Century Aluminum Company

Good afternoon. My name is Samantha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Century Aluminum Company Second Quarter 2022 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to your host, Peter Tripkoski, starting at the beginning of your conference.

Thank you, Samantha. Good afternoon, everyone, and welcome to the conference call. I'm joined here today by Jesse Gehry, Century's President and Chief Executive Officer, and Shelly Harrison, Senior Vice President of Finance and Treasurer. After our prepared comments, We'll gladly take your questions. As a reminder, today's presentation is available on our website at www.centuryaluminum.com. We use our website as a means of disclosing material information about the company and for complying with regulation FD. Turning to slide one of today's presentation, 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 I will now turn that call over to Jesse.

Thank you, Pete, and thanks to everyone for joining. I'd like to start today by following up on our announcement from last Monday and welcoming Jerry Bialik to Century as our new Chief Financial Officer. Jerry was most recently CFO of Cupertire, and before that had an excellent career with Ford and Amcor. Jerry will officially join us later this month, and you can all expect to hear from him directly on our Q3 hearings call. He'll be a great addition to the team. Okay, turning to page three, I'll start by talking about the current macro environment and our operations, and then Shelley will take you through our Q2 results and Q3 outlook before I wrap up. The second quarter proved to be quite dynamic, with market conditions changing significantly over the course of the quarter. Second quarter adjusted EBITDA with $87 million, with net sales and shipments up 14% and 1% respectively. LME pricing averaged $2,900 in Q2 versus spot prices of around $2,500. We took a number of actions in the quarter to solidify our balance sheet, including the extension and capacity increase of our revolving credit facility. The term of the facility is now extended through 2027 with a total borrowing capacity of $250 million. We think this is a good level for the business and allows us the flexibility to fully utilize our borrowing base to finance our liquidity needs as they arise. We also used cash from operations to repay $20 million in outstanding borrowings under the facility, giving a strong total liquidity as a quarter end of $226 million. Earlier this month, we entered into a binding sales agreement to sell the remaining portion of the real property located in the Mount Holly Commerce Park. for total consideration of $30 million. As a reminder, we formed the Commerce Park in the mid-90s in order to develop excess land at the Mount Holly site and to assist the local community to bring additional business to the area. Over the years, we have sold off individual lots at the site for development. This transaction enabled us to dispose of all of the remaining lots while achieving an excellent sales price for the land. The transaction remains subject to ordinary course conditions and is expected to close in the fourth quarter. The sale does not have any effect on the main 5,000-acre Mount Holly site, of which we remain the sole owner and operate the Mount Holly smelter. Turning to the aluminum markets, you can see from the balances on slide 4, aluminum fundamentals remain strong. We expect that global supply and demand will remain in slight deficit over the balance of the year, which will continue to drive already short inventories of aluminum lower, and support regional premiums. While demand in LME pricing will likely remain volatile in the short term, longer-term macro trends towards electrification, sustainable packaging, and renewable energy will continue to drive strong demand growth. We expect these trends to remain especially strong in value-added markets, where spot billed prices remain favorable in both the U.S. and Europe in Q2. We are well-placed to meet increased demand for aluminum extrusions and sheet from our two U.S. value-added casthouses and, once complete, the new Grundertage casthouse. In fact, once the Grundertage casthouse and U.S. casthouse debottle-making projects are complete, we expect that over 75% of our production will be sold at a premium to P1020 in 2024 and beyond. Okay, turning to page five, you can see that the Russian war in Ukraine paired with Russian curtailments of natural gas flows to mainland Europe continue to cause turmoil in European energy markets. Flows of Russian gas to Western Europe are now approximately only 20% of their historical average. This has resulted in mainland European power prices spiking to over 300 euros per megawatt hour in Germany, France, and other regions. High European energy prices have in turn put upward pressure on pricing in the North Pole energy market, albeit at significantly lower price levels. In Q2, North Pole energy prices averaged about 120 euros per megawatt hour, up about 10 euros over Q1. Fortunately, we have seen North Pole prices reduce so far in Q3, with North Pole averaging around 90 euros per megawatt hour in July. Norwegian officials yesterday announced that they will limit energy exports to the rest of Europe when necessary to maintain normal reservoir levels in the Nordpool system. This should help to reduce volatility in Nordpool and keep prices at more moderate levels. We are also exploring steps to reduce volatility in our own remaining Nordpool exposure. As a reminder, only about one-third of our Icelandic energy contracts are paid to the Nordpool price. with the remaining two-thirds provided under long-term LME-linked power contracts. We have hedged a little over 60% of our remaining 2022 North Pole exposure at an average price of 24 euros. For 2023, we have hedged 80% of our North Pole exposure at an average price of 30 euros. From 2024 onward, we do not have any North Pole exposure. Fortunately, the physical energy markets in Iceland are much better supplied than the rest of Europe, with reservoirs at or above average fill levels across Icelandic systems. In addition, Iceland's 100% renewable system avoids significant fuel cost pressures seen in the coal and natural gas-based systems in the rest of Europe. Turning to the U.S., domestic energy markets have been affected by increased energy exports to Europe and low domestic coal production. The combination of these factors has led to significant natural gas volatility and higher IndyHub energy prices, which average nearly $80 for Q2 and around $90 quarter-to-date. These tight energy markets have also impacted the power provider to our Mount Holly facility, where a force majeure event from their largest coal supplier has left the utility to cover shortages in their coal generation with market power purchases. Under our Mount Holly energy contract, they are allowed to pass a portion of these increased generation costs to us, which will increase our Q3 energy costs in Mount Holly by approximately $10 per megawatt hour over Q2.