Q3 2021 Century Aluminum Co Earnings Call
Good evening. Thank you for attending today's entry aluminum company third quarter twenty-three one earnings conference call. My name is Hannah and I will be your moderator for today's call all minds will be needed during the presentation portion of the call, but an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star one on your telephone keypad I would now leads to pass the conference over to our host heater trip Koski with century aluminum. Please go ahead.
Thank you and good afternoon, everyone and welcome to the conference call.
I'm joined here today by Justin years centuries, President and Chief Executive Officer, Craig County, Executive Vice President and Chief Financial Officer, and Cheerleaders, Senior Vice President of Finance and Treasurer.
After a preferred comments, we'll take your questions.
As a reminder, today's presentation is available on our website at www dot associated aluminum dot com.
We use our website as a means of this goes the material information about the company and for complying with regulation F D.
Turning to slide one please take a moment to review the cautionary statement shown here with respect to forward looking statements and non-GAAP financial measures contained in today's discussion.
And without having to call the Jesse.
And thanks to everyone for joining the call today.
I'd like to start by speaking about the current market environment and give some highlights from the third quarter of repeating Craig take you through the details are then finish the call by walking you through our exciting new Bill would cast test project at Gouldner Doggy.
Okay. So starting on page three we continue to see a robust market for aluminum in the third quarter with prices hitting a 13 year highs earlier. This month price momentum has been driven by continued consumer strength, especially in the west combined with energy driven supply curtailments in China and to some extent Europe and hydro.
Transportation costs across the world on the demand side, we have seen consumption returned to pre COVID-19 levels and expect that 2021 demand growth will be nearly 10% from 2020 levels.
This growth come despite headwinds and automotive and aerospace, giving you the semiconductor shortage and lower commercial airline travel respectively.
Recovering these lagging sectors in 2022 would help drive new demand growth in 2022 and beyond.
We have continued to see especially strong demand and extrusions with still a demand and spot premiums remaining at all time highs in the us and Europe.
As a reminder, because he was below market prices are set on an annual basis or 2021 below production was price before the current run up in prices. However.
However, we are now mostly through the 2022 commercial season, and we are pleased to announce that we were able to achieve near record below premium sort of 2022 annualized sales.
While we're still finalising the entirety of her book, we expect that we will achieve incremental billet price gains near the midpoint of the 10% to 15% range I provided on our last call.
If you extrapolate that against are expected 250 to 275000 metric tons of billet production. In 2022, you will see that we expect this to be a substantial incremental EBITDA generators versus our 2021 performance.
On the supply side of the equation continued production curtailments in China are now approaching 4 million tons of annualized capacity due to compliance with the new Chinese dual control system for energy consumption as well as flooding and other energy disruptions.
As a result, China has remained a net importer in 2021 and is expected to remain a net importer next year as well.
We have also seen much smaller production curtailments in Europe due to high energy prices.
All in all these supply curtailments have left the physical market exceedingly type and regional delivery premiums near record highs and both are key markets in the us and Europe.
People will give you the details in a minute.
These curtailments have led to continued significant drawdowns in inventories across the world, bringing inventories to post financial crisis lows.
We know anticipate continued production deficits in the 2022 that could result in inventories following both falling below equilibrium levels.
On the input side.
We are seeing and continued price inflation across our key commodities most significantly on the energy side, where rising oil gas and coal prices have raised in order to pull on my cell energy prices.
Forward myself North pole prices for Q4, 21, and Q1 22 are now trading it elevated levels, reflecting rising gas and coal prices is driven by shortages in the EU in Asia and rising LNG in coal exports from the us.
While we expect the impact of these prices will be significant to our Q4 and Q1 results. We do believe these markets will return to more normalised levels in the second quarter of 2022 and beyond which is reflected in the steep backwardation in the forward curves and both myself notable.
We will provide the detail in the expected impact of these elevated prices.
To our queue for results shortly.
On the raw materials side, we've recently seen price increases in alumina, mainly driven by supply curtailments in China, and a fire in the gym Alcoa aluminum refinery in Jamaica, while aluminum prices remain within their historical price relationship to aluminum prices of 15% to 17%. They are elevated from price levels earlier in the year.
Finally as has been widely reported production cuts in China have led to concerns of shortages of certain alloying materials globally, namely magnesium in silicon.
Close to 80% of the world's magnesium production now comes from China and earlier this quarter. They curtailed significant amounts of this production due to introduce shortages.
Unfortunately, we have begun to see some.
Fortunately, we have now begun to see some easing in these pricing for the past week or two as production and started to increase in China.
While we're monitoring the situation closely we believe we are well situated to pass along the majority of any price increase associated with the shortage and have sufficient supply on hand to meet our needs well into next year.
This physical tightness is just another example of why domestic supply chain for key raw materials are imperative and why programs like section 232, or so important to bring back domestic industry and jobs the.
The vitamin administration has continued to show his support of section 232 program for aluminum with its recent agreement with the EU to implement a tariff rate quota on all primary aluminum imports from the <unk> the us.
Under the new agreement a tariff rate of 10% will continue to apply to all EU imports to primary aluminum above a quota leveled 18000 metric tons per year, a level, which means of the vast majority of imports into the U S is 6 million ton market remains subject to the tariffs.
We believe this agreement continues to show this administration support for the domestic aluminum industry and its workers as we continue to invest and expand.
Turning to our own operations, we've made good progress in the quarter on our expansion programs and generally has stable and consistent operations across our system.
And the U S. We continued to make substantial progress in our Mount Holly restart program and I am glad to say that the project remains on track.
Just to remind everyone wants complete the research program will return the plant to 75% of its capacity or about 170000 metric tons of production on an annualized basis.
In order to reach this point, we will ultimately rely on all of the parts online one which has been operating continuously and also rely on and Re-energized half-line too, which has been shuttered, which have been shuttered since 2015.
The majority of the re line activity will take place this year with the remaining re lines occurring in 2022 and 2023 itself Phil.
As we discussed on our last call we have experienced some delays over the course of 2021 due to COVID-19 supply chain in hiring issues, mainly from suppliers of materials necessary to complete the pot relining and difficulty in hiring the required amount of new employees to restart and run the additional thoughts.
These risks of course remain as labor markets and shipping schedules remain tight and we are reliant on supplies and hiring occurring on time to complete the project.
This is pushed the bulk of our incremental volume gains into Q4 and brought forward. Some of the re online activity that we had originally planned to occur in 2022 and 2023 into Q4.
At hospital, we've made good progress towards reaching our end of year goal to return to four full plotlines of operation about 80% of our capacity.
This process remains on schedule an in line with our previously issued estimates.
I would like to take the time to make specific acknowledgement of the extraordinary efforts of our teams at all of our locations during the pandemic.
During Q3, we experienced our highest levels of Covid an infection in the cross each of our operating locations at the Delta wave of infection traveled across the us and Europe.
Fortunately these levels of infection of now receded towards pre delta levels and all locations are operating well.
In Europe garnered on the enlisted and continue their excellent performance that we've become accustomed to we will discuss are very exciting new bill attached house project for greater Tangi at the end of the call.
All in all we remain focused on completing a restart product because both hawesville amount of Holly and entering 2022 at our targeted production levels across our system. We're starting to see some signs of progress and Ah recently implemented operational execution programs and hope to have that continued positive developments on that front in the future.
And with that I'll turn it over to Pete.
Jesse.
If we can move the slide four please I'll take you through the current state of the global aluminum market.
And the third quarter global aluminum demand winds up approximately 7% from prior year.
This increase was mainly driven by the World X, China, which saw demand up approximately 16%, while China was an increase of only 1%.
Global production was up approximately 4% in the third quarter from prior year.
With 3% supply growth in China and.
And 5% growth in the World X, China sequentially global supply growth was flat.
Taking a closer look at our region in the US demand was up 12% from prior year, while supply was down 2%.
In Europe.
Demand was up approximately 16% from the prior year.
And supply growth was up only 3%.
We continue to see these two market is the shortest markets in the world and.
And that will carry into next year and beyond.
As we saw last quarter demand continues to outpaced supply growth around the world and the global aluminum market is now projected to be in a one and a half million tonne deficit.
2021.
Most market participants estimate a larger deficit next year.
Due to the tightening of power availability in China, resulting in supply curtailment and delays and expansion projects.
Global aluminum inventory levels have fallen to post financial crisis loans of less than 60 days of primary aluminum consumption.
These inventory levels, along with the global deficit should continue to support higher prices going forward.
Okay, turning to slide five please.
We continue to see the highest highest pricing for aluminum in over 10 years and year record premiums.
The cash LMB price average approximately 26 55 zero per ton in the third quarter, which was up approximately 10% or $250 per ton sequentially.
Currently spot prices around $2700 per ton.
In the third quarter regional premiums averaged 33 per pound and the U S.
Which was approximately 30% sequentially.
An average approximately $360 per ton in Europe.
An increase of 50% sequentially.
Current spot price of the U S. Midwest premium remain near record highs approximately 30 per palm.
An increasingly tight market and high freight rates and prices in Europe are approximately $300 per ton.
And with that I'll end the call over to Craig.
Thanks Pete.
Let's turn to slide six and I'll take you through the results for the third quarter.
Before I get into the details I would like to point out that on a go forward basis, we will remove share based compensation from our adjusted results. This decision was made by the historic fluctuations in non-cash mark to market adjustments and their distributive impact on earnings we've shown the previous quarter, both on and as presented historical basis and and updated <unk>.
This.
The change between the two prior quarter views is approximately $500000 of adjusted earnings and one penny of ETS.
Please refer to our earnings release for additional details.
Okay, and a consolidated basis Q3 shipments were up 3% quarter over quarter, primarily driven by Hawesville in Mount Holly at the ongoing rebuilt gain traction.
We liked prices increased substantially versus prior quarter as a result of higher lagged LMB prices and delivery premium is driving a 10% an increase in sequential net sales.
Looking at operating results adjusted EBITDA was 73 million this quarter, which represents the highest quarterly quarterly level of adjusted earnings we've achieved in the last six years.
We had an adjusted net loss at five $7 million or six cents a share.
In Q3 be adjusting items were 35 million for the unrealized impacts support contracts seven $7 million for the settlement of two separate historical disputes and $4 million per share based compensation.
Liquidity at the end of the quarter was $127 million composed of a mix of cash and credit facilities.
This total represent a 17% improvement versus prior quarter liquidity levels.
Turning to slide seven as we forecast on our last call. The Q3 realized LMB of $2375 per ton was up $220 per ton versus prior quarter, while rely to use Midwest premiums of $670 per ton, we're up $180 per ton.
And European delivery premiums of $245 per ton, we're up $70 per ton over the same period.
Realized alumina was $340 per tonne or about flat prior quarter.
Both domestic indie hub in European newer pull energy prices increased steadily throughout the quarter.
And the hub prices ended Q3, and an average of $43 per megawatt hour, we're off about 40% versus Q too long newer pool prices averaged $81 per megawatt hour or up 60% versus prior quarter.
Carbon prices continued their upward trend as well both colton pitch quarterly prices were up about 12% versus Q2 on average.
Western slide eight and we'll take a quick look at cash flow.
We started the quarter was $9 million in cash and ended September with $58 million.
A few notable outflows for the quarter included 20 million for Capex, the majority of which was Mount Holly restart related and $37 million per head settlements.
Working capital with an inflow of about $32 million versus prior quarter, primarily driven by payable typing.
Western to slide nine and a decent detail on the fourth quarter.
This is a new slide we inserted into a deck, which is intended to make the buildup of the next quarter of bit easier to fall.
As always please note that this is an unintended is a precise forecasts, but it's solely intended to show how spot and forward prices combined with volume increases could impact our profitability.
Four Q for the lag LMB of $2640 per ton is expected to be about $265 per ton Britain Q3 realized prices.
The Q4 realize the U S. Midwest premium is forecast to be $740 per ton are up $70 per ton and the European delivery premium is expected at $360 per ton or up $115 per ton versus the third quarter.
Realized alumina is expected to be $375 per ton are up about $35 per ton versus prior quarter.
Taken together, the LMB alumina and delivery premium pricing moves are expected to increase Q4, EBITDA by about 50% to $55 million versus Q3 levels.
We continue to make significant progress on Mount Holly in hospital, both plants are scheduled to hit their targeted production levels by year end.
We expect a $10 billion EBIT to increase versus prior quarter driven by sequentially increased production.
Power prices have continued to trend upward, particularly in the domestic any hub market.
At current forward, we expect a 40% increase in domestic energy prices versus Q3, while Nord pool prices are expected to be moderately lower than the previous quarter. These.
These forward values combined with our unrealised quarter to date prices equally to $25 million reduction in EBIT versus Q3.
As I noted earlier cope prices have continued to rise and we expect that trend to continue into Q4 with an overall increase of about 8%.
We expected realized co prices to be $475 per ton in queue for we're about $35 per ton greater than Q3, driving a $5 million EBIT decrease versus prior quarter.
And some we expect all of these items taken together will equate to an approximate EBIT increase of $30 million to $35 million from Q3 levels for a Q4 pro forma total of about $100 million to $105 million.
As we discussed previously we have in the past mandatory exposure to various commodities by entering into for contracts largely in support of our long term investment in the Mount Holly restart project based.
Based on current spot prices, we expect a 45 to 50 million dollar realized loss on our various hedges in queue. For this result will be low EBIT geographically and will impact adjusted net income.
As Jesse mentioned earlier, despite rising Q3, COVID-19 levels, coupled with supply chain in hiring issues. We continued to make solid progress on the ongoing Mount Holly and Hawesville projects and expect that we will exit 2021, with our targeted 75% and 80% capacity production rates respectively.
As we discussed on our last call. We expect the bulk of them remaining capital spending for the Mount Holly restart to be incurred in the fourth quarter with only limited reminding expenses extending into 2022 and 2023 as we finished a complete overhaul of the legacy operation.
Before I turn the call back over to Jessie I would like to call everyone's attention to some new details. We've included in the appendix of today's presentation. We.
We have included analysis on a year to date and expected total year performance on various operational financial items as well as a breakdown of our value added product portfolio with total capacity and expected total year following.
Additionally, we have outlined are pricey conventions, and the components of our cash cost.
Finally, we have provided a detailed schedule of our financial hedge volumes by commodity and by year.
Our hope is that you will find additional disclosures and tools, both insightful and helpful. We intend to provide an update this data in our earnings presentations on a quarterly basis going forward.
With that I'll turn the call back over to Jessie.
Thanks, Greg.
Turning to page 10, I'm really pleased to announce the commencement of construction of our new Bill to cast house that gruner target the new cast house, which will be fully powered with renewable hydropower from our partners Atlanta, Oregon will produce 150000 metric tons of natural ability and will also provide an incremental 60000 metric tons.
Foundry alloy capacity, bringing total foundry alloy capacity of the plant to 120000 metric tons per year.
All of this new value added capacity or replace current standard grade <unk> 20 production, resulting in the capability to cast over 80% of <unk> production as value added product.
This additional value added products will provide a new source of incremental margin to our already excellent operations.
The cathouse expansion will also enable the continued progress of our capacity creep program, which we believe will ultimately bring production at Gruyter, Tom gate to above 330000 metric tons per year from its current 320000 metric tonnes production levels.
This is important all of this production will have the capability to be cast as natural or low carbon aluminum brand, which has total scope one two and three emissions of less than four tons of C. O two per ton of aluminum amongst the lowest carbon footprints in the world and less than 25% of the industry average.
Current record high Bill of premiums in Europe show that the market is calling for additional low carbon Greenville production and we've already seen very strong interest from our existing customer base to purchase billups concluded target.
The European market is currently about 1 million metric tonnes short of built production and is expected to continue to grow at a 5% annually over the next several years.
This Margaret sharp position is currently filled by a number of high carbon footprint important sources, which would be replacing part of our by our industry, leading natural ability lowering our customers carbon footprint.
We believe that we will have no issue, placing this bill is a high quality customers in the European market and the natural billet will receive an additional green premium above high carbon billet in the marketplace.
We currently expect that the project will be completed in the first quarter of 2024 and construction is already underway.
120 million a project cost will be 100% debt financed via new eight year Green term loan facility from area on bank in Iceland.
Due to the structure of the financing we do not anticipate the project will have any near term cash flow requirements other than interest due on principle and expect that once its operational the incremental cash flows from the project will more than cover all that service amortization and repayment obligations over the term of the financing.
This project fits directly within centuries strategies I discussed on our last call to leverage our structural position.
And the world's too short of aluminum markets in this case, Europe and service our customers with a reliable local production of the products they require.
This project also advances our strategy to provide increasingly value added and green products to the market, thereby increasing the value we deliver to our customers and increasing the marginal profitability of the time we produce.
We intend to vigorously pursue these strategies with all of our resources, both internal and external to deliver further growth for our businesses and value to our shareholders.
And with that we'd like to open up the line for your questions.
And can I think I'd like to ask a question. These style followed by lying on your topics.
For any reason you and think turn this that question. Please pass tire followed by 10 again to ask a question press star wine.
As a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking a question we will pause here briefly as questions. They are registered.
The first question is from the line of mucus.
Would be Riley security you.
You May proceed.
Thank you very much and good afternoon everybody.
My first question is on.
The additional disclosures site provided the headache I really appreciate that.
Slide 17, I keep out at.
That's right about 200.
Hedge on the midway.
Premium.
I Wonder could you share kind of wetland those hedges were put in place in and how you look.
To to manage that exposure to the Midwest to have premium going forward. Thank you very much for your perspective.
Yes, Lucas so most of these hedges were put in place in association with the Mount Holly restart project and so that can be a pretty good sense of where those hedges.
It struck at.
As we said on the last call and sort of as I look going forward given our structural footprint in these markets in the us and Europe. Our intention generally going forward is to remain exposed to these pricing both Midwestern LMA.
And if we do make any changes to that in the future. If for any reason it will probably be associated with the capital projects like Mount Holly and we'd be sure to let you all know.
When we do that.
I appreciate that thank you and then.
Switching topics too.
Hello Cathouse project.
Could you frame up.
We've tried expectations for a project like this and.
I took a quick look at.
Through the release I didn't see a capital finger.
<unk>.
I missed it I would appreciate.
At the capital requirements nine return expectations for that project. Thank you very much.
Sure Yeah, we're really excited about this cathouse project.
And I think we've been discussing it.
A little bit with with you all over the past year or so obviously it was triggered in our ability to enter into this was triggered with the extension of our land pertinent power contract that we talked about on the last call.
And now we're excited to have commenced construction. The total project cost will be about 120 million.
And as I said that'll be entirely debt financed by our new facility with with area on bank in Iceland.
Primary returned perspective, we won't go into the exact details but.
As was sort of all projects like this we obviously look at Arthur returned as we allocate our capital for this project you could expect something for an unmeasured IRR in the mid teens.
And just to add a little bit on that Unlevered IRR in the mid teens is.
Historical assumptions that are long term historical assumptions Jesse.
Jesse had mentioned today, where Europe Europeans north premiums are today, we certainly haven't use those in that mix.
Assumption, we've used long standing historical levels.
That's super helpful really appreciate that.
That's great to hear.
Last question for me for now I saw it.
I noticed an increase in the balance due to affiliates could could you share.
Mind us what what that is what drove to balance up and Tom and would appreciate your perspective on that thank you. Yes. Sure book is good cash and Thats pure timing pure tightening of the majority of that is going to be a luminal purchases. So you'll you'll see that if you were to go out and look over.
More than a couple of quarters you'd see that balance.
Move all around so that's just purely timing.
You'll see a comeback into line over the next quarter too.
And so if this wasn't an affiliate this would just be part of accounts payable.
It is accounts payable set the way the company.
Yes, yes got.
Got it okay.
Very helpful. I'll turn it over for now thank you. Thank you very much.
Thank you.
Thank you Mr pipes.
The next question is from the line as David Gagliano with BMO capital markets. You May proceed.
Hi, Thanks for taking my questions.
Let's see here.
Some of the question has already been covered but just on the.
Yeah, just on the on the on the commentary around 2022, Bill It I didn't quite catch.
The volumes I know you mentioned previously but can you can you tell us again, what are the volumes associated with that 10 to 15.
Increase.
Yeah, it'll be about 250000 to 275000 tonnes of production.
On the <unk> next year too.
Okay, perfect and then if I flip back to slide.
What is it here 20, I think it is with the value added products.
Total 285000 tons.
Is there any.
What about the balance.
Four <unk>.
<unk> products for next year.
In terms of expectations there.
Yeah. So if you just just to go through go through the smelters directly.
At Mount Holly, we should be around 170000 metric tons of production. This is in total David and you can just subtract off the value added.
Alex from here.
At <unk>, we should be about 200000 metric tons of production.
At February what do we say about 210 to 15 31 to two 220 feet. Thanks, and then a grilled her tongue it should be about 320000 tons.
Okay, and I know I didn't answer ask that question right away, what I was really trying to answer so if I look at just the total fiscal year 21 outlook. It looks like by products 385000 tons and I was just kind of doing a little mental map on alright. So we've got $275 and 50 235000 accounted for for next year I'm wondering.
If you can comment on the pricing.
On average expectations for the other call it whatever.
Whatever the differences between the two of those two numbers.
Roughly 100000 tons.
Yeah. So I think David you can just look to or if you're trying to balance out. The year. You can just look to the queue for guidance, which should incorporate all of that.
With within its within the guidance of Craig gave Ya I'm not sure exactly.
That'd be following exactly what you're getting at I think.
Reach out again for 2022, what I'm asking is for 2000 for next year you gave his commentary on 10% to 15% increase for 270 250 to charter 75000 times right at 10 to 15 cent increase for 2022, and what I'm, saying is basically.
What do you think the increase is for next year for the remainder of your value add products relative to this year.
You are looking for pricing for the remaining as value added products for 2022.
Alright, we'll give you that as per normal David when we come back in February and Roundhouse. The queue for a call will give you will give you that holds back for 2022 going forward on that call.
Okay no problem. Thanks for that and then just.
Again, it's a bit of a clarification, but I think I know the answer but just to make sure everybody's clear on it but.
The capex or the the outflow for the for.
The new cast out there's not gonna be any sort of capex on the cash flow statement it is going to be.
As you said.
That's going to go up in the cash outflows can be tied to the interest associated with that dirty scratch.
<unk>.
It will be I mean geographically traditional to capex, but it will be from a cash flow standpoint, David as a way to think about it is it's netgear household as we draw down to build a facility and it'll be coming and it will be coming off of the revolving since the resolving term loan right than we have in place and.
It's an interest only loan symbols for the first couple two and a half years right, we're not going to be having any amortization on that so you're going to see a drawdown on the loan an increase in the capital spend for the company, which from a cash flow standpoint is going to be net zero, which I think is what you're asking.
Yeah. So can you just give us a sense of the timing of those.
Sure I guess that yes, you are most I'm sure so.
Yes, Yes, you are so it's 120 million dollar project is Jesse mentioned the construction time is two years.
So any additional property change in six months, but I don't think materially the shape of that spend is going to be about.
$50 million off spend and hence a $50 million drawdown on the facility in 2022, and then 70 million spend and hence the remaining $70 million drawdown in 2023 with mental to start coming out at the tail end of 2023.
Okay perfect. Thanks, and then one last question for me.
Really appreciate the additional disclosures by the way across the board and.
Including slide nine the current outlook now since this is a new slide and since I believe last quarter. There was commentary of about $150 million for the fourth quarter and that is now 100 $105 million.
If I was trying to reconcile where there was a change for the last quarter I Shoulda volume incremental is now 10 million I believe it was 25 million last quarter can you just kind of give us a sense of what.
The changes are in each of those buckets versus sooner that 150 expectation.
Sure and I'll give you the two biggest market is the biggest fucking by far as power and I'll break that down for you. So if you were to start at the queue for pro forma 150 from.
From last quarter about 35 of that is power.
And just to put a quantum on it in the hub price we'd assumed at the time, which is look forward was was about 38 Bucks right looking out to queue for right now it's $60.
Nor pool is up another $5. So we had thought.
Pull forward can we talk last quarter was $60 65, so add up to $35 million.
Pat from that 150, the remainder the majority of the remainder is coke and pitch. So coke is up about $60 per ton versus the Q4 four was when we talked last 475 and pitches up about 10% to 850, so to make a real simple that 150 from last time 35 worse in power.
10 worse and co can pitch gets you back down to that 100 to 105 that we talked about in my prepared comments.
Okay. So the volume at Mount Holly Hawesville same number will change perfect.
Okay. That's it for me.
Thanks.
Thank you Mister Gagliano.
The next question is from the line of John to Mazda with very independent research you may protein.
Thank you and thank you for all the extra disclosures very helpful.
And your cost breakdown.
For the coming quarter.
There was no change in aluminum but.
Quoted a woman prices have changed.
Should we interpret from that that you have and.
Annual contract with the prices that change quarterly and the price change will be January one next year.
For a moment.
No. So great question in Europe Johnson from Q2, Q3 realized landed aluminum was relatively flat is only a few percent and really that was due to timing of receipts. So one of the things that we have in the appendix today is R. A moment, a stack and I don't remember exactly what page. It's on fact, let me find it so I can tell you that.
You can take a look at it.
Thank you so on page 16 in the lower right hand corner, we actually split out how we're buying alumina here. This year. So it's 80% lemme linkage and we've talked about in the past where that elderly linkage would be somewhere in the historical fair value of alumina, we've we've quantified that in the past, 10% API and 10%.
Fixed.
So when we take delivery on one piece of that stack versus another and it's going to and then of course as we can soon as we can obviously, sometimes two to three months worth of inventory on site, it's going to impact how it actually internalizes looks like quarter over quarter with respect to what it's going to look like in 2022, it will be a mix again.
We're still going through that stack of negotiating now.
So there's no fourth quarter impact not because the market prices were stable, but because you are working from inventory.
Well and and and it's lax for how alumina internalize as soon as a couple of things going into the fourth quarter that number is going to be.
$35 increase and waited alumina and landed alumina, that's compensate extent when I'm consuming that illumina.
Harlem buying it in the stack that I just talk to you and then of course the lax.
And John you'll you'll see a little bit of that we were a disclosure on on slide nine as well as to the impact of the Illuminati.
And Craig's lock on site.
Yeah.
Yes.
I guess, that's right a noted item in the 50% to 55 okay.
Corrected for clarifying that.
I wanted to make sure I understood.
The balance sheet cash file an income statement interaction of the hedge counting.
It looks like the only impact as a deduction from revenue.
And the income statement U S 239.2 million nine months impact.
The cash flow statement 168.6, so I guess that means 78.6 has already been deducted from revenue.
And it's not hundred well pleases, let let let me five.
Yes go.
Go ahead.
Yeah I was just talking there is for one second.
Five.
I'm, sorry, I think we got a little wagon.
We've got a little lag on the line here John I apologize.
This is recorded as.
Other income and expense for us this is not a reduction in revenues.
$123.5 million a hedge liability is short term I guess that means.
That it's over the next four quarters.
And 23.9 is on the balance sheet as long term.
Which I guess means.
That it's after September 30 next year is that right. That's correct that's correct.
That's correct and you can reconcile gathering 0.5 is short term.
And you said about 50 is in the fourth quarter.
Uh-huh it would be in round numbers about $25 million a quarter.
The first three quarters of next year on average and then verbal down a lot since only 23.9 million is long term. After September 30 next year.
So we're sort of at the peak of it and it diminishes over the course of next year is that a fair characterization.
It's a very fair characterization of some really good math needed in here I think the easiest way maybe to see that on page 17.
Where you look at the quantum of the hedges and you can see as those roll off and then the other thing I would caution I think you got it bye bye the way that you were you were talking about John is that there's a difference between realized an unrealized gains. So when you go in and that 200 plus million impact and you are seeing today remember that's a blend of things that are really.
And unrealized and that unrealized number is gonna continually give mark to market on the last day of the quarter. So that number is determined as a snapshot point in time. So I think the best way to look at it is to look at the quantum of the hedges that we put on page 17, and the appendix, but you got very close to that.
Now you have a left hand side short term asset called derivative assets, which arose from six $4 million and 33.7.
Should we assume that that's something like a treasury bond held for collateral.
But.
You're a true hedger and not a spec.
So.
Counterparty.
Worry to see a moment in price went to $10 hypothetically because it's just revenue forgot.
There is no data account, that's hard back or.
Or cash flow item, it's just revenue foregone, because it's true hedge accounting.
John John that added mainly relates to.
Some power hedges that we've done.
Or pool, which you will also see on the volume slide on page 17.
So regarding aluminum there's no collateral requirements, because it's a true hedging not a spec.
We do have collateral requirements to our Counterparties, Tom as you might imagine.
But again those are rolling off quite quickly now as as we as you see on the slide 17, but I think it's helpful. If you just look at Q4, you'll see your right to characterize it as as the high point of the.
Hedging and then you'll see especially on Midwest youre going to reduced by about half and LMA as well you are going to reduced by about half a roll into fiscal year 22, and you will see those pretty evenly spread down across the balance of fiscal year 2002.
Is it fair and forgive me I never did a lot of commodities physically myself is it fair that the collateral for the aluminum is very small because we can't really see a big visible collateral account on your balance sheet as an asset or a liability.
The other side is going to be liquidity. The company. So the collateral against this is either going to be posted cash or or a posted letter of credit right. So the way to installation look at buried in Iran years lines of credit Okay.
It is and and maybe I should maybe I should have started their receipt think about the liquidity the company going up 17% quarter over quarter. We're at 127 today, which is we are getting near historical good levels in there. So I think again, we're getting to the end of this.
Of this hedging exercises you can see the collateral is going down because the liquidity is bigger the unused credit is bigger.
Correct.
In general.
Forgive my top questions.
Did the your questions are not dumb at all they're very well and research so thanks for asking.
Thank you.
Thank you Ms <unk>.
The next question is a follow up question from the line of Lucas types would be Riley you May proceed.
Lucas by chance, we can't hear Ya.
Sorry about that and thank you very much for taking my follow up question.
John John had just touched on it.
And in one of his first questions in regards to alumina and how you think about.
The balance of the contracting for 2022.
Aluminum prices.
Covered here more recently and I Wonder do you have a preferred approach to go about it.
Maybe locking in a bit more or or floating in a floating versus the lemme.
Is there room too.
Take into account the reason well.
Well more distant recent trading activity of Aluminography. This LMB, how would you frame that up thank you very much for your perspective.
Yeah. Thanks.
We view the 2022 commercial season for alumina sort of asthma do every year.
And the way we look at it as there are three different ways to purchase eliminant on the market.
We have our sense of of what those market rates are for each of those metrics, whether it be API, whether it be on the percentage of whether it would be fixed and we obviously try to negotiate the best mix of that.
Against.
Suppliers folks for that for that book.
And so as we look forward.
I think that you should expect to see continue to see a mix like we have in the past.
That MC.
Mix may change slightly but I think you'll always see us book to do some balance between LMB percentage an API.
As we move forward I think that's prudent for us to do good in our position in the marketplace.
Okay.
Alright, I appreciate that and best of luck.
Thanks.
Thank you Mr pipe.
The next question is a follow up question in the line of Jamie Galliano.
Now you May proceed.
Okay, great. Thanks, and it's actually related to the last question. So this is.
Should be pretty safe for it it it looks like on slide 17.
For 2021, Aluminize cash cost.
Sort of 80% of it was that.
Lemme, laying 20% or sorry, 10% with API and 10% with sex for.
For 2022 as you just mentioned as you think about that mix should we expect that those those buckets to change materially or similar mix between the three.
That's a good question.
Tough to say, because we're still negotiating into those contracts, David and some kind of what I was getting at is.
You see.
When you go to purchase of the amount of the marketplace, you'll see diff quotes for both of these and some are more competitive than another relative to the type of pricing that you're receiving so in other words, you may receive better LMA prices percentage prices and some years than others as compared to API or vice versa, and so we try to manage that participant.
And to the best outcomes, given our view of the marketplace.
I think in general what you saw last year is probably a little heavier LMB percentage, then you would see in a normal year.
And so if we just taken normalize here in general I think you would see more API and the balance of our book and against the reduction in army percentage.
And then on the safe side generally that tends to be sort of opportunistic because we have the ability to grab a cargo here they're pricey.
Pricing that makes sense is how we intend to end up with that fixed pricing. So very simply I think in a more normalised drs compared to 2021, you would see more API.
Then we saw in 2021.
Okay, Okay, and then just.
Back to Jon's some of Jon's questions.
Trying to fight on my side from a truly modeling perspective, if the world stayed where it stays where it is.
No that's not going to happen, but theoretically.
In terms of realized in terms of the cadence of the realized hedge losses.
And then just in the next few quarters is it reasonable to assume sort of a $25 million per quarter realized loss for <unk> each of those quarters.
And it's that that that's a real tough one as you know David any cute he gave us a little out of the question there, but I mean I would look at it in terms of Midwest premium rates of the major driver as you would as you would anticipate and the realized losses Midwest premium and that's cutting roughly in half going into 2022, so probably not a bad way too thin.
About it and you know of course will have some more visibility of this will be calm and talking.
In February, but and just add on David but in general without talking about the dollar content with for just talking about the volume quantum volume you would expect those to be pretty evenly spread over over 22.
Okay, Great and then.
Same idea of well today's where it is.
Even with things, having called a little bit.
They looked at 2022 and 2023 it to some more questions.
Got last time.
It looks like you're actually century will start generating.
Quite a bit of cash in with.
Adjustments.
So I actually two questions. One can you speak to the Capex overall for 2022.
In 2023 if possible.
I know you mentioned part of it with the with the cast have sort of a net zero number but just the rest of the Capex and then also.
Just any updated thoughts on capital allocation plan.
Yeah sure. Just this is a very high level, David because again as we said we'll come back with our annual items that we normally do on our February call and give you a lot more detail on the Capex for 2022, but obviously just looking back at 2021, I think going into this year. We spoke about this year, it's as being a very capital intent.
A year as we work to bring the volumes Hawesville and Holly back online and so a lot of the cat.
The majority of capital you saw this here went towards those projects.
And as we mentioned we continue to expect those contracts will be substantially complete by by year end.
And so this is you look towards the quantum of Capex for 22 23, you should see it returned more towards historical levels. Obviously, just excluding the total cost us from from from that comment.
And I figure if there's a second part David.
Capital allocation, Thanks, where do you want it.
Plans with all the cash exactly.
Thank you for taking the thing, but we are building a new $120 million cast test in Iceland. As we said that is that finance and we do think that the incremental cash flows from that will cover that that service in the repayment of that project.
So, but I think that starts to give you an idea of the types of projects that were interested in from an organic perspective, so as we look forward.
We will continue to look towards projects that offer similar level returns and fit within that overall strategy that are covered at the end of my comment.
Against that.
Obviously, we will also continue to look.
Towards.
Any.
Opportunities that may arise.
On the M&A level inorganic.
Organically.
And then.
Yeah.
From the desk side of things.
I think we are in a good spot with with our terms all pushed out into 2028. So borrowing so after taking into account all of that obviously, we will continue to look.
For opportunities to return value for our shareholders.
And that could come in a variety of forms depending on how the balance of 2022 pans out.
Okay. Thanks for the thanks for the insights.
Thanks.
Thank you Mr Galliano.
There are no additional actually we have one follow up question from the line of Lucas pipe would be rightly may proceed.
Thank you very much for taking my follow up and it's it's a follow up on Dave's question, just now regarding M&A.
Or rather capital allocation you mentioned M&A.
Could you share kind of where.
What areas might be more interesting strategically than others I remembered years past.
Vertical integration Allah alumina was mentioned.
Is that an area, where you're still interested where you would still be looking today or have priorities shifted and if so.
How would you how would you rank.
Strategic interests. Thank you very much.
Sure. It's good good follow up question and maybe this is Tyrrell just reiterate what I said on the last call and reiterated here in the near term, we're very focused on execution. So we need to bring these existing projects to a close.
So for the for this quarter, that's very focused on Hawesville in Mount Holly and then just really going strong into 2022.
Giving you a good example of organic growth with the printer Tonguing Cathouse project, obviously, I think from an MAA perspective.
Our view is just to be opportunistic.
I don't think this is.
Primary focus at the moment.
But if the right opportunities arise and I'll talk to that for your question.
Oh of course be ready to act, if we thought that that.
Our.
Expectations of return and fit within our strategic priorities and so just speaking from a strategic perspective, I think our focus is going to be to try to continue to leverage our position in these U S and European short markets first and foremost.
And so when we look at the types of assets that might fit within that that can be a guidance cutting framework.
And then secondly, I think our view as we see where the world is going we see the types.
Products that our customers are demanding they tend to be low carbon they tend to be.
For value added products and that.
Well within our idea to sort of increase the margins of the tons reproducing.
And so as we look at opportunities out there they would try to fit within those two pillars primarily.
Not to say that the right opportunistic thing came available we wouldn't look at it but I think just in terms of guidance.
That's the type of opportunities we'd be looking looking towards.
But again I think again just to reiterate we're very focused on just finishing things out there an existing project very focused on getting off on the right foot on the cast has concluded hungry.
I am very mindful of the fact that looking forward things look good, but we need to perform and make sure that we bring that value to the businesses in our shareholders and then we'll look to go from there.
Terrific very helpful. Thank you again best of luck.
Thanks.
Thank you Mister Hyatt.
There's no question bleeding at this time, so I will pass the conference of it to the management team pre closing remarks.
Thanks to everyone again for your time, and we look forward to speaking with you in February partisan.
That concludes the century aluminum company third quarter of 2021 earnings Conference call. Thank you for your participation you may now disconnect your line.
Hum.
Yes.
[music].