Century Aluminum outlook revised to positive, credit rating affirmed by S&P

S&P Global Ratings has revised Century Aluminum's outlook to positive from stable, affirming its 'B-' issuer credit rating, citing improved credit metrics and profitability driven by backward integration and lower production costs. The company's earnings momentum is expected to continue, and the positive outlook indicates a potential rating upgrade within the next year if Century maintains a debt to EBITDA ratio below 4x with strong free cash flow, which is projected to be $100-$150 million in fiscal year 2025.

Analysis

S&P Global Ratings has revised its outlook on Century Aluminum Co. (CENX) to positive from stable, while affirming the 'B-' issuer credit rating and 'B' issue-level ratings for its senior secured debt. This revision reflects significantly improved credit metrics and profitability, driven by strategic backward integration through the acquisition of a 55% stake in Jamalco, which has reduced exposure to volatile spot alumina prices. Further contributing factors include lower production costs, notably from approximately $93 million in 45X manufacturing tax credits in fiscal 2024 that accounted for almost half of its EBITDA, and strong price realizations. Century Aluminum's adjusted EBITDA more than doubled over the past two years, reaching $210.9 million with a 9.5% margin in fiscal 2024, a substantial increase from $88.7 million and a 3.2% margin in fiscal 2022. The company's earnings momentum is anticipated to persist, supported by the completion of the Iceland cast house project, enabling expansion into the premium low-carbon billets market, and a secured power supply for its Grundargtangi smelter until 2032. Management intends to allocate projected free cash flow of $100 million - $150 million in fiscal 2025 towards debt reduction, targeting a net debt level of approximately $300 million. A credit rating upgrade is possible within the next year if Century maintains a debt-to-EBITDA ratio below 4x for a second consecutive fiscal year alongside good free cash flow, while a revision back to stable could occur if this ratio rises towards 5x.

Key Decisions for Investors

• Investors should view the positive outlook revision by S&P as a de-risking event, reflecting enhanced financial stability and operational improvements at Century Aluminum.
• Monitor Century Aluminum's ability to sustain its debt-to-EBITDA ratio below 4x and achieve its projected free cash flow of $100-$150 million in fiscal 2025, as these are key metrics for a potential credit rating upgrade.
• Consider the ongoing benefits from the Jamalco integration, the Iceland casthouse expansion into low-carbon billets, and the continuation of 45X manufacturing credits as significant drivers for future earnings and cash flow generation.
• Evaluate exposure to aluminum price volatility and the company's progress in optimizing the Jamalco facility towards its nameplate capacity, as these factors will influence future profitability and debt reduction capabilities.