Q4 2020 Century Aluminum Co Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the century aluminum company fourth quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your speaker today Peter Tarkowski. Thank you. Please go ahead.
Thank you David Good afternoon, everyone and welcome to the conference call.
I'm joined here today by Mike Bless century's, President and Chief Executive Officer, Craig Conti, Executive Vice President and Chief Financial Officer, and Shelly Harrison Senior Vice President of Finance and Treasurer.
After our prepared comments, we'll take your questions.
<unk> a reminder, today's presentation is available on our website at www dot century aluminum dot com we.
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.
With that on the call to Mike.
Pete Thanks to all of you for joining us. This afternoon, if we could just flip to page three please I'll give you as usual.
Summary of the last couple of months.
Before we get started we were extraordinarily said to report a fatality at Mount Holly that occurred in December.
The incident happened outside the cash test from the loading area. Those of you are familiar with these facilities can picture that where that location would be.
The victim was a longtime employee cherished colleague and friend.
She is sorely missed by her family <unk> co.
<unk> and.
And by the entire community.
This tragedy reinforces our commitment to take an unbiased look at absolutely everything we do.
And commit to improve where needed without condition.
It requires dedication and leadership from every part of our organization.
And personal commitment from each and every individual.
We all know we must hold ourselves to the highest standards.
And demonstrate our promise to keep ourselves and each other safe.
Not just talk but we need to demonstrate that each and every day.
Okay with that let's let's dive in.
Pete and a couple of minutes, we'll give you a summary as he normally does have the industry fundamentals. Let me just make a couple of points to put the rest of my comments into context before I get going on the risk you all follow the macro data so I'll keep it pretty quick.
Obviously world manufacturing indices are approaching levels that frankly, we last saw in early 2018 at that time, the <unk> price as you may remember was over $2500 a ton.
Manufacturing activity in our key markets in the U S and in Europe remains especially robust.
<unk> seen the most recent employment data. This morning, obviously, it's got a long long way to go.
But it is showing some hopeful signs.
Other factors are coincident with strong base metal prices, a number of them amongst which obviously.
Dollar showed a little bit of strength in January but obviously it remains on a weakening trend.
<unk> prices are up.
Thus far headline inflation has shown resistance to upward pressure.
As said, you've all looked inside the summary data and you've seen that there are some potential signs lurking on.
You've seen the crawl upwards in treasury yields.
Adding to this environment as further stimulus coming in the U S. Obviously and.
And almost certainly in other developed markets.
The situation has led to extraordinarily tight supply conditions in our markets with real pressure for prompt units.
In the cold weather in the southern portion of the U S. Over the last couple of days is only exacerbated this problem.
Inventories measured in days of supply are at historically very supportive levels.
Midwest premium in the EU duty paid premium are on upward trends I will talk about the trade environment and just a couple of minutes.
On the spot premium from any value added products is at an all time high.
All of these conditions as well as well have pushed up the global commodity price.
Moving on our operations are generally stable and running at expected levels of efficiency and cost.
<unk> and sebree each are at a full complement is selling very well.
<unk> on the other hand has had a difficult last couple of months the plant experienced two unrelated, but almost simultaneous equipment and incidents in December.
This resulted in the loss of a number of cells and generally poor operating efficiencies and it drove some cost increases during Q4.
These were offset by really good performance from the other plants, especially in non Hollywood <unk>.
We've got a plan in place to get hospital back to normal operations by the early part of the second quarter.
And Craig will take you through a financial summary of Q4 in just a minute.
Mount Holly is running very well and as I said had an excellent quarter and controllable costs.
That said, we continue to lose sales at the predicted rate, obviously thats given the age of the parts since we last rebuilt them.
It's simply reinforces the importance of moving forward aggressively on the rebuild process and I'll talk about that in just a minute.
Let me just give you a couple of brief comments on the expected financial performance for the first quarter.
And for the full year and Craig will give you lots more detail on a minute.
The fourth quarter is going to be impacted by two items, which will result in lower EBITDA.
And then you would expect to see with our realized price in the low nineties hundreds that's where we're currently particularly that's going to come and you all are familiar with our lag as well as lag premiums.
First it goes without saying as the extreme weather, which you've been seeing impacting the electrical grid and the southern part of the U S.
This will result in a meaningful increase in our power price for the Kentucky plants for the first quarter frankly, we haven't seen this kind of situation since the polar vortex in 2014.
The power price has come nicely back down and it's almost back to where it would normally be.
So the impact for the quarter. This event it looks to be about 15, one 5 million.
Of course, that's an extraordinary occurrence, which only impacts the first quarter.
Our second much much less significant factor is a good dose of restart expenses non Hollywood Youll hit in Q1.
And Craig will take you through all that detail in just a couple of minutes.
Absent these items the quarter would look as you would expect and obviously if you would adjust for the current <unk> price, which is over well over $200 higher than the price that we forecast will realized in Q1.
That would produce a significantly higher level of profitability.
Obviously today's price wont be realized on our financials until the second quarter.
Craig is also going to take you through our expectations for quarters two through four in terms of production volumes plant operating costs and other assumptions.
When he does when you have a time to look at the data in the appendix, you'll see that plant costs.
Our estimated to be up about $150 a ton versus the estimates at this time last year, it's important to understand the vast majority of that increase is simply based on the fact that we're using a higher LMA price estimate to estimate the cost of alumina and power in those contracts that are linked to the LMA.
We're also using slightly higher market power prices based on the current forward prices arguably those prices obviously those forwards are at slightly higher levels.
<unk> levels than it would normally be just given the product prices.
Most importantly, you will see controllable costs, such as labor and maintenance on a per ton basis are absolutely flat.
2021 to 2020 on we're really pleased with this especially given the restart spending at Mount Holly.
Okay, Let me move on tuck for a couple of minutes about Mount Holly specifically you saw our announcement in mid December that we had signed a three month extension to the power contract that that contract of course was set to expire at the end of 2020.
We intend to Cooper had made very good progress in November and December on terms for a new three year contract and we just needed to give the teams a bit more time to finalize an agreement and then provide for the necessary regulatory approvals.
At full contract has now been agreed on terms consistent with what we what we had in December what we were expecting.
Santee Cooper is submitted the contracted the required state oversight committee.
We're jointly awaiting approval and net new contract is expected to commence on the first of April.
It goes without saying, we're so pleased to have reached this milestone.
Our colleagues at Santee Cooper, we're really creative and helping us mutually reach this point and we are quite appreciative of their substantial commitment of time and resources.
All of this further encourages us with regard to Mount Holly as long term prospects and in fact, we are working with Santee Cooper now on <unk>.
Some interesting demand response opportunities that would bring additional value to each party to their system into our company.
The real credit for getting us to this point goes to our people at Mount Holly.
And manage the plant consistently through an extraordinarily difficult period.
Obviously, they had the issues caused by the pandemic and those were exacerbated by the uncertainty over whether we could find a sensible power contract to run the plant post December 2020.
We're very grateful for their commitment and we are now excited to give them the opportunity to rebuild and expand the plant.
The new contracts for just shy of 300 megawatts. This will enable us to grow the production from the current 50% to 75% of capacity, that's an annualized rate of about 170000 tons.
As you know due to the lack of visibility on a long term power contract, we purposely not rebuild sales as they are normally sales over the last four plus years.
And thus we need to fully rebuild all of the sales on the Potline that's been operating.
Plus half of the other lines to get to one and a half potline at 75%.
Youll recall that is very similar to the process that we went through it hospital in 2018 in 2019.
And also like hospital, there's some necessary capital projects in various parts of the plan.
All of these processes have already begun and obviously, we want those metal units as quickly as feasible.
We just spend a moment on some financial structuring that we put in place to support the non Holly rebuild program.
The new three year contract. If you had a chance to read the press release that it comes with a fixed power price.
It's obviously different from Kentucky, where we're exposed to floating power prices.
And in Kentucky, those market prices tend to move generally with other commodities like our revenue LMA.
Of course other than in extreme environments like we've had in the last couple of days.
Given this we've taken a large portion of the risk off the table to guarantee an adequate financial return during the three year contract and to protect against downside.
So since the power prices fixed.
We fixed the good portion of the other commodity costs as.
As well as the revenue related to non <unk> production.
We think this approach represents good balance.
Guarantees reasonable cash flow flow from the three year contract. Despite the significant rebuild costs, so over and above of course, but a significant rebuild costs.
It preserves upside during the contract to extract further value on the power price be a demand response or opportunities and other alternatives.
And it preserves our ability to work with Santee Cooper on longer term concepts and obviously the time to do so during the three year term.
A couple of other comments before before we move on the on the trade environment as <unk> seen we think it has been generally well supported.
Imports have averaged around the levels that were established back during the third quarter as Youll recall. These amounts were specifically set to backstop the effectiveness of the section 232 program.
And thus far we believe it is generally working although of course, we're watching it very closely.
It is clear to us that the Biden administration supports the purpose of the 232 program.
The most immediate action you've seen with the rollback of the previous administrations last minute exemption of a large importing country from the tariff.
On a president bottoms principle platforms. As you know is the urgent requirement to build deck use strength in manufacturing.
One of the key points that his administration has made is that we must build debt employment base of technical knowledge and experience in these key industries.
The point is been emphasized that U S workers can't be good consumers unless they are good jobs fair wages on which they can depend for the long term and of course, we couldnt agree more.
Going forward to doing our part.
The hiring of an additional folks to support Mt. Holly as expansion as the next step.
One last item just want to spend a minute summarizing some developments on our sustainability efforts were really excited about if you could just flip quickly to page four.
You may have seen our recent announcement relating to a multi year agreement, we signed to sell our low carbon natural product to hammer hammer aluminum industries.
It's a great high quality OEM, and we're really proud and excited to be working with them.
Also in discussions with other potential customers.
This represents a really exciting opportunity for century.
We also continue to work on on interesting renewable power opportunity for the Kentucky plants, specifically and we hope to be able to report to you on some specifics over the coming months.
And with that I will hand, it over to Pete Thanks, Mike.
If we can move to slide five please I'll take you through the currency of the global aluminum market.
The cash <unk> price averaged 1900 and $18 per ton in the fourth quarter of 2020.
Which was up approximately 12% or $211 per ton sequentially.
As we continue to see a strong recovery on the global economy and in particular the <unk>.
Are you factoring sector.
On that quarter.
As industry conditions continued to improve the LNG price is average $2020 per ton so far in the first quarter.
This year concerning around a two five year high.
$2150 per ton today.
In the fourth quarter regional premiums averaged approximately <unk> 13 per pound in the U S.
Which was flat sequentially at $136 per ton in Europe on the.
Increase of 12% sequentially.
Current spot prices on approximately $15.05 per pound in the U S. Midwest.
And approximately $155 per ton in Europe.
In the fourth quarter of 2020 global aluminum demand was up approximately 5% as compared to the fourth quarter of 2019.
In the world, excluding China, we saw demand flat when compared to the prior year quarter.
In China, we saw.
Saw demand growth of 9%.
Impaired to the fourth quarter of 2019.
Global production was up approximately 6% in the fourth quarter.
As compared to the fourth quarter of 2019.
We saw approximately 10% production growth in China on.
On the rest of the World was flat.
Looking at some of our key raw materials.
The aluminum price index averaged $282 per ton in the fourth quarter.
Which was up 3% sequentially.
While Indiana hub prices were slightly down.
<unk> 22 per megawatt hour lower sequentially.
Spot prices on our approximately $300 per ton from there.
Alumina price index.
And with the cold snap covering much of the United States. This weak power prices have already begun to come off their peaks from levels that we haven't seen.
Since the polar vortex of 2014.
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 fourth quarter.
On a consolidated basis global shipments were down four percentage quarter over quarter, primarily due to timing of European profit delivery.
<unk> price has increased substantially versus prior quarter as a result of higher lag LNG prices and delivery premiums, bringing net sales about flat with prior quarter.
Looking at operating results adjusted EBITDA was 800000 this quarter and we had an adjusted net loss of $30 6 million or <unk> 32, a share in.
In Q4, the adjusting items were $13 6 million for the unrealized impacts forward contracts $5 $5 million per our share of the litigation settlement $2 4 million from the net realizable value of inventory and 800000 for the historical sebree equipment failure.
Our liquidity remains strong with $182 million of funds available via a mix of cash on hand, and credit facilities. This represents an approximate $13 million improvement versus prior quarter liquidity levels.
Okay, Let's go to slide seven and I can walk you through our quarter to quarter bridge of adjusted EBITDA.
As we forecasted on our last call higher lag LNG prices and delivery premiums drove the majority of the EBIT increase versus Q3 levels.
The Q4 realized <unk> of $1730 per ton was up $180 per ton from the very low levels realized in Q3, while realized U S. Midwest premiums of $285 per ton were up $40 per ton over the same period.
Realized alumina was $290 per ton or $15 per ton greater than prior quarter.
As we discussed previously the majority of our alumina contracts are priced with an <unk> referenced in the realized prices will largely track in line with lagged aluminum pricing trends average.
Average domestic energy prices were essentially flat versus prior quarter due to the relatively mild early winter weather. However, the Nord pool price, which we referenced for approximately 30% of our Icelandic power needs was up about $6 per megawatt hour.
We are largely hedged on our Nord pool exposure at least through 2021 I'll give you some more detail on this in a few pages.
Looking ahead to Q1, specifically the lagged <unk> of $1930 per ton is expected to be up about $200 per ton versus Q4 realized prices.
The Q1 realized U S. Midwest premium is forecast to be $290 per ton are up about $5 per tonne and the European delivery premium is expected at $140 per ton were up $15 per ton versus the fourth quarter.
Realized alumina is expected to be $320 per ton are up about $30 per ton versus prior quarter.
Taken together, the lemme alumina and delivery premium pricing moves are expected to increase Q1, EBITDA by about $30 million versus Q4 levels.
On power cost as Mike mentioned earlier, the extreme weather driven spike in domestic energy prices is expected to cost an incremental $15 million in the quarter.
In addition to this impact normal seasonal power price impacts are expected to be in the range of $15 million to $20 million globally versus prior quarter.
Roughly half of the seasonal impact is driven by Nord pool prices, which as I mentioned earlier, we are largely hedged for 2021.
In total we expect global power costs to increase in the range of $30 million to $35 million versus Q4 levels.
This range will be the quarter over quarter impact on EBITDA the impact on cash flow will be about $10 million less due to the hedged the nature of our normal position.
Finally, we began the process of rebuilding by Holly in early 2021, as Mike mentioned, we expect the incremental restart spend will be about $5 million in the fifth quarter.
In sum, we expect all of these items taken together will equate to an approximate EBITDA decrease of $5 million to $10 million from Q4 levels.
Let's turn to slide eight and we'll take a quick book and cash flow.
We started the quarter with $81 million in cash and ended December with $82 million.
A few notable inflows for the quarter included a $5 $5 million litigation settlement and about $1 $5 million in insurance recoveries of which the largest component related to our 2018 sebree equipment failure.
To date, we have recovered $21 3 million over and above the $7 billion deductible and we expect to close out the claim with our final collections in the first quarter.
Now I'd like to transition to our discussion of 2021.
With our practice in previous years, we would like to provide you we would like to provide you with the tools to forecast our business from an EBITDA and cash standpoint, using the commodity prices from your choosy.
Please keep in mind that any future commodity prices referenced on this page or on the following pages are planning assumptions and not century forecast for those commodity as Mike mentioned earlier, we are using a higher lapse assumption than in 2020, which in turn increases our power in alumina cost and hence accounts for the majority of the operating expense increase in.
2021 versus prior year.
Let's turn to page nine.
We expect our 2021 shipments to be about 875000 tons or about 65000 tons more than 2020, largely attributable to the incremental impact of the partially restarted capacity at Mount Holly and a full year of hospital production Thats current 80% capacity.
Lemme pricing lags in the U S will be roughly 50% on a one month lag and 50% on a three months lag, while Iceland transactions will be price primarily on a three months lag.
Midwest premium pricing will be on an approximate one month lag while European premium pricing will be on an approximate three month lag.
Our weighted average value added premium is expected to be about $115 per ton worldwide. Please note that this is expressed as a value over the premium tonnes itself not overall tons produced.
Domestic power similar to previous years, with our Kentucky smelters using market based Indiana hub price contracts.
As Mike mentioned earlier, Mount Holly will transition to a largely fixed power cost contract in Q2.
This year for the next several years in Europe, similar to 2020, approximately 70% of Iceland power will be <unk> based while 30% will be market based referencing the day ahead market.
On the Nord pool price has been particularly volatile in 2020 and early 2021, while the referenced to this price covers only about 10% of our global production in order to Derisk. The volatility we hedged the majority of our 2021 exposure at levels, which are globally competitive.
The impact of this price mitigation as with all of our financial hedges will be reported below EBITDA.
Taking this together with our other price mitigation strategies, the near term impact in aggregate is expected to be immaterial to overall century cash flow and we will continue to update you on a quarterly basis. It just becomes more significant.
Aluminum pricing for 2021 will be primarily LNG referenced with the majority of our purchases transacting via this pricing mechanism.
Aluminum costs will be incurred with an approximate three month lag on a book basis and about a one month lag on a cash basis.
Carbon materials will continue to flow through our P&L on a three month lag and where that approximate one month's lag on a cash basis.
The bottom section of page nine shows our net plant cash cost for the second through fourth quarter of this year, which exclude interest capex and corporate SG&A.
These costs are net of all premiums and hence are presented on a basis debt is directly comparable to the LMA, meaning you can take an <unk> assumption deduct these numbers and be left with a plant gross cash profit. Please.
Please note that we have provided a bridge from our gross to net cash cost as well as the commodity assumptions, we use to calculate these costs in the appendix of today's presentation.
2021, net cash cost on a weighted global basis are up about $150 per ton versus prior year levels, driven primarily by commodity price assumptions over half of the increase is driven by the higher LNG price versus prior year and its effect on inputs purchase primarily on in Leds linked basis, notably <unk>.
Alumina and 70% of Icelandic power.
The majority of the remainder of this increase is driven by non LMB linked portions of power, notably U S. Indy hub indoor pool, which are assumed at roughly at their forward values, which are somewhat elevated due to due to crop prices.
Recall that the Nord pool portion of the cost increase is substantially hedged so on a cash basis, there will be limited impact from higher prices.
In 2021, we will run the company with no increase in controllable operating costs versus prior year on a volume adjusted basis.
Turning to page 10.
Cover some of our other cost expectations for 2021.
SG&A will be about $45 million on a book basis, while on was $35 million on a cash basis.
Interest cost will be $37 million on a book basis and $34 million on a cash basis.
Hey down of our hospital term loan will be $20 million over the course of the year, Although we will be fully repaid by the end of 2021.
Our non restart related Capex is expected in the range of 20% to $25 million in total with about $20 million from maintenance spend and up to $5 million for investments back.
But now.
So now how do we restart will be a multi year project that will ultimately result in an expanded operations capable of producing over 170000 tons per year with 2021 phase of the project will be a capital expenditure of about $50 million and will result in total year production of 140000 tons or 21% greater output.
In prior year.
Depreciation is forecast to be in the 80 million $80 million to $90 million range from an income tax perspective, we expect both our book and cash impacts for U S income taxes to be less than $1 million, while Iceland will be about 20% of 2021 income on a book basis and about $4 million on cash basis, as a reminder, Iceland.
Taxes are settled one year in arrears.
Finally, we expect our cash flow breakeven cost to be $1775 per ton. Please note that this is on a direct <unk> comparative basis income.
In comparison to our discussion in February of last year, the cash flow breakeven is up $100 per ton. What's important to know is that the LNG price underlying 2021 assumption is $250 per ton higher than that of 2020.
As I detailed earlier, the higher <unk> assumption elevate <unk> linked costs, such as aluminum and portions of isolated power.
As we think about 2021 outlook in total it's important to note that the quarterly pacing of adjusted EBITDA is backend weighted primarily driven by lagged LNG prices increased.
Increased extreme weather related energy costs in the first quarter.
As well as incremental Mount Holly production coming online throughout the first half.
A good way to look at the pacing is to take the total year outlook calculated on your own commodity assumptions using the sensitivities provided in the appendix.
To assume the back three quarters are relatively similar after deducting the first quarter outlook, which we provided some insight on earlier.
This concludes our prepared remarks. Thank you for your time and attention I would like to turn the call back over to David to begin the question and answer session David.
Certainly.
A reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or cash Keith Please standby, while we compile the Q&A roster.
And your first question comes from the line of Lucas pipes with B Riley Securities. Your line is open.
Hey, good afternoon, everyone.
Lucas Lucas.
I wanted to follow up on that.
Point regarding debt cash flow breakeven so essentially.
Outside of the change in <unk> price assumption.
Really it would be.
Exactly the same as from the prior year on $16 75.
No.
The <unk> is going to be the biggest driver. So when you look at cash cost, which is probably the easier way to do this I think Lucas year over year <unk> is going to be the biggest driver, but if we were to take it in total for the company net.
Net cash cost for century aluminum is up $150 versus prior year $70 million $70 of that is driven by the law.
Another 50 or $60 is driven by power.
Alright, so when Youre looking at when you are looking at the cash flow breakeven you have to look at the power piece as well now to bring debt back down from a gross to a net basis you look at the delta in premiums year over year, which for the company has about 20 Bucks. So that gets you to the 150 year over year on cash cost, which is a good proxy for the <unk> breakeven Lucas it's Mike if I can just pile on.
The LMA.
It will be what it is it's a circular reference as you know because of the linkage of most of our hour pardon me of alumina and and.
And as Craig correctly says a good chunk of the majority of the.
Northern Cal tower on on the market power prices the other piece.
We try to be agnostic, there and we try to be consistent so we use the forwards.
Okay.
The forwards obviously had some elements of the prompt price in them today, both India and MISO power end.
Nord pool, but we are going to stick with our we're going to stay consistent and just use those forwards.
So if those turn out to be elevated maybe theres. Some theres some room, there for that to come down but.
We felt we ought to just just just stick those in there now.
And then see what happens.
That's great.
Very helpful. I really appreciate that additional detail.
Okay.
Good question.
High yield markets are wide open.
King.
What I would consider very attractive rates on from.
From the new issuance out there.
How do you think about that market, obviously you have.
Put in place secured piece of debt.
On the loan.
We could do that at the time, what kind of when you think about the market day are there opportunities on that front to optimize that would appreciate it. Thank.
Yes, great Great question Lucas. Thank you for the question.
Youre right on.
If you think about the piece of paper that we had out there as of July the first call period in July of this year and that's at a coal price of 105. So clearly we're looking at this opportunistically bolt up to that call period, and then after that call period. So it's something that we're staying very close to and I would agree with your assessment.
The market. So we'll come back if anything changes on that on that front. You can you can read the indenture Lucas if you haven't already so.
As Craig correctly says, we've got a fixed cost price normal for these instruments, a little bit better than normal normally you would see half of the coupon on this a little bit better on acres anniversary.
On the first year after the issue right now if you wanted to redeem it it's got a traditional treasury base make whole formula and just obviously given interest rates, even though they are coming up. So we're looking at it there is a pretty easy breakeven that you can calculate as to.
How far up our new issue yields either has come as a combination of either.
The treasury or the credit spread would have to go between now and our over the next what Craig four months four months and so that's kind of the math, we're watching on a daily basis.
The Treasury works.
Honestly for you and against <unk>.
Were you in that.
It lowers the cost of the redemption rate today, but in essence, it it's going to continue to drive up all else being equal, which you could refinance at.
At some point in time so.
So we're it's iterative and were watching it is good question.
Very helpful very helpful. Yes.
Got something at what.
For us to keep on on a 12 force absolutely absolutely enter your inference, probably we havent done anything before July.
We will talk to you before then but.
Keep an eye on that space in July.
Great terrific one last one from me and I'll turn it over.
Wanted to get your read on the inventory situation.
Yes kind of 2020.
Perfect.
But.
What we heard often in commenting on ourselves.
Well on production was also pretty strong.
Period.
Lost demand.
How do you see inventory position today.
Both on the exchanges on off peak EBITDA.
Thank you yeah.
So obviously that I think you're referring to you redirect. Please if I if we get it wrong.
There was a chunk of three or four months worth of the swelling and.
And inventories given as you correctly say that.
March April may going into June demand has fallen off a cliff and started to recover.
Until the spring was underway.
Well now the smelters.
Basically the world kept produced.
So the world built a couple of million tons of inventory that it did it.
It turned out it didn't need it goes without saying and those have been coming down nicely a lot of those remain locked away in financing transactions that goes without saying, but the inventories have been coming down nicely and if you look at even the <unk>.
<unk> inventories irrespective of where they are whether they are locked in a warehouse or up in an <unk> or non <unk> warehouse or in the supply chain and you look at debt versus current run rate of.
Of consumption of demand it looks frankly pretty favorable we're watching it closely but to the extent that demand is where it is or even is going to increase.
I think from that says that the inventory should continue to.
<unk> you want to say anything else on that one the market here in the market.
And then maybe the days inventory.
Put it in context of the question.
We didn't we didn't jump to the levels you saw back in 2000, no no we didn't.
Global financial crisis.
Did see a little bit of a peak.
Three months that Michael was talking about on the onset of the pandemic and the health crisis.
But then you saw on the heels of that.
I'll say, a massive recovery on the manufacturing sector and so on the orders are being accelerated demand is picking up especially in the U S and European sectors.
You saw that some of the inventory start to kind of flow breakdown downstream demand just to see where asking a prime of course, but downstream demand remains.
China.
Yes.
Melodramatic superlative, it's crazy I've never.
In 15 years in the business I haven't seen this even in six or seven.
We can't.
We are producing obviously.
Every time that we can.
But we have at this point in time.
At times I've had to sort of I wouldn't say allocate that choose amongst.
Stable very good customers because they can't get the metal <unk> got secondary cash is now being impacted by the weather as you may have read a lot of those cash with Texas is a huge huge both extrusion and secondary as is Mexico.
So on situation is pretty interesting right now.
Very.
Helpful color I really appreciate it.
Best of luck. Thank you. Thank you. Thank you so much Lucas.
Again, if you would like to ask a question press star one on your telephone.
Your next question comes from the line of David Gagliano with BMO capital markets. Your line is open.
Hi, Thanks for taking my questions I'll try and keep it quick here.
Just on the.
Three buckets that you called out in the first quarter.
Rich.
15 million.
Sort of a spike in power cost Thats come and gone on there.
I think 15 to 20 million global increase in power cost and then there was.
$5 million on non.
Matt Holliday startup costs I think those are the three.
I haven't gone through the bridge Matthew on for the rest of the year and the cash cost guidance or the numbers in the presentation, but.
Within those numbers whats the assumption for how those reverse or do those reverse on how much of those from burst or.
Moving forward that's my first question.
Each of those buckets.
Yes, sure David So it's Mike So the first I'll take you three buckets. The 15 is already reversed we really convinced it's a onetime thing if you look at the Indy hub prices and frankly, the prices that are nodes have been better than India those on public but.
But if you even look at Indy hub, it's come straight down in the predictions on or if you look at the forecast is going to be back.
The fifties by the weekend and back into the Thirty's next week. So it's really it was terrible but it is really it is a one week, maybe more like eight or nine days last Friday Saturday when it started on it.
It started creeping up and that has shot up so the answer on the first book as it all goes away at all of our Sitka on.
The second bucket is again, there's no all of that is is an increase from Q4 to Q1 that second bucket that Craig talked about it's just the fact that power prices were frankly I would come unseasonably. They were good in Q4, both Indy hub and Nord pool, and then in Q1.
Net.
And.
Other than the.
One week aberration, there, we expect it to be sort of normal Q1, and so our expectation is that come Q2, those prices generally is back down in a normal year.
Our expectation is that they would do the same in that expectation David.
Hold the stock per sector.
A summary comment.
Net expectation is embedded in the cash costs that Craig took you through.
And then yes, Mount Holly is just the first of <unk>.
Expense most of it is capital as Pete said, it's a burst of expense.
Covid items that you don't capitalize under GAAP.
Tends to be at the beginning of these projects and flow through as expense.
The only other comment going back I apologize to that second bucket.
As.
Make all those same comments again for both event Indy hub on Nord pool, but as Craig said on Nord pool, specifically, it's a bit strange.
From a reported earnings perspective, EBITDA on all the rest.
<unk> and Nord pool impacts our earnings, but it doesn't impact our cash flow because we've hedged debt north what we don't we don't like the volatility and so we've taken that risk out and so while you will see it in Craig we'll call. It out three every quarter and the EBITDA or the operating profit I guess, we should say from a GAAP standpoint.
There is no cash impact.
Okay. That's helpful. Thanks, and then so just the Mt. Holly piece on outstanding whatever its small relatively speaking does that go after the first quarter to $5 million zero co.
Yes, yes.
Okay, and then just on the cadence of the Mt. Holly ramp I mean, I think it's roughly 25000 ton year over year increase it doesn't sound like there was anything embedded in the first quarter bridge that was flagged for volume growth.
25000 tons, if thats right is sort.
<unk> or when does that ramp.
Non.
Youre going to see the material tons committed over the back half of the year David.
Okay, because you're just starting to rebuild those sales now.
Well stop there.
Okay, Alright, thats, what I needed. Thanks, Thanks, Dave.
Your next question comes from the line of per Tosh Misra with Baron Burke. Your line is open.
Thank you thanks for taking my question.
Is there any opportunity.
For you to pass through some of this high profit cost to customers.
From kind of farmers surcharge or is it just too early to think about that drought and I'm asking because you mentioned demand is very strong.
In the U S.
Yes. Thanks Fair does Thats great question I mean in terms of the primary piece of it that's just not the way the business works as you know.
Businesses.
LMA.
Thus local delivery premium in this case with the Midwest issue, So plus Midwest plus product premium and so I'm going to creeping up on an answer to your question most of our the.
The current situation demand situation.
As reflected in.
In the product premium of course like most suppliers most of our <unk>.
Contracts are long term contract one year contract, meaning we don't do the majority of the business. We do the prices the premium would have been set.
On the commercial season Socal meeting period on.
On October November timeframe.
So long winded answer to your question, we will see some benefit on that demand.
Through spot premiums, but thats, a small portion of our business.
Got it got it and then for Europe.
Increase in power.
Power prices.
As to why the prices have been higher this year or something has changed in that market or what's going on now it is seasonal.
Seasonal I mean, there is you've got you've got cold weather, there too and really Nord pool.
It trades this is but one of the reasons per touch why we think we understand India, we've got a price and I suppose on every seven or eight year.
Excursion like the polar vortex, but we think we understand the factors there Nord pool. The factors are myriad that you've got the emission allowances that are required in the EU a trade on their own basis on our end.
The fair market value of those are embedded in the Nord pool prices. So you get that going up in ground, you've got German coal prices going up and down you've got whether in Scandinavia that significantly significantly impacts on this.
These are all sort of very short term things and then longer term of course, you have demand and you have longer term structural changes like interconnections between the various zones and Nord pool, but but but.
It's just it's a panoply of factors some as I said emission allowances politically driven.
No.
That's one of the reasons. We just said look we can take the opportunity, which we did last year to create a first or second quartile power price our references.
Are the other hydro based smelters, Norway, and Canada, and we said we can create a power price that is competitive with those and we took it.
We took the risk off.
Understood and.
Again, I get the strategy question and aluminum if you could just talk about.
Have you talked about.
Aluminum cost as soon as to why you picked an let me link.
<unk> cost structure as opposed to buying basing on some kind of spot alumina price.
Yes.
This is the time to ask a question like that so absolutely look.
All one has to do is look back at the <unk>.
The spike in the API or spot price to which you refer.
Starting in 2018 I suppose it was when a large Brazilian smelter.
Went out and prices went from the 300 to the 400 to 500 and then.
Some problems with zoom.
You might recall with sanctioning or threaten sanctions sanctioning for awhile.
Russian suppliers on the price went to 700.
30% of LMA and so for that reason frankly before we as we said over and over we didn't like the API anyway. We didn't think it represents we don't think it represents a true.
Discoverable transparent market price is too few suppliers too few buyers, it's not a transparent market theres no liquidity there so.
We believe that by a percentage of <unk> basis, obviously, it's a natural hedge so you give a little bit back at high times, but you hire on lead times, but youre protected load times and so that's the reason we were able to contract at prices. We think are are within.
Within the range that we've always talked about of the fair value of aluminum as we thought it was alright.
Still think such.
Great. Thanks, Thanks, very useful and good luck with everything Mike. Thank you pair to us very much.
Your next question comes from the line of John Tumazos with very independent Research. Your line is open.
Thank you.
I was starting on the website of your customer have or industries for the green aluminum.
And they make a very wide variety of products from.
Railcars.
Parts cars. They do indeed, it's a really interesting company yet it didn't seem.
Seem to be making every aluminum category.
Except beverage can in foil packaging right Yep Yep.
Yep.
And then my construction products too so that the.
On the packaging products might be the ones that would best consumer advertise to get some loyalty for green model.
I would think.
So can we conclude.
From the Hammer industry as example.
The green premium applies to all end markets.
Can you sell more than 150000 tons of the Green premium yes, that's a great John the answer to the first is absolutely like Es Bev is a great to pik.
The market for green, given consumers and whatnot, but think about cars and think about construction LEED certified buildings into the European equivalent on all the rest is happens to be on European OEM, there based on in Austria, but they do business throughout the world and so.
So absolutely and we've got plenty of firepower left that 150 is over five years. So it's only 30 a year. So it's 10 percentage or less 9% of <unk>.
Annual production pardon me now some of that as you know, we divert to foundry alloy because that's a really good high margin business for us, but even picking the foundry away. It's still only maybe a six or seven five grams per tonne views annual or less on our production in <unk> and <unk>.
So long winded answer yes, we were really excited and we think.
As I said, we can't talk about anything now, but as you would expect.
We're talking to other customers. This is a great lead customer, it's a really interesting nice business.
Net.
Congratulations thank you John.
There are no further questions at this time I will turn the call back over to the presenters.
We thank you as always for your time and good questions and interest and.
Look forward to talking with you on a couple of months everybody take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Sure.
[music].
Moving on.
Okay.