Q3 2021 Alcoa Corp Earnings Call
[music].
Good afternoon, and welcome to the Alcoa Corporation third quarter, 2021 earnings presentation and conference call.
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Please note this event is being recorded.
I would now like to turn the conference over to James Dwyer, Vice President of Investor Relations.
Please go ahead.
Thank you and good day everyone.
Im joined today by Roy Harvey Alcoa Corporation, President and Chief Executive Officer, and William Oplinger, Executive Vice President and Chief Financial Officer, we.
We will take your questions after comments by Roy and Bill.
As a reminder, today's discussion will contain forward looking statements relating to future events and expectations that are subject to various assumptions and caveats factors that may cause the company's actual results to differ materially from these statements are included in today's presentation and in our SEC filings in.
In addition.
We have included some non-GAAP financial measures in this presentation.
Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation.
Any reference in our discussion today to EBITDA means adjusted EBITDA.
Finally, as previously announced the earnings release and slide presentation are available on our website.
With that.
Here's Roy.
Thank you Jim and thanks to those who are joining our call today.
Had another strong quarter bolstered by aluminum prices that are higher than we've seen in more than a decade has in every quarter Bill and I will discuss these results and take your questions.
Before we get underway, however, and particularly at a time, where we are experiencing a rapidly changing market dynamic I would like to reinforce once again that our values, which we established when we launched as an independent company in 2016 continue to guide us.
Not just about the results, but also how we achieve them our values continue to be foundational for our company and our embedded in all of our decisions.
Now as our core corporation approaches its five year anniversary, we've been reflecting on the achievements I'll cowens across the globe helped us to accomplish it is clear that our strategic priorities are creating value today Alcoa is much stronger than when we launched we have significantly improved our processes we've strengthened our.
Balance sheet, we've reshaped our portfolio. We've responded to societies need for responsible production launching the industry's most comprehensive portfolio of low carbon products and we are also certified many of our assets to the stringent standards of the aluminum stewardship initiative.
In addition, our strategic priorities have helped us to do exactly what we said we wanted to do strengthen our company to prepare for an even brighter future and today, we've reached an important milestone.
As you saw from the press release that we just issued Alcoa has decided to initiate a quarterly dividend. Additionally, we've authorized a new share repurchase program that will complement our existing program that was authorized in 2018.
These decisions concerning capital returns align with our existing capital allocation framework and reflect two important points first we have confidence in the strength of our company and our ability to generate cash to sustain these programs through the commodity cycle today, both our balance sheet in the operating portfolio.
We're in a much stronger position with no substantial debt maturities until 2027.
We believe the markets we participate in will be stronger that this cycle will last longer and that Alcoa is well positioned to deliver in a low carbon ESG focused world but.
Our work is never complete these achievements simply serve as a strong foundation.
Despite the positive financial news I am disappointed that we had a serious injury in the quarter, an electrical contractor in Brazil sustained a life threatening electrical shock thankfully. He recovered and has now returned to work and we've implemented corrective actions.
Our focus must always be on the safety of everyone, who visits or works at our facilities.
As our comments progress today I'd like to highlight some recent initiatives that align with our strategic priorities and that use this strong foundation as a starting point the <unk> restart that will be powered by renewable energy the joint development project for high purity aluminum and our net zero ambition the green evolution.
It's happening fast and as evidenced by these projects we are positioning ourselves for the future.
Also we will talk more today about the strength in aluminum pricing and an improved pricing trend in alumina, but first let's review the financials with our CFO Bill <unk> Bill.
Bill. Please go ahead. Thanks, Alright, this quarter was even better than the previous one rep.
Revenues at $4.0 billion were up $276 million or 10% sequentially.
Revenues were up $744 million or 31% from the same period last year on higher aluminum and alumina prices realized aluminum prices were up 13% sequentially and 64% year over year third quarter earnings per share was $77.0 per share <unk> 13 per share.
Higher than the prior quarter and $2.02 per share higher than the year ago quarter adjusted earnings per share for the third quarter increased 38% sequentially to a record $2 <unk> per share adjusted EBITDA. Excluding special items also increased up 18% sequentially to 728.
8 million much higher than last year's $284 million.
Okay.
These charts, which debuted last quarter showed that the aluminum segment with modest income taxes and virtually no minority interest continues to outperform and drive record net income in.
In the first nine months of 2021, the aluminum segment has had its best year, so far with nearly $5.0 billion or 73% of I'll call. It total adjusted EBITDA, excluding special items of $10.0 billion.
That segment EBITDA generated record adjusted net income.
Before this year, our best full year adjusted net income was in 2018 at $698 million in 2021, our adjusted net income for the first nine months is already $822 million or $124 million higher.
Now with aluminum prices remaining at post global financial crisis highs and alumina prices recovering nicely earnings should be even better in the fourth quarter now lets review adjusted EBITDA in more detail.
The $110 million increase in adjusted EBITDA, Excluding special items was driven by higher metal prices as well as favorable currencies slightly higher alumina prices and better product pricing in alumina and aluminum.
However, as you know our bauxite on loader at Albemarle sustained structural damage in mid July and we ramped down refinery production by roughly one third with corresponding impacts to bauxite production as you are.
This outage had a $27 million impact in the quarter, mostly affecting shipment volume and production costs.
In addition, we experienced a few other impacts in the quarter higher raw material costs, mostly caustic in the alumina segment and carbon products in smelting.
Higher energy costs in Europe, and to a lesser extent in Brazil were unfavorable by $71 million.
<unk> costs increased by $53 million, while we also experienced higher cost in Norway and Brazil.
These increases were favorably offset by strong earnings in the Brazil Hydro's, the highest earnings in a decade for a net unfavorable energy impact of $17 million.
Lastly, in the aluminum segment railcar delays in Canada, and seasonal shipping patterns in Europe negatively impacted the results in the quarter.
The other column, primarily reflects the non recurrence of the Portland smelter government support which ended in the second quarter. After we repower the facility through July 2026.
<unk> increased accruals for residue storage area improvements in Brazil.
Now, let's look at impacts and our cash flows.
Yes.
The cash flows continue to highlight major corporate actions as well as the benefits from very strong adjusted EBITDA to illustrate the strong cash generation in the last quarter, we've bridged from the second quarter ending cash balance to the third quarter cash balance cash declined $200 million to $145 billion.
Our largest single outlay was $518 million in September when we redeemed the 2026 bonds, followed by working capital use of $206 million $83 million of capital expenditures and a modest $19 million of pension and <unk> funding, which is mostly OPEC EBIT.
EBITDA another factors provided net inflows of $626 million.
On a year to date basis, you can see the benefit of the strong nine months of EBITDA and the additional major sources of cash inflows, including noncore asset sales and the $500 million bond issue.
Those cash flows and Ebitdas also impact key financial metrics.
Return on equity increased to 32% for the first nine months of 2021 nine months 2021 free cash flow less noncontrolling interest distributions was negative $51 million due to the second quarters $500 million pension funding, but was positive $320 million in the third quarter due to.
The strong EBITDA, partially offset by a three day increase in days working capital.
Most importantly, our key leverage metric proportional adjusted net debt is now below our two to two $5 billion target range at one 7 billion.
Working capital has increased in line with expectations as metal prices continue to rise and now are being joined by aluminum price increases.
Moving to our outlook for the remainder of the year.
The full year 2021 outlook is expected to see modest changes for bauxite shipments. The expected ranges are decreasing 1 million tonnes to 49 to 50 million tons due to the <unk> outage in the third quarter.
We are expecting improvements on the income statement below the EBITDA line depreciation depletion and amortization is expected to improve $10 million to $665 million.
While interest expense is also expected to improve $10 million due to our redemption of the 2026 notes.
In the cash flow section there are three expected changes.
Turn seeking capital expenditures are expected to be $10 million lower.
Payment of prior year taxes has been adjusted 5 million to $30 million.
In environmental and Aro spending is expected to be $20 million better down to a $120 million for the year.
For the fourth quarter overall.
Al <unk> refinery production, returning close to normal operating levels and its current aluminum and alumina index pricing levels persist, we expect another record setting quarter.
However, at the sand separated refinery in smelter the current high energy costs in the country and the strike if both persist through the quarter and are expected to be primary factors decreasing adjusted EBITDA, approximately $100 million sequentially and increasing working capital sequentially $120 million in.
<unk> in the sand Cyprian impacts are in refining we expect sequentially lower shipments of 86000 metric tons and an unfavorable EBITDA impact of approximately $15 million.
And smelting, we expect sequentially lower shipments of 52000 metric tons and an unfavorable EBITDA impact of approximately $85 million.
For the rest of the portfolio adjusted EBITDA in the bauxite segment is expected to improve $10 million sequentially, primarily due to recovery from the RMR unloads outage in <unk> 2021.
Aside from index pricing currency and the San <unk> impacts that I mentioned, the alumina segment adjusted EBITDA is expected to be flat sequentially higher.
Higher shipments cost improvements and the partial recovery from the RMR unloads outage are expected to offset higher raw materials and energy costs.
In the aluminum segment again, excluding the <unk> impact index pricing and currency impacts.
And assuming todays spot alumina prices persist, while we expect substantial benefit in the alumina segment.
<unk> costs in the aluminum segment are estimated to increase by $100 million.
Higher shipments are expected to offset increased raw material and production costs.
Energy related impacts are expected to be comprised of two factors.
$30 million as Brazil, hydro sales seasonally decline and higher smelter energy costs of $20 million primarily in Norway.
Now, let me turn it back to Roy.
As Bill noted the aluminum segment has a significant role in our profitability. The <unk> aluminum prices. The highest it has been in 13 years and has doubled relative to the low point in the second quarter of 2020 in.
In addition, regional premiums are being influenced by higher transportation costs into deficit markets, such as North America and Europe.
The continued economic recovery in the tightness of supply of continued to support this <unk> rally and high regional premiums, we continue to see positive GDP and industrial production across the world's leading economies, which supports aluminum demand across all major end use sectors.
This year, we expect annual global demand for primary aluminum to increase approximately 10% relative to 2020 and surpassed the pre pandemic levels of 2019.
Strong demand is also being supported by China's continued status as a net importer of primary aluminum in 2021, China has curtailed more than 2 million tons of annualized capacity due to power shortages and its enforcement of policies related to the energy and the environment.
These curtailments represent one of the largest supply cuts the aluminum industry has ever experienced particularly given that they are occurring during a year in which we have seen strong demand growth.
These supply dynamics are not only occurring in China. There have been recent reports in Europe regarding energy shortages and high power costs that may lead to smelting cuts there as well.
For Alcoa's commercial impacts we are also seeing significant year over year growth for our value add aluminum products in the third quarter. The premiums we earned for value added products were up relative to the second quarter strong demand supported high spot premiums for open volumes.
Much of our volume for value added products is sold in annual contracts. So only a portion of the benefits from higher spot pricing. However, current market dynamics provide a positive environment for 2022 contract negotiations.
Next I'd like to comment on what we're seeing in the aluminum market, which is also on the rise.
As we've noted previously we are the world's largest third party producer of Illumina and market fundamentals. There have also become more favorable over this last month.
In the first two months of the quarter ex China aluminum prices remained more muted than in aluminum high freight costs made shipments to China on attractive in the market outside China had sufficient supply. However in the last month or so we have seen a substantial rally in ex China alumina pricing some unplanned production.
<unk> outside of China reduced the amount of aluminum available for spot purchases.
At the same time, some refineries in China have restricted production due to the same dynamics I discussed earlier in regards to the smelting cost power shortages and policies related to the environment and energy. These dynamics have driven current global supply tightness and alumina.
While China remains short and alumina at a net importer. It is now competing with smelters outside of China for available alumina as a result prices for alumina outside of China are at the highest levels they've been since 2018.
Now, let's move to slide that recaps some of the items that Alcoa has been doing to support our business for the future.
Our strategic actions over the past two years and our ongoing activities are positioning a co op for the future two years ago, We announced three key strategic programs, the new operating model noncore asset sales and the portfolio review, we've already met the goals on two of these first we fully.
Implemented a new operating model and captured the annual savings second we also met the top end of our target for non core asset sales.
The portfolio review. Meanwhile, has three years remaining and was designed to improve both the cost structure and sustainability position of our global production assets, focusing primarily on smelting and refining it considers options for significant improvement curtailment closure or divestiture.
At this two year Mark we've already addressed nearly half the $6.0 million tons of smelting capacity with our Repowering of Portland, the curtailment of in telco and restarted our EMR.
The announced restart of 268000 metric tons of smelting capacity in Brazil equates to our share of <unk> nameplate capacity.
It will supply the shorts Brazilian market and the smelter will be fully powered with renewable energy by 2024.
We earlier reported about 78% of our global smelters are powered by renewables and we expect that percentage to reach 85% by the conclusion of the portfolio review in 2024.
In refining we've also addressed half of our global goal of 4 million tons of refining capacity with the 2019 closure of the point comfort refinery in Texas.
Now, let's move to the right hand side of this slide in September we took another step to strengthen our balance sheet and redeemed in full $500 million in senior notes issued at a 7% interest rate that were due in 2026, we used cash on hand to repurchase this debt.
A stronger financial position is an outcome of our focus on aligning decisions with our strategic priorities, including our imperative to advance sustainably.
Last month, we added even more production facilities to our list of locations are certified to the aluminum stewardship initiative. The industry's most comprehensive third party system to verify responsible production today.
Today, we have 15 global sites certified to ASI performance standard the latest where two Canadian smelters Abi <unk> congratulations to those teams in Quebec for earning these certifications.
Importantly, we also have ASI chain of custody certification, which allows us to sell ASI certified bauxite alumina and aluminum and we've earned a premium on ASI certified products, which we can sell globally.
Earlier. This month, we also announced the beginning of a joint development project related to the market for high purity alumina, where HPA industry analysis shows that demand for HPA will be strong with increasing year over year demand due to the need for low carbon solutions in transportation and other sectors.
Non metallurgical alumina HPA is used to create a variety of products for a sustainable economy. This includes lithium ion batteries that are the backbone of clean emissions free electric vehicles and energy efficient led lighting applications. While we are still at an early stage of development. We believe our process knowledge of alumina refining can.
Ensure the operational and financial success of this joint development project.
And more generally across our alumina refineries. It is important to note that Alcoa has the world's lowest carbon intensity in its global refining system.
This too was an advantage now and in the future for our smelter grade in non metallurgical businesses, both of which are the largest outside of China.
Finally, I am proud of our ambition to reach net zero by 2050 for scope, one and scope two greenhouse gas emissions across our global operations.
Now earlier this month this ambition complements our climate change policy and existing ghd targets, which we discussed more fully in our annual sustainability report.
To work toward this ambition, we are focused on increasing the share of our operations powered by renewable energy and commercializing some of the breakthrough innovations. We've discussed previously such as the <unk> technology, which eliminates all direct greenhouse gases from the traditional aluminum smelting process and adapting mechanical vapor recompression to alumina refining to further reduce.
<unk> are already low carbon intensity.
Next I wanted to quickly highlight the news we announced earlier today, we are proud to initiate this quarterly dividend and authorized a new buyback program since Alcoa Corporation's launch nearly five years ago, we've talked about strengthening our company. This announcement is clear evidence of the work that I'll cowens across.
The globe have completed to position the company to succeed not only in the favorable market environment, we're seeing now but through the.
The commodity cycle today.
Today I'll cover is stronger than it has been since our inception and with our current view of the markets and expected cash flows. We believe these programs can be sustained.
The decision regarding capital returns aligns with our current capital allocation framework.
To review the framework prioritizes, maintaining liquidity and investing capital to sustain and improve our operations.
We aim to maximize value creation opportunities across four categories listed in no specific order one of those of course is returning cash to stockholders, which we've demonstrated today.
Now let me briefly highlight the other three value creation opportunities first we have made great progress in reducing our debt as mentioned our adjusted proportional net debt is now below our target range of 2.0 to two 5 billion.
Today, our company has no substantial debt maturities until 2027, and our expected cash pension funding requirements are at their lowest levels.
As we've said previously our net debt may fluctuate, but we intend to maintain a strong balance sheet through the cycle.
Second another focus is the transformation of our portfolio building on the progress we have already made in this five year program.
Finally, we continue to evaluate value, creating growth projects and pursue opportunities that will generate an adequate rate of return.
Now as we prepare for your questions I want to summarize a few important items.
It's a very good time to be in the upstream aluminum business, we have a long position in all three of our segment and the work that we've accomplished while continuing has made us more competitive enabling us to succeed through the commodity cycle because of this work, we're well positioned to capture benefits from improved markets, including the very healthy aluminum price.
<unk> that we're currently seeing.
Next I'm proud to say that our core corporation is stronger today than at any other time, our strategies are working and our balance sheet is in its best shape ever. This improved financial strength has allowed more flexibility to execute on our capital allocation framework includes.
Including the authorization of further returns to our investors.
For your support and trust and Alcoa.
Finally, we're ready for a sustainable future as we approach our five year anniversary next month I'm excited about what's ahead as we move forward at a stronger company that can deliver value to our people our processes and our products.
Bill and I are now ready to answer your questions operator, who do we have for our first question.
We will now begin our question and answer session.
I'll ask a question you May press Star then one on your phone.
You are using a speakerphone you will need to pick up the handset before pressing the keys.
To withdraw your question. Please press Star then two.
Please limit yourself to two questions.
At this time, we will pause momentarily to assemble the roster.
And our first question comes from Carlos de Alba of Morgan Stanley. Please go ahead.
Hello, and good afternoon guys.
Installations on the quarter.
Just a couple of questions.
First on the smelters, if you could maybe give a little bit more color as to what else could you guys do in terms of maybe increasing your planning and maybe I'm doing it reviewing potential restarts of the capacity that is curtailed right now.
Some of which has been only a few quarters. When you took action, but the market has changed so wondering if there is any potential restarts are above and beyond <unk> and <unk> are there is there any color on the type of power agreement that you guys were able to secure at ACC.
Renewable power being in hydro and why only in 2024 and it will be fully source without power and then if I may squeeze another in the second one on an alumina, particularly the recently announced HBA project.
Could you comment that it would be more about the economics of the project, particularly maybe what is the likely.
Spread on prices for these type of alumina above and beyond the asthma.
Great.
Illumina, mostly produce thank you very much.
Yes, Carlos Thanks. Thanks for the question. So let me, let me start off and Bill can complement as we go through this but let me start with your question about smelters.
The fact that it took us some time to work through the restart of value more I think is is a pretty good example of the type of effort that needs to go into any restart.
<unk> was a pretty clear decision because we have access to very competitive power. It also happened to be renewable energy like you said starting in 2024. It is a very competitive plant and so it sort of checked all the boxes.
And then of course hit the fact that we were that the domestic market inside of Brazil is also short so that increases the.
The increases the financial outcomes of that particular decision.
Each of the other smelters that we have curtailed right now what's your term was curtailed for a very specific reason.
And so as we go through those analyses, we obviously look at todays pricing, we look at how that pricing will continue into the future and then connect that back to where we think those particular smelters would be located on the cost curve.
And I think what you should take away from from the <unk> decision.
Is that we are focused not just on being successful in today's environment, but in having a very competitive smelter true through all all of the potential commodity environments in the future we want it to be successful to that commodity cycle and so we'll continue to look there is nothing further that we wanted to announce right now we do have more capacity curtailed.
However, it would we would need to find that long longer term power that would fit the cost competitiveness criteria that we have.
On on your question about RMR power. The fact is it takes time to be able to bring it up to speed and so as we were looking at Repowering that facility.
We wanted to repower it with with the longest timeline possible. We wanted it to be renewable energy in Brazil, Thats, very typically hydro and that part of the country.
And we wanted that to be ready once that that smelter was back up at full capacity.
Getting to full capacity is a question of timing and how we plan to move through that you saw you saw sort of the outline that we had in the original press release and in today's presentation.
But it's it is without saying what that contract exactly looks like it is a very competitive race that we believe allows us to be successful through the commodity cycle.
Okay.
On your third question Carlos on HBM, and I'll, let bill chime in on anything he might like to add but I think the short answer is that we are in very early stages of developing this project.
And so we have an understanding of market we have an understanding of what we can bring to the technology that our that our partners are bringing to the table.
But we need to prove out that technology and feel a lot more a lot more certain about those outcomes and we are right now which is why we structured it as it has with a series of options as we go along so I think you will see more on economics down the road.
But really not too much to comment right now.
Yes, nothing nothing further to add I think you covered it well.
Thanks Carl.
Thank you. Thank you very much just one clarification is it fair to say that going forward.
Were to restart any remain remaining curtail aluminum production.
Is it the type of power, meaning renewal it has to be renewable power or not necessarily.
We consider the type of energy and how that fits with our short term medium term and long term environmental criteria as part of any of those decisions.
The fact is is that we've just repower, the Portland facility, which has a goal to move towards more renewable energy.
Because it has a relatively short timeline, we were comfortable stepping into that into that power contracts.
At that time, when you look at <unk> of course, this is a longer power contract and thus the fact that it was renewable becomes more and more important.
So I know that doesn't specifically answer your question, but it gives you sort of a feel for how we how we look at.
ESG criteria and specifically the percentage of renewable power that goes into those contracts as we make those decisions.
Thank you Ron and Bill Congratulations on the results again, thanks Carlos.
The next question comes from Emily <unk> of Goldman Sachs. Please go ahead.
Hi, Roy and Bill congratulations on the quarter.
Maybe I'll start off with a quick question around the capital allocation strategy now the leverages in good shape <unk> got the capital returns piece in place and you've addressed half of roughly half of your smelting capacity portfolio review.
Firstly, how do you think about the buyback the execution of the buyback will it be more systemic opportunistic in nature.
And then the latest thinking around the pensions and potential for new authorization.
So thanks, Thanks, Emily let me take the second question first and that's around the pensions pensions are in much better shape than they have been historically global pensions are greater than 90% funded at this point the U S. Pensions are close to 100% funded.
And so the net liability has has really significantly been reduced.
We still have a fairly large gross liability and we will be looking at opportunities to opportunistically.
<unk> more of that gross liability.
We have moved at least in the U S. We knew the asset portfolio to a.
More defensive strategy that should inoculate it from.
Large changes in interest rates, but we will be looking at.
Opportunities to our new advertising.
Going forward.
As far as capital allocation goes specifically to your question around timing of the buybacks.
We will do that based on.
<unk>.
Our continuing analysis of the market financial and other factors.
And so we'll be doing that over time.
I think if you step back and look at where we've come on the capital allocation program as Roy said the four pronged.
We just now have announced the return to shareholders. So.
We've executed well on the capital allocation program.
Thanks, Thanks, that's really helpful.
Just one follow up when you think about the current state of the aluminum market.
Alcala views around potentially investing in either greenfield capacity, all brownfield opportunities in cleaning some production.
Lower cost assets I'll leave it at that thank you.
Sure and I can I can take a first stab at that one Emily.
The fact is is that we are creeping some of our very low cost facilities that have long term power. So you look at Canada and those are places, where we can create creep our technology, it's relatively nuts and bolts. It actually takes a lot of a lot of thoughtful approach for all of our engineers on site and our operators et cetera.
We're very much in line with that when it comes to a greenfield or brownfield.
Obviously, we need to look at a much longer timeline for aluminum pricing and try and think through supply demand.
As we see there seems to be some real structural shifts that are happening inside of aluminum today. So that's certainly certainly strike strengthens the case.
It also connects with the with the energy market and as we've talked about with Carlos It's a question about renewable energy and as you look at our smelter decision, obviously that becomes immensely important to find something that is both low carbon and renewable.
The third thing that we need to be thinking about as capital costs.
Need to solve the capital cost issue between.
Capital can you spend and still get a very good financial return on it and so thats something that because they were able to construct plants. So inexpensively in China and because of this this last decade, where we had overproduction at essentially made it impossible and made every single brownfield or Greenfield that's grown up over that time period to be.
Not have gotten the returns that are expected by by our stockholders. So we take that very seriously. It takes some time to see how these structural shifts will play out I.
I would also put into the mix. The fact that we're in the midst of developing our <unk> technology and so there is a very real decision between investing in conventional technology. When we have what we think will be the preferred solution.
Four zero carbon smelting long into the future and so that one is the wildcard, but I'll tell you. It is weighing very heavily on our minds and is a very important project for us.
Thanks for the color I.
Thanks Emily.
The next question comes from Alex Hacking of Citi. Please go ahead.
Yes, Thanks, Roy and Bill So first question on <unk>.
I understand obviously, a sensitive situation, but are there any debt.
Deadlines, there or dates to reach a resolution.
And then second question.
Bit random, but the shortages of alloying agents magnesium and so on.
Does this have any effect on our color or any commentary around that would be helpful. Thanks.
So Alex let me, let me cover sent Sebree on quickly and then I'll pass over the alloy question over to Bill. So there are no specific dates that we have in mind right now I'll call continues to seek a solution for sensor prion.
The fundamental problem, which is the price of power in Spain in which we've seen exacerbated over this last little period with with a pretty wild ride that's happening in energy markets inside of Europe.
The price of power in Spain before we hit this crisis has far exceeded what other global smelters are experiencing.
And so we've been trying to find a deal with the government that allowed us to address this underlying issue around around sensor, but not being competitive.
With that said, we had announced the collective dismissal. Since then we've they have restarted their strike, which is why we have we've talked about the financial impact that that has on us.
We are now in the midst of an appeal to the decision that was made at the end.
And the <unk> courts, and so all of that there is very little specificity around when that will be that will be settled but it is at the very top of our minds. It is obviously, a very important financial impact.
And we will keep you informed as we learn more.
Hey, Alex let me take the.
Alloying agents question just to put it in perspective.
Silicon at <unk> are the 282 alloys that we're really.
There are currently.
And a lot of People's minds, we buy about 20000 metric tons of each of magnesium and silicon.
As you know China accounts for about 80% of the magnesium output and 70% of the global Silicon output and the same dynamics that we're seeing to a large extent in the aluminum industry are occurring in the magnesium and the silicon industry.
Due to production cuts in China.
The good news, though Alex is that we.
We pass through the majority of that impacts onto our customers and we would.
Project that through smart, either smart buying or customer contracts, we'd be passing through about 95% of the impact of higher magnesium in silicon to our customers.
Thanks, Bill if I could just follow up or shortages are concerned more so than the ability to pause the pricer shortages are a concern and our.
Our procurement team is actively working on trying to make sure that we have enough material to be able to supply our customers blood shortages are a concern.
Okay. Thanks, so much I appreciate the time.
Thanks, Alex.
The next question comes from Lucas pipes of B Riley Securities. Please go ahead.
Hey, good afternoon.
Like to add my congratulations on a good quarter. My first question is in the similar vein.
But maybe higher level just in terms of aluminum prices today obviously.
Incredibly strong.
Have you tried to kind of tease out what is what is demand pull here what is cost push.
And.
Where some of these bottlenecks could lead us.
Appreciate your perspective.
Sure Lukas let me, let me give you probably a non answer to this.
I think trying to trying to parse out what what's being driven by demand, which obviously continued very strong. Although we are seeing some some some issues around supply chain that is causing some of that pull back a little bit.
And we're seeing.
An incredible change in what's happening on the supply side and so when you look outside of China, which is probably the less influential on supply we're starting to see that that European smelters. Many of which are tied to market prices are simply not able to continue to operate in times like this and I think we've seen the first the first.
Couple of steps above as.
As a reaction of course not at a point in time that will continue through time, but we'll see where that takes us. So so not easy even with the prices that we have right now not not easy to keep supply when gas prices have increased so much inside of the European Union.
Inside of China, They have seem to have the perfect storm of of flood events.
Decisions around environmental audits and environmental policies, it's connecting over with their dual control system I think in the short term when you look at it.
You've seen between two and 3 million tonnes of curtailments that have happened because of because of the these short term issues.
When you start to project that out longer I think the fact is the policies that China has put into place.
Is what's driving this fundamental change not just for aluminum today, but aluminum longer into the future and so when I think about sort of the impacts on pricing right. Now I think demand continues to be strong and that is very good but I think the real structural shift sits.
This fits very much on the supply side and is not and while you have physical shortages right now and you see that in the inventories being drained you see that with what's happening with the with.
With regional premiums as well, but people are also looking towards the future in saying that there simply isn't enough new capacity coming online and certainly not enough new capacity being fueled by renewable energy in order to meet the future demand. So I think that to me is bodes well both for today's prices, which of course are very attractive but also for the.
Long term structural structural changes happening in the pricing environment.
Thank you. Thank you very much for for that perspective and.
Just at the end you touched on my follow up question.
You mentioned this also throughout your earlier comments that you have.
Access to renewable powers is kind of is a key item.
For increasing capacity.
What role can you play to tackle that.
You own renewable energy assets today could you expand dose do you look more to developers to provide that power.
How will that bottleneck.
Yes, I think it's I think the answer is all of the above we could look at a number of different ways in order to in order to try and and Debottleneck the process and find renewable energy I would caution you, though that we're very careful not to.
Not subsidize our aluminum business by building our own renewable energy and I think you've seen that in Brazil.
We need to if we're going to build a renewable energy position then we'll need to decide whether that's best to put into one of our smelters or in fact better to sell it into the market. We're we're pretty we're pretty careful about not mixing our decisions when it comes to when it comes to those two different types of businesses.
However, when you look at how we've been Repowering Portland as an example will come through power suppliers. When you look at some of the ways that we were powered our Norwegian plants has been through partnerships with new with new wind power facilities and so I think the answer is as is.
There is not going to be enough renewable power to go around there is a lot of demand. There's a lot of new announcements on facilities, but it is incredibly complicated in order to build this maneuver renewable power and so finding those spots where you can smell aluminum smartly and can buy and find those renewable energy contracts is going to be it's going to be the <unk>.
<unk>, which is what again creates a structural change but also at the other end is going to help help define and who will be able to build for the future and one more plug for <unk>. As you then connect renewable energy into a zero carbon process and as such as <unk>.
You can you can really demonstrate that as we head towards the world.
A net zero world by 2050, it's those type of solutions that are absolutely necessary to make that possible.
Really really exciting developments in the industry.
Really appreciate your perspective, thank you.
Lucas.
The next question comes from Curt Woodworth of Credit Suisse. Please go ahead.
Thanks, Good afternoon, Roy and Bill.
Hi, Kurt.
So kind of a follow up question to Alex on the magnesium in silicon.
It does seem like there's a potential to shortages to certainly exist here, we've already seen and when you look at bill Bill at or foundry alloy premiums dropped dramatically anywhere from 500 to well over 1000 met tons. So it is pretty meaningful and I know that you guys tend to set those.
Contracts on an annual basis, but are you do you feel comfortable with your position today are you looking to build safety stocks within those alloys and how do you think that the shortage. There is going to play into your negotiations around setting your value add premiums into next year and can you give us any sense for.
The potential benefit of how those premiums could book next year relative to what you booked for this year.
Yeah, So Kurt.
Globally value add products.
<unk> is very strong.
We are focused in Europe, and North America.
And if you go around the around the globe on the various value added products, we're seeing strength in flat demand.
And just about every major area, both in Europe and in North America.
Bill It as you said bill it is extremely strong.
And with some of the curtailments that we've seen in Europe due to the energy situation is as taking supplier fill it out of the market at a time when demand is very strong.
And then foundry foundry largely is in automotive.
Market and what the automotive chip shortage, we have seen the foundry market fall off a little bit, but we've been able to re purpose a lot of that metal into different markets and so you don't really see it hitting our our result, as we go into 2022.
Some of that market situation, and we will be looking to.
Do as well as we can with value added premiums in 2022.
And we will be making sure that we try to pass through all the Mag and silicon price increases.
As far as building stocks of Mag in silicon.
We clearly are out there, making sure that we want to be able to fulfill our customers' needs. We will do the best that we possibly can.
Upstream of US we are starting to see some force majeure declared by by an AG suppliers. So.
We are actively trying to make sure that we can meet our customers' customers' needs going into 2022.
And Kurt I'll, just tease out one more point and I mentioned it during my presentation, but I think it's worthwhile reiterating it.
At a time like this with increasing premiums we don't realize all of those in the current year, because we don't we only sell a portion of our sales on spot. However.
However, this is a great time to see a strong premiums because we are in the midst of.
We're in the midst of our discussions with all of our customers to set what those prices and premiums will be going into 2022. So it's.
That's very good news for our value added business not just from the really strong demand and therefore, we can really choose those products that make the most sense for us.
But also it's a good time to be setting premiums book now, particularly in North America and Europe.
Okay. That's helpful. And then just just to follow up on power I think roughly 55% of your powers LNG indexed.
I know you highlighted the same separate issue, but can you talk more broadly about.
Power cost inflation through the portfolio of the next couple of quarters and then we continue to see this energy shortage persists.
Should we continue to expect those levels of headwinds.
Specifically at San <unk>, and more broadly how you're thinking about that thank you.
Sure Curt let me let me just give you some some data points personally address sensitive brand fairly quickly.
Said that the site, including the refinery and the smelter would be about $100 million EBITDA hit in the fourth quarter. That's a combination of two factors. One is the strike, but that's a smaller earnings impact the largest factor there is the energy cost.
<unk>.
And the numbers that we've provided you were assuming about a 200 to 210 euro.
Per megawatt hour cost and.
In Spain, so the energy costs in Europe are not in a position to support smelting in Europe.
If we then look at the rest of our portfolio as you alluded to we have some fixed price we have some self generation. We've got roughly 50% that is LMA linked so those element linkage go up with elevate prices.
And then we have a little bit of spot pricing in Norway.
So if you boil that down to.
And this is in our additional business consideration stage when we look at the fourth quarter. We're looking at about a $50 million negative impact from energy and that breaks down between $30 million of seasonally very strong results in our Brazil hydro that the prices and volumes will come down in the fourth quarter.
And then a $20 million impact.
Energy outside of sand sit brand.
If I if I can just step back for a second though and.
The aluminum segment is expecting much better shipments in the fourth quarter and some of the higher raw material prices that we're seeing in coke and pitch. We plan on offsetting that because we think that both for the alumina and aluminum segments, we will have better volumes in the fourth quarter.
Super helpful. Thank you guys.
Hey, Kurt.
The next question comes from John Tumazos of John Tumazos, very independent research. Please go ahead.
Congratulations on all the good times.
Thanks, John John.
The first question is aluminum.
Contractors are references at $81.0
The spot in the $83.0 for the various future months.
Perfect.
A reasonable benchmark.
Given all that's been rising dramatically in the last six weeks or so given the time lags.
Is 402 aggressive of guests for the.
December quarter realization for alumina first question.
So John we typically try to stay away from guesses of pricing in any particular quarter, but API pricing today is sitting at around $482 per ton if I can.
Could give you a little bit of a view on the market.
And then you can draw your own conclusion around pricing.
We have seen some curtailment of production of our refineries in China for all the same reasons that youre reading about in other areas with power cuts and focus on emissions couple that with a very short Atlantic market because of the <unk> shut down where they had the powerhouse fire.
That has shortened up the the Atlantic market and also we had the RMR ship on loader issue, which is back up and running not the unloading itself, but the plant is back up to about 95% capacity.
So combine the two of China.
Shortage and a.
Short market in the Atlantic and alumina prices are running up fairly quickly and as you know unlike the aluminum market. There is no inventory or very little inventory of alumina. So in the case of a short market of alumina you typically see very quick and can see very drastic.
Changes in pricing.
Thank you. Thank you second question.
I did was I took.
Third quarter price revenues minus EBITDA divided by tons.
<unk>.
I calculated this third quarter.
<unk> was $36.0 per ton more than last year's average.
Lumen.
$33 a tonne.
And the aluminum metal.
15.
<unk>.
Given your different guidance is all of those continue to accelerate.
And we're not fluid so I presume.
Let me just.
Take on one market at a time.
<unk>.
On the bauxite side, we're largely internally sourced on bauxite and year over year.
We had a change in bauxite pricing that lowered bauxite pricing into the aluminum business.
We've shown that during the course of the year, that's what's being reflected in some of the bauxite segment results.
We just talked about the strength of the aluminum market and.
The aluminum market given the two factors that I just discussed are very strong and then on the aluminum side.
I think Roy Roy highlighted it pretty well, what's going on in the aluminum business. So.
Each of those markets at this point with maybe less less less emphasis on bauxite isn't as in a pretty good situation for US Bill I was referencing the cost per ton or pound.
Yes, and that's what I was.
To some extent trying to answer and that is in the case with both strong and the costs were going to do over the cost creep doesn't matter because we're doing so well on the revenue side I guess is what you are saying well when we when we think about cost creep.
<unk>.
We should not see any cost creep with bauxite <unk> alumina because the bulk side is actually cheaper this year going into alumina.
On the refining side, we are seeing some hockey stick.
And that that has an impact and then on smelting, it's a combination of the energy and <unk>.
Raw materials, and we've seen some raw material creep in the third quarter, we will see a little bit more in the fourth quarter, but as I said in my comments, we anticipate that the volume benefits that we will be driving in the fourth quarter, we will.
We'll offset that.
Thank you very much so great to see things. So good. Thank you thanks, John nice job there.
Our final question will come from Michael Dudas of vertical research. Please go ahead.
Good afternoon. Thanks for squeezing me in at the edge you're up ROI.
When you look through your capital allocation, which certainly I think is going to be very well received in a very thoughtful over the two.
These violent cycles, we've had the last few years.
Already touched about maybe long term capital spending and growth opportunities.
Putting out a budget or guidance for future years, how does that flow through given all that you've talked about today with internal and creep opportunities.
Certainly.
I think more so on the new technology leases or the HPA opportunities is there a thought to buildup.
Capital buildup of flexibility with the strong cash flows to <unk>.
Put that in the longer medium longer term basis, how should we think about that over this capital allocation strategy. Thank you.
Yes, Mike I. Appreciate the question there is always space to squeeze you in so.
Thanks Glenn.
When we step back and we think about where we find ourselves today, it's certainly been a very different situation than 18 months ago.
We have opportunities that sits inside of our three businesses and so bauxite. We obviously have the ability to creep if we find the pricing environment supportive or again, if we can use that internally in one of our refineries.
We have a series of medium sized growth projects.
Brownfields, but sort of large creep projects inside of the refining business in Brazil in Western Australia that we continue to evaluate.
For those who need to have both the capital cost and operating and operating cost, but also our revenue side that we can feel confident that we're going to get the returns on it on the smelting side and we talked already a little bit about this we have opportunities to creep the current assets.
So those things I think are somewhat predictable I think we can explain them very well.
Your question gets to what comes next.
And to me, we've got <unk>, that's going on Alex This is going to be this revolutionary technology that once proven I think will set the stage for a brand new way to smelt.
And then we will have the option of whether we choose to commercialize that in the external market or whether we use it to move very quickly inside to retrofit or to build that next smelter and very much depends on what's happening in the broader market of course, but also on us meeting the commitments around cost savings and capital cost efficiency.
We're also working on mechanical vapor recompression inside of inside of refining today, we have the most lowest carbon efficiency and all in all of the refining system. So we're very advantaged when it comes to carbon content inside of what we produce but.
But if we can also solve how to electrify pieces of that refining process and be able to do that in a cost efficient and competitive manner.
It starts to unblock, what we can do on the refining side as well and so I think the way that the world is structurally moving yes, it's great to see the structural shift in and the supply demand coming in smelting and smelting and aluminum because I think that helps us to feel that the cycle can last longer but also when you add in the ESG trends that are happening.
Right now.
I think we have an opportunity given our legacy given our technology and given what we know about refining and smelting.
Really take a big step forward.
And what I can assure you is that we'll bring you along for that ride and talk to you about that as time goes forward. So right now what I'd say is what we've got are really a good set of creep projects and we will keep you informed as we approve those are as we decided to move forward on them.
And then we're working on the rest of these items as well and more to come.
Look forward to their right. If we if we can hire trucker to tick us. Thank you.
Great.
Yes.
Perfect for a question and answer session I would now like to turn the conference over to Roy Harvey for closing remarks.
Good. Thank you Andrea so so bill and I have enjoyed talking to you today, our our entire executive team and the thousands of employees across our global operations are proud of the work that we're doing what we do matters aluminum is strong light recyclable.
Right material for a sustainable future and we are the right company to deliver <unk>.
Next month will Mark our five year anniversary as an independent company and we've made significant progress over that time, we're excited to talk about how we will leverage the strong foundation for the future and we will give you a better answer Mike on.
On November 9th when we plan to hold a virtual investor day.
At that event I will be joined by other members of my executive team to discuss various topics, including our markets strategies and the technologies that we envision for the future.
The specific details for that Investor day event will be shared by our press release next week.
I look forward to talking when we met with many of you soon at the upcoming November 9th and until then thank you once again for joining our call today and please stay safe and healthy good night.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
Yes.
Yeah.
[music].
Yes.