that I covered at the end of my comments. Obviously, we'll also continue to look towards any opportunities that may arise on the M&A level, inorganically. And then, from the debt side of things, I think we're in a good spot with our terms all pushed out into 2028. So after taking into account all of that, obviously we'll continue to look for opportunities to return value to our shareholders, and that could come in a variety of forms depending on how the balance of 2022 pans out.

Okay. Thanks for the insights. Thanks.

Thank you, Mr. Gagliano. There are no additional – actually, we have one follow-up question from the line of Lucas Pipes with B. Riley. You may proceed.

Thank you very much for taking my follow-up. And it's a follow-up on Dave's question just now regarding M&A or rather capital allocation. You mentioned M&A. Could you share kind of where – What areas might be more interesting strategically than others? I remember in years past, vertical integration a la Illumina was mentioned. Is that an area where you would still be looking today or have priorities shifted? And if so, how would you rank your strategic interests? Thank you very much.

Sure, Lucas. That's a good follow-up question. And maybe just to start, I'll just reiterate what I said on the last call and reiterate it here. In the near term, we're very focused on execution, so we need to bring these existing projects to a close. So for this quarter, that's very focused on Hawesville and Mount Holly, and then, you know, just really going strong into 2022. We've given you a good example of organic growth with the Grundertage Catch House project, Obviously, I think from an M&A perspective, you know, our view is just to be opportunistic. I don't think this is a primary focus at the moment. But if the right opportunities arise, and I'll talk to that for your question in a second, we will, of course, be ready to act if we thought that that met our sort of expectations of return and fit within our strategic priorities. And so just speaking from a strategic perspective, I think our focus is going to be to try to continue to leverage our position in these U.S. and European short markets first and foremost. And so when we look at the types of assets that might fit within that, that can be a guiding framework. And then secondly, I think our view is we see where the world is going. We see the types of products that our customers are demanding. They tend to be low carbon. They tend to be for value-added products. And that fits well within our idea to sort of increase the margins of the tons we're producing. And so as we look at opportunities out there, you know, they would try to fit within those two pillars primarily. Not to say that if the right opportunistic thing came available, we wouldn't look at it, but I think just in terms of guidance, that's the type of opportunities we'd be looking towards. But, again, I think, again, just to reiterate, we're very focused on just finishing things out here on existing projects, very focused on getting off on the right foot on the Caps House and Grundertangi. I'm very mindful of the fact that, looking forward, things look good, but we need to perform and make sure that we bring that value to the businesses and our shareholders, and then we'll look to go from there.

Terrific. Very helpful. Thank you, and, again, best of luck. Thanks, Luke.

Thank you, Mr. Pipe. There are no additional questions waiting at this time, so I will pass the conference over to the management team for closing remarks.

Thanks, everyone, again for your time, and we look forward to speaking with you in February. Talk to you soon.

That concludes the Century Aluminum Company third quarter 2021 earnings conference call. Thank you for your participation. You may now disconnect your line.