Q4 2022 Alcoa Corp Earnings Call
Speaker 2: We ion P F P, P P.
Speaker 3: Good afternoon and welcome to the Alcoa Corporation fourth quarter 2022 earnings presentation and conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker 4: After today's presentation, there will be an opportunity to ask questions.
Speaker 5: To ask a question, you may press star then one on your phone. To withdraw your question, please press star then two. Please note this event is being recorded.
Speaker 6: I would now like to turn the conference over to James Dyer, Vice President of Investor Relations.
Speaker 7: Please go ahead.
Speaker 8: Thank you and good day everyone.
Speaker 9: I'm joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer, and William Opplinger, Executive Vice President and Chief Financial Officer.
Speaker 10: We will take your questions after comments by Roy and Bill.
Speaker 11: 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.
Speaker 12: 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.
Speaker 13: In addition, we have included some non-GAAP financial measures in this presentation.
Speaker 14: 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.
Speaker 15: Finally, as previously announced, the earnings release and slide presentation are available on our website.
Speaker 16: With that, here's Roy.
Speaker 17: Thank you, Jim, and thanks to everyone for joining our call today.
Speaker 18: As you saw from the fourth quarter and full year results that we released today, we returned $572 million in capital to our stockholders through buybacks and dividend payments in 2022.
Speaker 19: We continue to be well positioned with a strong balance sheet ending the year with $1.4 billion in cash and proportional net debt of $1.2 billion.
Speaker 20: In 2022, we also progressed strategic restarts of capacity and worked to mitigate the impact of high energy costs.
Speaker 21: That said, it was a challenging year. World events influenced costs for raw materials and energy. Our markets saw significant variances in pricing between the first half of the year and the second half, demonstrating once again why we are so focused on reducing complexity and continuing our improvement initiatives.
Speaker 22: As we progress through this year, we will continue to act to drive operational and commercial excellence, disciplined execution, and rigorous cost management.
Speaker 23: Before we get into more details though, I want to emphasize, as always, our most important priority, safety.
Speaker 24: We strive to protect the safety and health of those who work at our facilities or visit them. In 2022, we did not have any workplace fatalities. This, however, is not an achievement. It is simply an expectation.
Speaker 25: And we always have areas where we can and will improve.
Speaker 26: We recognize that maintaining a fatality-free workplace requires constant vigilance to identify and eliminate critical risks.
Speaker 27: In fact, every employee at Alcoa has the authority and my permission to stop a job and seek help if they are unsure if it's safe to proceed.
Speaker 28: There's never any production goal that will take priority over safety.
Speaker 29: Now, on to our financial results.
Speaker 30: In the fourth quarter, we had a net loss of $374 million and $29 million in adjusted EBITDA. For full year 2022, we had a net loss of $102 million and adjusted EBITDA of $2.2 billion.
Speaker 31: It is clear from our fourth quarter results that we are confronting a challenging market and operational situation. And we are taking action to be sure that we are firmly focused on driving improvements across our operations and company.
Speaker 32: Bill, who will become our Chief Operating Officer on February 1st, will provide the full detail on our financial results in just a moment.
Incidentally, this will be Bill's last earnings call as our Chief Financial Officer.
Molly Bierman, our current Senior Vice President and Controller, is being promoted to CFO . She has tremendous financial experience and has been a strong leader for Alcoa. She'll join me for our earnings calls beginning in April as she takes over Bill's former role and he takes his skill and experience to operations.
Now, turning to some operational highlights.
Last year, we advanced several restarts that will bring economic value to the business.
We also acted swiftly to reduce production capacity when and where conditions warranted.
Last month, we completed the safe restart at our Portland aluminum joint venture smelter in the state of Victoria in Australia, and we continued to advance the restart of the Alumar smelter in Brazil.
To mitigate the rising cost of gas and electricity, we reduced output at the San Zeprion alumina refinery in Spain, and curtailed one-third of production at our Lista aluminum smelter in Norway.
Separately, over these last couple weeks, we adjusted production at the smallest of our three refineries in Western Australia due to natural gas shortages that continue to persist in the region.
We have a strong foundation across this company with the know-how and expertise to drive continued improvement.
We are ready to address short-term challenges while remaining focused on our future, one where aluminum will become even more important as the world works to decarbonize.
As we progress into the year, it's also worth reinforcing the work we are doing on our ESG objectives.
Alcoa has a clear purpose and a vision that guides our actions and decision making.
We are producing and delivering products that support our customers' own sustainability ambitions, and we are creating shared value for our communities and our other stakeholders.
Just recently, in fact, we were once again named a top-tier industry producer by the Dow Jones Sustainability Indices.
We also continue to pursue growth opportunities via projects that can creep our production, and we're excited about the progressing development of our transformative technologies, which align fully with our vision to reinvent the aluminum industry for a sustainable future.
So with that, let's dive into the numbers. Bill, please go ahead.
Fourth quarter 2022 revenues declined $188 million compared to the third quarter to $2.7 billion on lower aluminum and aluminum prices.
At this point in the cycle, input costs were not yet declining, and the result for the fourth quarter was a net loss of $374 million, or $2.12 per share.
Special items in the quarter totaled $251 million and included $196 million of tax items primarily related to a valuation allowance on Brazilian deferred tax assets.
$30 million of smelter restart costs and $26 million from mark-to-market energy contracts.
After special items, adjusted net loss was $123 million or 70 cents per share.
Adjusted EBITDA, excluding special items, was $29 million.
For the full year 2022, year-over-year revenues increased $299 million to $12.5 billion, and net income decreased $531 million to a loss of $102 million, or $0.57 per share.
Adjusted net income changed from $1.3 billion in 2021 to $890 million in 2022, or $4.83 per share. Adjusted EBITDA excluding special items moved from $2.8 billion to $2.2 billion.
Let's take a closer look at the quarterly change in EBITDA.
For fourth quarter adjusted EBITDA compared to the third quarter, the largest driver of the decline was $98 million of lower metal and alumina prices and includes higher raw material costs and higher production costs in alumina and aluminum.
Energy improved $9 million as substantial LISTA, smelter, and sanciprian refinery improvements were partially offset by CO2 compensation adjustments in Norway of $35 million.
Thanks to actions taken at the Lista Smelter and the San Zippurin Refinery, Lista and San Zippurin EBITDA improved a combined $67 million compared to the prior quarter.
The other category is comprised primarily of a $25 million ARO charge in Brazil and $22 million of intersegment eliminations.
In the segments, Bauxite improved $9 million on better volume, favorable foreign currency, and broad cost improvement.
In the Illumina segment, the $42 million EBITDA decline was due to lower index prices, as well as a $25 million charge to increase the ARO reserves at Alumar, partially offset by the $27 million improvement from the San Sipran partial curtailment.
In aluminum, the $121 million EBITDA change was due primarily to lower metal prices, but also due to broadly higher costs, partially offset by favorable foreign currency and lower alumina costs.
Below the segment level, transformation, inter-segment eliminations, and other corporate expenses increased a total of $27 million.
Let's move to cash flow.
Fourth quarter cash balance declined $69 million sequentially to $1.36 billion as releases of working capital, CO2 credits received, and quarterly EBITDA did not fully fund outflows.
Capital expenditures, cash income taxes, and environmental and ARO spending were the largest uses of cash in the quarter. Dividends paid were $17 million.
On a full year 2022 basis, uses outpaced sources by $451 million.
Our largest use of cash was returning capital to stockholders, followed by cash income taxes, low expenditures, and increased working capital.
Now for key metrics at your end.
Return on equity for the full year 2022 was 17.2%.
In 2022, we returned $572 million of capital to investors, $500 million of share repurchases, and $172 million of quarterly dividends.
The balance sheet finished with proportional adjusted net debt of 1.2 billion dollars. While DWC working capital improved a hundred and eleven million dollars sequentially, primarily due to higher accounts payable, lower revenues kept days working capital flat at 50 days.
Pre-cash flow less net non-controlling interest distributions was negative $49 million in the fourth quarter and the full year 2022 number was positive $177 million.
Let's take a closer look at the cache and liquidity position.
We are proud of the improvements we've made to our cash and liquidity position. And the three charts you see over time are cash position, debt maturities, and key cash outflows.
Year-end 2022 cash on the balance sheet was a substantial $1.4 billion, consistent with the average level for the previous five year-ends.
After redeeming higher rate debt with maturities in 2024 and 2026, our debt has a lower rate and scheduled maturities are inconsequential until 2027. Our revolving credit facility has improved terms, has been extended to 2027, and has no borrowings against it.
Pension and OPEB cash needs were low in 2022 and are expected to remain low in 2023 and beyond and are now mostly OPEB which as you know is pay as you go.
Turning to our 2023 outlook.
First, we are simplifying our reporting structure for 2023. Beginning in January of 2023, the company will combine its bauxite and alumina segments and report its financial results in two segments.
alumina and aluminum.
In future reports, segment information for prior periods will be updated to reflect the new segment structure.
In 2023, we expect alumina shipments to range between 12.7 and 12.9 million metric tons due to lower refinery production driven by the partial curtailment of the San Siprin refinery and lower bauxite quality at the Australian refineries.
The aluminum segment is expected to shift between 2.5 million and 2.6 million metric tons as increased production at Alumar and Portland is offset by lower buy resell activity and modern shipments.
In EBITDA items outside the alumina and aluminum segments, we expect transformation costs to increase to $80 million on higher demolition expense.
and other corporate expense to be virtually unchanged from 2022 at $130 million.
Below EBITDA, we expect depreciation to increase to $645 million, primarily due to the weaker U.S. dollar.
Non-operating pension and OPEB expense is expected to improve $45 million to $15 million and at $110 million, interest expense is comparable to 2022's level.
For cash flow impacts, we expect 2023 pension and OPEB required cash funding to be similar to 2022 at $75 million. The majority of that spend is US OPEB. Our current capital expenditure estimate is $115 million of return seeking and $485 million of sustaining capital.
to increase to approximately $195 million.
Finally, capital returns to stockholders will be aligned with our capital allocation framework.
Looking specifically at adjusted EBITDA excluding special items for the first quarter and excluding impacts from index sales prices over foreign currency.
In Illumina, we expect approximately $25 million higher cost from a Western Australia gas supply disruption to be offset by the non-recurrence of the Alumark ARO adjustment.
In aluminum, we expect alumina costs to be favorable by $15 million. We also expect Norwegian smelter costs to be favorable by $70 million from the non-recurrence of CO2 credit adjustments and lower energy costs.
Additionally, we expect $15 million lower raw material costs and $15 million lower production costs.
Below EBITDA, other expenses expected to be unfavorable by $45 million sequentially on equity contributions to ELSIS and lower modern equity income.
Based on recent pricing, the company expects one Q23 operational tax expense to approximate $5-15 million.
Beyond the first quarter of 2023, the company is reducing the available alumina grade at the Huntley Mine to provide additional time for an extended mining approvals process.
This grade change is isolated to the Huntley Mine that supplies the Pinjarra and Quinauna refineries.
Operating the refineries with lower quality bauxite decreases Alumina output and increases input costs.
Starting in the second quarter of 2023 and continuing through the fourth quarter of 2023, we expect lower alumina segment adjusted EBITDA of approximately $55 million per quarter in comparison to the fourth quarter of 2022 after excluding $35 million of non-recurrence for the Alumari.
and aluminum in 2022.
Even given the clear change in pricing from first to second half of 2022, these markets were balanced or even in a slight deficit across the year. But differently than we have seen in previous cycles, the cost for raw materials have remained stubbornly high throughout the year. And it is only here in the beginning of 2023 where we are starting to see a decline in the price of raw materials.
that have kept market balances tight.
In Illumina, we saw a 39% increase in the market price for caustic soda in the fourth quarter of 2022, compared to the same period in 2021. Caustic soda is used in the digesters in our refineries.
In aluminum, we saw more than a 70% increase for the market price of pitch and a nearly 30% increase for coke compared to the fourth quarter of 2021. Both products are used to make anodes for our smelters.
Meanwhile, recent smelter curtailments announced across the US and Europe have only marginally influenced calcined coke prices.
We have, however, mitigated supply chain disruptions by maintaining an agile and diversified global sourcing portfolio, which also closely manages our inventories to avoid market-driven supply disruptions.
As far as global supply demand balances.
The market for alumina was mostly balanced in 2022 and in aluminum the global market was in a deficit including in China and the rest of the world. China has continued to enforce its 45 million metric tons smelting cap and we saw approximately 2.5 million annualized metric tons of smelting capacity.
curtailed in the country in 2022 due to power constraints in southern provinces.
And we enter 2023 with the likely constructive impacts of a loosened COVID policy in China and the increased application of stimulus measures in China and globally.
Next, let's spend a bit more time on what we're currently seeing in aluminum over a longer time horizon.
We continue to see evidence that supports our positive view on aluminum.
Although 2022 was an unusual year with global events influencing energy and raw material costs, we remain bullish on the long-term fundamentals for aluminum.
Even in a challenging market like what we saw during the second half of last year, there was continued evidence of the growth of aluminum demand for the future. Let me illustrate this point with two of aluminum's end use markets, transportation and packaging. Because Alcoa became an independent company in 2016.
these two sectors have experienced significant growth rates. First, the share of electric and hybrid vehicles is on a solid trajectory to experience nearly a seven-fold growth rate in a six-year period by 2023. These vehicles contain more aluminum in their construction versus traditional internal combustion engine vehicles.
Electric vehicles, for example, contain approximately 40% more aluminum.
Several recent reports from industry analysts have reported on this strong growth for EVs, which is occurring even faster than some had earlier predicted.
and key auto manufacturers such as BMW and Ford have taken significant steps to increase their mix of battery electric vehicles relative to their total output.
At the same time, China, the largest automobile market in the world, saw one of the largest year-over-year increases in 2022 electric vehicle production, with 6.9 million units confirmed.
Current estimates would add an additional 2.1 million new electric vehicles to be produced in China in 2023, bringing that total to 9 million units on an annual basis.
The transition to these vehicles is also supported by several major countries and regions that have announced bans on new internal combustion car sales in the years between 2030 and 2040, including the UK, France and Canada.
The second market to watch is Packaging, which is expected to see a 41% growth rate in aluminum can stock consumption between 2016 and 2023. For Alcoa, packaging was one of our best performing markets in 2022 in Europe and North America.
Also, more beverage products are using aluminum, such as alcoholic seltzers and sparkling waters, due to the metal's lightweight, infinite recyclability and ability to chill beverages quickly.
While these markets are meant to be examples, they support continued strength in aluminum demand in the long term.
Now, let's move to the right hand portion of the slide. Given the importance of Chinese capacity growth over the last decade, one of the most influential factors for this next decade will be China's self-imposed 45 million metric ton cap.
We see continued policy decisions and actions in China further supporting this capacity cap.
Any increase in that ceiling would hinder the country's well-publicized goals for energy efficiency and decarbonization. While we expect an increase in operating capacity of roughly 1 million tons of metal in 2023 compared to last year, these are added capacities that either transfer existing operating permits from plants that will be shuttered, or they will be shuttered.
or have outstanding permits complying with the Chinese cap.
We've also recently seen China's actions to limit exports of primary aluminum through increased export tariffs on Commodity-grade aluminum in 2023, supporting the reality of the country's capacity cap. One final point to make on this slide, with the drop in global stocks over the last six years, inventories in 2023-
levels in 2023 could be insufficient if we see a rebound from current demand growth figures in China or the rest of the world. This adds support to both the short and long-term outlook for aluminum.
While there continues to be significant uncertainties about the global economy in 2023, we continue to expect another year that will remain in relative balance for aluminum. And even more importantly, the underlying fundamentals continue to remain very favorable for aluminum in the long term.
Now, let's talk specifically about some of the important actions Alcoa completed in 2022 to advance our strategy while also addressing the challenges of the volatile market.
First, we worked to offset negative market impacts at some of our locations, including the high costs of energy in Europe , which skyrocketed after Russia's invasion of Ukraine. We partially curtailed two facilities, adjusting our production rates to San Zebrian alumina refinery in Spain due to high costs of natural gas.
And we curtailed one of three pot lines at Lista in Norway, our smallest aluminum smelter, due to high electricity costs.
In July of last year, we curtailed one pot line at Warwick Operations due to workforce shortages in the region and increasing instability, and we've continued to maintain that partial curtailment as we focus on safe and consistent production from the site's two operating pot lines.
Also, we are continuing to work toward the planned restart of the San Zebrián smelter and we've now signed two power purchase agreements for wind-based electricity.
although permitting will need to be approved by the regional and national Spanish governments before construction can begin.
As I mentioned at the top of our call, we also maintained a strong balance sheet, which is essential, especially at a time when there is still a lot of unpredictability in the world.
We reduced our pension liabilities in 2022 by completing a $1 billion transfer of liabilities and related assets to a highly rated insurance company for certain U.S. retirees and their beneficiaries.
Our strong financial position also enabled us to make dividend payments and share repurchases, while achieving an investment grade rating on our debt and improving our revolving credit facility which remains untapped.
We made significant strides in growing the business as well, at locations on four continents through capacity restarts and creep projects.
In Australia, we safely completed the restart of additional capacity at Portland Aluminum in the state of Victoria.
In Europe , we announced a capital project now underway to increase capacity at Moojian in Norway via a Creek project.
In South America, we progressed with our Alumar restart in Brazil, which is powered 100% by hydropower and will capitalize on the integration with the co-located refinery.
In North America, our Dacium Bose Melter is working to increase its casting capacity to add standard sized ingots to meet increasing demand for foundry alloys in smaller formats.
With all these actions, we continue to advance sustainably, both in supplying customers with low carbon products and advancing our breakthrough technologies.
In 2022, we continued to see a significant increase in year-over-year demand for our equilibrium low carbon aluminum, which is part of our Sustana brand. Sustana is the most extensive suite of low carbon products in the aluminum industry, while still a relatively small portion of our overall sales volume.
We saw increased margins and deliveries of EcoLoom in 2022. Our sales of EcoLoom, in fact, grew more than four times over 2021, driven mostly by the European market. Two examples of customers looking to us for this low carbon metal were Spira, a global aluminum rolling and recycling company, and Hellenic Cables.
a large cable producer in Europe with key markets in renewable energy transmission and distribution.
We also maintained an increased certification of the aluminum stewardship initiative, our industry's most comprehensive third party validation of responsible production. We have two additional sites certified to ASI's standards in 2022, bringing our total number of sites to 17.
We can also market and sell ASI certified bauxite, alumina and aluminum to customers globally.
Finally, we made progress on our roadmap of breakthrough technologies. This includes work to decarbonize the alumina refining process through our Refinery of the Future initiative, which has support from the Australian Renewable Energy Agency.
Also, our ELSIS joint venture furthered its work to commercialize the carbon-free smelting process first developed at Alcoa's Technical Center.
The actions we took in 2022 helped us prepare for the year ahead.
As we start this new year, we are laser focused on further improvement.
It will drive operational excellence and rigorous cost management to meet today's challenges while working to promote future growth. We are developing opportunities to create growth via improved margins as a producer of low carbon products and our breakthrough technologies provide opportunities that can set us apart from others in the industry.
The news that we announced last week regarding our Restructured Executive Leadership Team will drive continued focus on our priorities. We have teams across Alcoa that have a proven ability to execute and we intend to deliver.
In operations, we are actively managing the issues we face in Western Australia as it relates to ore supply, as Bill mentioned in his portion of the presentation. While the annual mine approvals are taking longer than in prior iterations, we are adjusting our Huntley Mine Plan to extend mining operations already permitted under our existing approvals.
We continue to work collaboratively with regulators to address this matter.
Meanwhile, we are focused on improving our overall system processes to drive stability and performance across our facilities.
We continue to review our operating capacity to address short-term market challenges and promote operational excellence.
This includes monitoring the energy situation that prompted our decision to curtail some production at our Lista smelter and the San Ciprian refinery and the most recent impacts from gas shortages that led to a 30% reduction in output at the Quinao refinery in Western Australia.
And we continue to progress the restart of the Alumar smelter and prepare for the future restart of the San Ciprian smelter per our agreement with the workers there.
We've worked hard over these past several years to improve our company's financial position and we are intent on maintaining that rigor as we further sharpen our focus on costs.
We will continue our work to maintain a strong balance sheet, which includes considering more opportunities to reduce the risks from pension liabilities as the market allows.
While we focus on the immediate needs for success for 2023, we are also keeping our future programs firmly in focus. Our R&D programs are fundamental for our long-term growth strategy and our vision to reinvent the aluminum industry.
Our breakthrough technologies include the ELSIS joint venture, our Astrea scrap purification process, and the refinery of the future initiative. Our strategy and technology roadmap are tightly linked and continued innovation will be vital.
Today, we offer the industry's most comprehensive portfolio of low carbon products, and we are focused on delivering to our customers products that can help them and us reach sustainability goals.
We've seen year-over-year growth in both margins and volumes for our sustain-align, and we intend to continue this growth. And we see this developing low-carbon market as the key to building this critical demand, as our ELSIS joint venture continues to progress towards production at industrial scale.
Due to work across our company, we are well positioned as a supplier of choice, especially in a world that is working to further reduce greenhouse gases. We have a global refining system with the industry's lowest carbon dioxide intensity, and a significant portion of our smelting portfolio is powered by renewable energy. Underpinning all of our initiatives, we remain committed to being a responsible and effective
I have just a few points I'd like to summarize before we take questions.
First, our industry was a case study in contrasts in 2022.
The first half of the year was very strong with high pricing that more than offset high raw material costs.
But world events negatively influenced our markets in the back half of the year. That helped emphasize once again why we operate with an intense focus on cost and delivering consistent operational excellence while we continue to work on projects that can drive future growth.
Next, we know the world has experienced unexpected and disruptive volatility. Still, producers everywhere are facing increased demands and assurances of responsible production. Alcoa is quick to adapt and we will not simply wait for a market recovery.
Alcoins know how to do the hard work, including managing both the short and long-term opportunities ahead.
And finally, we took action in 2022 and we will continue to improve and operate as a sustainable low-cost producer while we work on our vision to reinvent the aluminum industry. The world is working to decarbonize and that provides us an opportunity.
We know the long-term fundamentals for our industry are strong. Aluminum is the material of choice, and Alcoa is the company to deliver the products our customers are demanding.
With that, we're ready to take your questions. Operator, who do we have on the line?
We will now begin the question and answer session. To ask a question, you may press star then 1 on your phone. If you're using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question, please press star then 2.
When called upon, please limit yourself to two questions.
Our first question today comes from Emily Chang with Goldman Sachs. Please go ahead.
Good evening, Roy and Bill. Thank you for the comments and congratulations on the new role, Bill.
My first question is around Western Australia Lumina. And perhaps could you share specifically what's driving the delays to the mine plan approvals there? Are these new environmental requirements that have been recently enforced that you now have to address? And is there a timeframe in mind as to when you would expect to see those approvals received?
Yeah, Emily, I appreciate the question. So we have an annual planning cycle. And as you can imagine, it takes time for us to adapt and prepare and put together everything that goes into choosing where we mine and how we mine. And so we also have an annual planning cycle.
regulatory and set of connections that we make in order to receive all the permits that we need for operations. And so as expectations have been increasing around how we protect the environment, the amount of information and baseline data that we provide over to regulators has started to increase.
And this is particularly in relationship to the Myara area that we're mining today. It's just taken longer for us to be able to receive and then put into place those permits. And so essentially it's not necessarily new requirements, but a new set of discussions that are necessary and just more.
more discussions that are happening between us and the regulators. And so as we go through that process and because of the critical importance of the bulk site that we have coming into the refineries and also just because of how critical Western Australia is to Alcoa as a company, we thought it would make sense from a risk mitigation standpoint really just to step...
confidence that we're going to get to an end point here. I look at this as an intelligent way to make sure that we have the extra time that's demanded because of, just because of some of the changing expectations and some of these discussions to allow them to fully happen. Over the course of these next few years, we're in the midst of preparing for that next big mine move in the Huntley Mine to North Myara.
manage all those different processes.
Again, I have full confidence that we're going to get this where it needs to be. I find that we're collaborating and working with all of the stakeholders that are involved in the process. I just felt it was the right thing to do to really de-risk and make sure that we have what we need and that we can operate our refineries smartly.
I would add one more thing on top of that Emily because I think it's important. As we look at these next few quarters over the course of 2023, the opportunity we have is also to fine tune our refineries to make sure that they're managing these new bauxite grades really smartly.
And so I think there are opportunities that we have to learn how to run more efficiently, to manage the mud and sand lungs that are coming in, and really to make sure that we're optimizing and running as cost-efficiently as we possibly can in Western Australia and across the portfolio. And that points to some of the changes that we've been making in the organization as well.
really just to make sure that we are as cost effective as we possibly can be. And so I, again, I'm confident we'll get the permits. I'm also confident that we can find ways to improve and make sure that we're driving that, that those mine operations and refinery operations as smartly as we possibly can.
Great, that was really helpful Roy. Maybe a follow up if I may and sticking with the cost theme there but just wanted to touch on what you're seeing from the lower gas prices in Europe right now and if there's been any benefit to Sansiprion going forward for the Illuminaut segment. I don't think that was mentioned in the release.
So yes, we are seeing lower gas prices in Europe for San Siparin Refinery. San Siparin Refinery results improved fourth quarter over third quarter. We anticipate that they will improve again first quarter over fourth quarter due to a couple of actions. One, the lower gas prices. Two, some of the commercial actions that we've taken to try to...
drive some price increases in our NMA business and really trying to optimize the cost of running the refinery at the lower levels that we have it at.
Great, thank you. Thanks, Emily. Thanks, Emily.
The next question is from Alex Hacking with Citi. Please go ahead.
Hi, thanks for the question. Let me have my congrats to Bill on the new role. You deserve a lot of credit, especially if you work on the balance sheet and hopefully investors will still have a chance to hear from you going forward. Just following up on Emily's question on the cadence of cost, you mentioned that you are
At Sanseprian, you would expect sequentially lower cost.
in the first quarter. As we look further ahead into the second quarter, would we expect European smelter costs, Norway, San Cyprian, to keep falling, assuming that that gas is a...
is at current levels or falls further. Thank you.
So Alex, what we're seeing on the cost structure is really, we're now starting finally to see some reduction in key raw material costs. I think you probably saw in the chart that we're starting to see Koch prices tip over. Koch's start is continuing to be pretty high.
But we've guided to a relatively stronger result in the first quarter than the fourth quarter, especially in the aluminum segment. So in aluminum, we're guiding really to $100 million positive, $100 million up from the fourth quarter in the first quarter.
As we look out into the second quarter, it really will depend on what energy prices do. And with the volatility in the market, it's probably too early to give an indication of what energy prices will do in the second quarter of the year.
Okay, thanks. Then on the Sansiprian smelter, what percentage of power is covered by the two PPAs that you signed? Then, what are the prices there indexed to, if anything? Are they indexed to market prices or LME? Any color there would be helpful. Thanks.
Yeah, Alex, I can answer that one. These two contracts that we've put together over the course of 2022 really add up to about 75% of the total demand for the smelter operating at full capacity. We've not talked about how the pricing structure works, but essentially it's a fixed price.
Together, the agreement with the workforce was reached. We were able to gain the time where we didn't need to curtail the facility completely. As I said in my comments before, we are preparing for the restart back in January, with the start of the restart back in January 2024.
ok Thank you.
Thanks, Alex.
The next question is from Carlos the Alba, with Morgan Stanley . Please go ahead.
Thank you very much. Happy New Year, Roy and Bill. And Bill, congrats on your tenure as CFO and all the best in your new role. Just a question regarding the Kwinana run rate, just to continue the discussion on Illumina, I guess. You mentioned in the press release and I think there were some
refinery.
That will be my first question. And then the second one may be related to Ulysses. What can you tell us there in terms of important milestones? When should we hear an update from you on how the developments are progressing and
Let me give you first couple answers, then Bill can fill in, particularly on the Ellis numbers quinana, just to get started there. So we we've got about 30% curtailed. It was very much driven by the fact we just didn't have enough gas in the state of Western Australia asked large consumers of gas to look for ways to be able to reduce.
And operating on diesel just doesn't make a lot of sense just because of the price differential and for a number of other reasons.
So as we looked at that, the right thing to do was to be able to take a series of maintenance activities and bring that down by 30%. At this point, we have seen improvements in how much gas is available, essentially up to our normal contracts. We've seen an improvement, but we've not yet got back to the stability that we normally have.
I would say we've made good progress on being able to fill in some of the gap, S So that we're now running what we have running fully on natural gas and we're not substituting diesel, which is very good and good from a cost standpoint, but also good from a stability standpoint. But we need to see continued sort of the return of all the normal operating capacity back before we.
And so, we'll be analyzing as we go. And as always, we'll keep you informed and let you know as soon as we've made a decision on that, Carlos.
On ELSIS, just jumping into that second question as well, important milestones. I'll hit it qualitatively and then Bill can step in and talk a bit more about the numbers. For me, the next important milestone, the ones that obviously we'd be talking more about, we're in the midst of constructing and preparing to start up the first industrial scale.
over the course of 2023 and 2024 as those cells continue to operate. By the end of 2024, what we've said is that we want a commercial package available so that we can get started on the first installations of ELLISIS, which we've not defined where that will happen yet.
With the idea that the first operating capactor really will be happening in 2026, and so to me, the 2023 is going to be absolutely critical sed to show that, that we've got the ability to operate to generate the quality of metal at at P 20 or better capacity, and to start to work on making sure that we can deliver on the operating efficiencies and the capital efficiencies.
that we've got planned. So it's gonna be an exciting year. And on the numbers, Carlos, a couple of numbers to keep in mind. We are guiding in the first quarter that other income will be down sequentially by about $45 million. $35 of that $45 is associated with contribution.
Including the $35 million of contributions in the first quarter, that we would anticipate about $6 million in full year contributions for ellysis. At this point now that will flex based on timing of some of the key decisions, but that's our best estimate at this point.
allright exceand. Thank you marx, very citing. You did a good loation.
The next question comes from Timna Tanners with Wolf Research. Please go ahead. Hey, good evening and happy new year everyone. Wanted to just touch on a little piggybacking on the discussion of kind of what it takes to restart some of your IDALS capacity, but ask a little differently. I'm looking around the European markets.
Do you think that there's also the potentials for ear some extensive restarts, given lower gas prices, or what do you think it takes to see some of those, those facilities, also restart?
Tim, I can take the first thing on that one, and Bill can chime in as well if he wants to. You know, operating in Europe is still pretty difficult. So, you can compare it to the period prior to the war in Ukraine, or maybe even better, take it a year before that because we were seeing inflation in energy prices even the year before.
it's still a very difficult place in order to operate a smelter or a refinery. Those smelters that are operating tend to be ones that have long-term contracts that have been disconnected from the spot prices that we see today. We were able to find a solution on the relatively small least of smelter that we have, although it is a third curtailed at this point. That was through
Some incredible work that our strategy and commercial teams were able to do. However, it is still just not a market where you can justify continuing to operate at spot power rates, as you see. And I would extend that to the refining business as well when you're buying spot gas. That is the current model and part of the strategy that you're ideal for.
LME pricing for aluminum nor the API pricing for aluminum giving you a return given where those where those rates are As we see the winter Continue and if it continues as mild as it is I think perhaps you'll start to see some some opportunities that emerge, but we're just not we're just not seeing that yet
If anything, when I look across Europe, I'd say that there are still opportunities or potential, particularly where certain smelters might be coming up on the end of shorter-term contracts and then are going into the spot market or looking for the next series of contracts. I think there's still some curtailment potential that could happen both on the smelting side and the smelting side.
And we've also heard some rumors about stuff that could be happeningalso on the refining side that sort of informed the difficultyof that's happening in the market again. We always when we step back when we look at our facilities and we think about how we run them. sansiprian is a good example of the sansiprian refinery as a good example of a place where we've been able to.
To make smart decisions and curtail it partially, So that we're really only producing the tons that in fact are creating value for us. It doesn't necessarily fix the problems because we want to be operating that facility at at full speed again down the road, but we need to see the more relief on gas before we get to that particular point.
Or more relief coming in from the pricing, the AP I pricing, et cetera. Just to put some numbers around that. I was going to reiterate the point that you were making. At the end of there we were. We have been consistently surprised that more capacity hasn't come offline in Europe and you've heard us Tim the talk many times about a million to one point zero zero zero zero zero two million metric ton.
Capacity is sitting in Europe today. To add on the refining side, a surprising number is that we would consider close to 85% of the refining capacity in Europe to be cash negative as of December.
average gas prices. Now we know that gas prices have changed a little bit in January but a lot of the capacity in Europe on the refining side is cash negative.
ok that's that super helpful thing for that context and thoughts. myither second question was just on the CapEx, given that your guidance, at least from my recollection, is a little lower than what we'd seen before by five million and actually your 2022 came in, I think, about 45 million lower than what you would initially said. So just wondering.
If any shortfalls there are getting pushed out, any explanation would be great. Thanks. I wouldn't say anything is necessarily getting pushed out, Timna. And you've seen over the years, given the market situation that we are in and the cash generation of the company, we will flex capital spending up and down.
And so, I think it's a good point. The last time we gave you guidance around 2023 was back in November of 2021. And we said at the time that we would spend $550 million on sustaining capital. And that was before we curtailed the smelter in Spain and made some commitments.
in Spain on capital spend there. So the 485 that we're showing you for 2023, we've already ratcheted down a little bit based on current market conditions. With that said, going into my new role we will make sure that we spend that 485 wisely and do the best.
Please go ahead.
Thank you very much, operator. Good afternoon everyone, and Bill, I hope it wasn't our questions that led you to the new role. In terms of my question, I wanted to follow up on Huntley, and the easiest way to think about it is about a $165 million impact for 2023.
between Q2 and Q4 and then as we look out to 2024 this issue will hopefully be resolved.
Yes, the number you mentioned, 165, is correct. That is in relation to the fourth quarter. We needed to be able to ground you in how much this issue was going to cost us in Q2 through Q4. Before rating W. Shannon's timetable number with communist one-tw, consider that it's about £7.99 a day for violation or divorce charges against W. Marshall's ads from the ACP.
So it's $55 million unfavorable compared to the fourth quarter. But it's important that you first back out some of the unfavorable items that occurred in the fourth quarter in the Illumina segment. So in the Illumina segment in the fourth quarter of 2022,
We had an ARO charge of $25 million, and we had an incremental one-time set of charges that were some small things in that segment. So what we're guiding you to is start with the fourth quarter of Illumina, add back the $35 million, and then deduct the $55 million.
So it's an incremental $2 million of unfavorability in relation to the fourth quarter and I hope that's clear. We just needed to try to make that as clear as we possibly could for you to be able to model out the impact.
Very clear to me. I appreciate that detail. This would also include all the quality concerns that Roy mentioned in response to one of the earlier questions.
It does, that's an inclusive number that includes the loss of tons but also it's more expensive to make the tons that we will be making. As we push through lower quality bauxite through the refineries we will have higher usages of caustic and other input costs. So that's inclusive of those two items.
And if this punch list is not completed by the end of this year, what happens? Do you go ahead with whatever the stock price for power is at that time, or are there other remediation possibilities? Thank you very much for that, Keller.
Yes Lucas me, let me try and answer that, and then, if if I'm not hitting the target, let me know. So what we have are a series of commitments that we made that essentially allowed us to idle the facility a little bit more than a year ago.
There were a certain number of capital investments, and some of those take longer than others, as you can imagine, and they're meant to set up the facility for the long term. And so those are ongoing. Also, what we need to do is make sure that it's ready to restart when we get to January 1st, 2024, which was a very specific commitment inside of the agreement.
So really, we just need to make sure that we have all of the raw materials necessary So as, to 2023 progresses, we'll be able to make sure that we've got cocon, pitch or anoes in place So that when we start to Spark those pots and bring production back online again, it'll be ready to go from an energy perspective.
It's a matter of having 75% of the contracts already in place. These are for wind farms still to be constructed, so they are going through the permitting phases which connect with both the national and regional governments. There will then be a construction phase, as you can imagine, for the construction of wind farms in northwestern Spain.
And whether we run that on the spot, whether we find a shorter-term contract, how we manage that is still not something that we've disclosed or have made a decision on. But as you can imagine, because we have an agreement with the workforce, we will be ready when the time comes, and we'll be working on that over the course of the next few months.
Roy, that is very helpful. That is exactly what I was looking for. So I appreciate that and to you the team continued best of luck.
Good luck.
Thanks, Lucas.
The next question is from Michael judas. With Vertical Research, Please go ahead.
Good evening, everyone, and well done, Bill.
Thanks, Michael.
Roy, could you share with us your observations of what your major customers are behaving like right now as we went into 2023? Is there expectation that the
tungry from the pandemic restrictions in China and such inuments is going to be a pretty major factor and is it going to be sooner up than later to what your customers are hookking.
Yeah, I can provide some color, Mike. As always, every customer might be a little bit different, so I'll try and generalize a little bit. We're still seeing a lot of strength in the US market particularly. And so when we look across the different product categories, and I would highlight transportation and packaging at the two places where we're just seeing...
We continue to see more demand than probably we're able to fulfill. So the US market is still running very well. In Europe , I think there's a lot more uncertainty. Some of that uncertainty, I think, has started to step back a little bit just because of the reduction in gas prices and the reduction in electricity prices.
happen a bit quicker than what you might see in the US. But I think there's now, I would argue, more uncertainty in the market about whether we'll start to see a better recovery. And you've probably seen as well as I have some of the analyst coverage about the potential for recovery in Europe because it's been such a mild winter and because they have sufficient gas and storage.
And so I'd say there's been a cautious approach in Europe , but I think it's also potentially constructive as we see what happens over these next few critical weeks, in these next two critical months.
From a Chinese perspective and we don't sell particularly into China, but I think that has a knock-on impact. What people are seeing there? I think there's a general expectation that they need to work through this abrupt opening of, or loosening of, covidt restrictions. I know there's plenty, plenty of discussions about how much.
How much industrial activity is able to happen between now and the Chinese New Year? We've also seen a lot of issues on the supply side, particularly when it comes to aluminum, just because of the availability of energy between droughts and hot weather and all sorts of things. It hasn't been an easy time to see stable operations in China, particularly in smelting these days.
And all that sort of will culminate then coming out of the Chinese New Year. We're coming into it, and I just saw a headline today saying that we're relatively a very low inventory build coming into Chinese New Year, which then bodes very well if we see that demand recover and we start to come out of sort of what might be the spike in cases of COVID because the low-loose-
A lot of bread crumbs and say Hey, there's still a significant amount of uncertainty. We come out of what's been a relatively small deficit for the aluminum market in 2022 into a market where there's a lot of uncertainty, but I would argue that over theselastweks we've been seeing more and more positivity come out.
Again, you always take into account what could happen in Ukraine, what's happening across the world when it comes to demand, etc. I look at our business and I look at our customers, and we're still finding good uptake of our value-added products. We continue to see good improvements in our low-carbon offerings as well.
That's a piece of the market. It's particularly developed within Europe. To me, that gives you good positive signs that we're continuing to see a constructive market. Even if there are some short-term disturbances, when we look into the medium and long terms, I am very positive about what's going to happen across our markets.
That's great, thank you. Thanks, Mike.
Our final question comes from John toamas, with John toama's independent research.
Our final question comes from John toamas, with John toammaa's independent research. Please go ahead.
Thank you. Looking at at ELSIS and the binary of the future.
Logging it at alysis and the refinery of the futurewhat is the?
likely first location
Where you would retrofit a smelter.
Or retrofitifa refinery, and what year?
Might we look ahead to that? Is it possible for it to be 2025 or sooner or later?
So, it's a great question, John, and not one that we've yet defined and certainly not communicated. We're looking across all the jurisdictions where we operate. As you can imagine, there's a lot of excitement about ELSIS, and a lot of excitement about who can be the first. In this journey, in 2007, I met Ms. Kelly on February 6, 2013, later in the week at Jadelin Delos DC. Her name is Gabrielle.
Canada, of course, is one of the front runners because they've been so supportive of the technology that the technology as an investor as as supportingall the work that's being done in Canada right now, and obviously they have a very attractive energy scheme as well.
But I wouldn't count out the? U's as a potential location. Norway, another great place where we've had a lot of support from the government, a lot of different places, and so I'd say that it is still very much open where that first, that first application, will happen. And, to be quite honest, as we watch the good results come in here, over the course of 2023, it's going to get more and more.
More and more opportunities are arising for us to decide where the first application will be. As for when the first one will be built, what we've been saying is that by the end of 2024, we want the engineering package in place so that the first metal can come out in 2026. So it means we really need to get started building in 2025.
across 24 and 25. So it doesn't give us a lot of time. It means we're coming up on a decision where that first location will be. It means we need to be interfacing with all of our host governments and our potential host governments. I need to continue to see good progress on the actual.
the actual success of those industrial scale cells that are being operated today. As far as Refinery of the Future goes, John , and I'll address that one quickly. Remember that Refinery of the Future is really a suite of processes that we are developing.
Out of that suite of processes, there are some that we've talked about externally. For instance, mechanical vapor recompression and electric calcination. We have committed to doing a pilot of mechanical vapor recompression in 2023 at the WagerUp facility, and we're receiving some funding from the Australian government.
Out of $115 million that we're talking about return seeking capital. mv is included in that $115 million. So while we've skinny down our return seeking in our sustaining capital, there are a handful of projects that are really critically important for us, and MBR is one of them and that's included in those numbers.
As far as electric calcination, it's a little bit farther away, and we need to prove out the technology at a smaller scale, so it's too early to say where that would be applied.
If I could follow up on slide 17, Roy's key areas of focus for 2023. A couple of the targets look like they're kind of hard things to do.
On bauxideite quality. Are you assuming that you get regulatory approvalor? Would you go across the road and buy some boauxite from wars whereyou across the Lake, from weaper or something?
And with the gas supply in Western Australia and energy for San Seprian and LISTA, are you a sanctuary?
seeing the markets soften and that...
supplies are going to become available that were not available several months ago.
So, John, it's...
So John, it's all very important questions.
So first and foremost, and this is something I've learned over the time I've been CEO of Alcoa, we lack easy-to-solve problems. We have lots of things that need complicated solutions that take time and must be addressed in smart ways.
It's why I've got the team that I do. It's why I've got a lot of faith as we deal with these things. And to be quite honest, it's one of the reasons that we made some of the changes in the executive team to make sure that we're focused on the right things, to be quite honest. And so we have the bandwidth, we have the right people working on these things.
And to be quite honest, particularly on the strategy side, we try and look at things without boundary conditions and so that we can find what's best to solve for the long-term viability for this business and for our stock stockholders across the Board, as little as as our stakeholders as well. And so, when it comes to boxide, like I said when in one of, or lotoffidence that we're going're going to be.
look at other solutions. And so we'll continue to do that. When it comes to your point about solving the energy questions around a plant like LIST or Sunseprion in the short term before we get to these new contracts or the Sunseprion refinery, a lot of times...
The deals happen as you approach deadlines and as you build consensus with communities and with host governments to find shared and common interests. Often, this can mean that you're working with suppliers, your energy suppliers, so that you can provide that base load. That's worked really well in the energy contracts that we've built up.
With Grinnellian and Indesa for Sunset Brown in the future, we're sort of that base load customer, and we can get a very advantageous cost position, price position for us. But, we also have to see how the market develops and then look at how the market mechanisms can come to support those final contracts.
So all that to say, they are difficult problems and there's a lot; it's a pretty simple slide, but there's a lot of work that's going into it. But I think we have the right people working on the right things. And I would just come back to my point that we put a lot of creativity into how to solve these things because none of them are easy problems. And the fact is that we need to always step back and say, 'Are we doing things as?'
with as little complexity and with as much effectiveness as we possibly can? It's a really good question, John , and I appreciate it.
Thank you. Thank you for your efforts as a management team.
Thank you for your efforts as a management team. Thanks, John. Thank you, John. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Roy Harvey for closing remarks.
Thank you operator and thanks once again to everybody who joined this call.
Given his time as CFO of Alcoa Inc. and now Alcor Corp, I thought it would be good to hear a few words from our good friend Bill before we close for today. Thanks, thanks, thanks, Roy. Just want to make a couple of points before we close off. The first point is I'm absolutely thrilled that Molly Bierman is stepping in and...
I think she will be a steady hand to help be a business partner for you, Roy. And I am just really happy that she's stepping into the role. So thrilled about that. I guess secondly, to address Lucas's question, Lucas, this is my 40th earnings call.
as CFO of Inc. and Corp., a full 10 years. And I have enjoyed tremendously the interaction with investors. Investors buy side, sell side. One of the highlights of my career has been working with the people on this call.
And many of the most enjoyable times that I've had as CFO have been working with the people on this call. So, going on to a new role, I think over time we may run into each other again. So, it's probably not goodbye for now, but maybe just we'll see you in the future. So, Roy, thanks for the opportunity to address the group.
Thanks thanks bill and as you know he's not going that far away operations are critically important to us. He does. He does sit next to me in our Pittsburgh office and we're moving him out moving Molly andso. The value of my real estate is definitely going up because of better neighbors. But But in the end in not to not to belor the.
I really do believe that we've built a strong foundation over these six years. And I also believe that we're working on the right things, continuing to drive improvement and making sure that we're doing things in the right way. So, these next few months will be gone before we know it. I look forward to speaking with you again in April for our first quarter of 2023.
You may now disconnect.
Z two six three 2, one Eight.
I.
But it's important that you first back out some of the unfavorable items that occurred in the fourth quarter in the alumina segment. So in the alumina segment, in the fourth quarter of 2022, we had an a AR o charge of $2.005 billion and we had an incremental one time set of charges. That were some small things in that segment. So what we're guiding you to is start with the fourth quarter of alumina, add back the 35 million and then deduct the fifty five million.