CENTURY ALUMINUM COMPANY
This Management's Discussion and Analysis ("MD&A") provides information that
management believes is relevant to an assessment and understanding of the
consolidated financial condition and results of operations of Century Aluminum
Company and should be read in conjunction with the accompanying consolidated
financial statements and related notes thereto. This MD&A contains
"forward-looking statements" - see "Forward-Looking Statements" above.
Overview
We are a global producer of primary aluminum with aluminum reduction facilities,
or "smelters," in the United States and Iceland . The key determinants of our
results of operations and cash flow from operations are as follows:
•the price of primary aluminum, which is based on the London Metal Exchange
("LME") and other exchanges, plus any regional premiums and value-added product
premiums;
•the cost of goods sold, the principal components of which are electrical power,
alumina, carbon products and labor, which in aggregate represent more
than 75% of our cost of goods sold; and
•our production volume.
Recent Developments
Mt. Holly Restart
We have finalized and received all necessary approvals for a new power contract
with Santee Cooper for the Mt. Holly aluminum smelter. The contract was
effective April 1, 2021 , and runs through December 2023 . It is expected to
provide sufficient energy to allow the Mt. Holly smelter to increase its
production by 50% (resulting in total production of 75% of Mt. Holly's full
capacity once the restart project is completed) at cost of service based rates.
Restart work at the Mt. Holly smelter is already underway and is expected to be
completed in the fourth quarter of 2021.
Hawesville Restart Activity
Our Hawesville facility experienced several equipment issues in late December
2020 that partially reduced the plant's production level; however, we began the
process of returning to our planned operating level of 80% of production
capacity early in the second quarter of 2021. We expect the various major
maintenance and other projects associated with these equipment issues will
result in approximately $10.0 to $12.0 million of one-time additional operating
costs during the last three quarters of 2021, with over half of this amount
anticipated to be spent during the second quarter of 2021 and declining amounts
in each of the third and fourth quarters.
Refinancing Activity
On April 14, 2021 , we issued $250.0 million in aggregate principal amount of our
senior secured notes that will mature in 2028 (the "2028 Notes") and used a
portion of the proceeds to purchase $195.9 million of our 12.0% senior secured
notes due 2025 (the "2025 Notes") pursuant to a cash tender offer for any and
all of the 2025 Notes. We also called for redemption on May 14, 2021 of all of
$54.1 million aggregate principal amount of the 2025 Notes not tendered in the
tender offer. On April 9, 2021 , we issued $86.3 million in aggregate principal
amount of convertible senior notes due 2028 (the "Convertible Notes"). The
remaining proceeds from the issuance of the 2028 Notes and a portion of the net
proceeds of the Convertible Notes will be used to redeem the remaining 2025
Notes on May 14, 2021 . With these transactions, we have effectively extended the
maturities of our principal debt obligations, reduced the interest rate on these
obligations, and raised additional liquidity through the issuance of convertible
senior notes.
COVID-19 Update
In response to the COVID-19 pandemic, we have taken a number of actions to
protect the health and well-being of our employees and to prevent the spread of
COVID-19 within our operations. As a result, our plants have not experienced any
disruption in operations as a result of the pandemic, and we continue to sell
all of our metal essentially as it is cast.
Since the outbreak of the COVID-19 pandemic in early 2020, we have seen
disruptions to the global economy and the COVID-19 pandemic created significant
volatility in the primary aluminum industry; however, in recent months, we have
seen some measurable improvement in the global market for primary aluminum along
with an increase in the price for our product and continued stability in the
market in which we operate. The LME price for primary aluminum averaged $2,192
per tonne for the three months ended March 31, 2021 , as compared to an average
of $1,702 for calendar year 2020, due in part to the impacts that the COVID-19
pandemic had on the LME price for primary aluminum during 2020. Because we sell
our product on a one-
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to three-month lag to current prices, our results reflect the LME price on this
one-to-three month lag basis. Generally, customer demand for value-added
aluminum products and, in turn, the product premium we receive for such products
have returned to first quarter 2020 levels after having been negatively impacted
by the COVID-19 pandemic throughout the last three quarters of 2020.
Since early 2020, we have taken actions to mitigate the financial impact of the
COVID-19 pandemic, including reducing discretionary spending, optimizing working
capital and deferring non-essential capital projects. The potential further
impact of the COVID-19 pandemic on our business, results of operations and
financial performance is difficult to predict and will depend on future
developments, and such effects could exist for an extended period of time. See
Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2020 for additional information on the potential risks
associated with the COVID-19 pandemic.
Results of Operations
The following discussion for the three months ended March 31, 2021 , reflects no
change in production capacities at our operating facilities.
Our net sales are impacted primarily by the LME price for aluminum, regional and
value-added premiums, and the volume and product mix of aluminum we ship during
the period. In general, our results reflect the LME and regional premium pricing
on an approximately one to three month lag basis reflecting contractual terms
with our customers.
Electrical power, alumina, carbon products and labor are the principal
components of our cost of goods sold. In general, our results reflect the market
cost of alumina on an approximately three-month lag reflecting the terms of our
alumina contracts and inventory levels.
Three months ended March 31,
2021 2020
(in millions, except per share data)
NET SALES:
Related parties $ 268.3 $ 271.0
Other customers 175.7 150.2
Total net sales 444.0 421.2
Gross profit (loss) (20.7) 4.8
Net income (loss) (140.0) (2.7)EARNINGS (LOSS) PER COMMON SHARE:
Basic and Diluted $ (1.55) $ (0.03) SHIPMENTS - PRIMARY ALUMINUM(1)
United States Iceland Total
Net Sales (in Net Sales (in Net Sales (in
Tonnes millions) Tonnes millions) Tonnes millions)
2021
1st Quarter 116,437 $ 275.6 79,260 $ 164.2 195,697 $ 439.8
Total 116,437 $ 275.6 79,260 $ 164.2 195,697 $ 439.8
2020
1st Quarter 129,114 $ 273.8 73,791 $ 141.0 202,905 $ 414.8
Total 129,114 273.8 73,791 141.0 202,905 414.8
(1) Excludes scrap aluminum and alumina sales.
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Net sales (in millions) 2021 2020 Three months ended March 31,$ 444.0 $ 421.2
Net sales (excluding alumina sales) increased by
Gross profit (loss) (in millions) 2021 2020
Three months ended
Gross profit decreased by$25.5 million for the three months endedMarch 31, 2021 compared to the same period in 2020, primarily due to unfavorable power price realizations of$41.6 million , primarily related to extraordinarily cold temperatures in theU.S. Midwest and South duringFebruary 2021 , unfavorable alumina price realizations of$10.7 million , and unfavorable volume impacts of$10.9 million . These unfavorable impacts were partially offset by favorable LME and regional premium price realizations of$40.0 million . Selling, general and administrative expenses (in millions) 2021 2020 Three months ended March 31,$ 16.1 $ 8.9 Selling, general and administrative expenses increased by$7.2 million for the three months endedMarch 31, 2021 compared to the same period in 2020 primarily driven by an increase in share-based compensation costs.
Net gain (loss) on forward and derivative contracts (in millions) 2021
2020
Three months ended March 31, $ (98.1) $ 3.8
For the three months ended March 31, 2021 , net loss on forward and derivative
contracts increased by $101.9 million compared to the same period in 2020
primarily due to increases in LME and MWP prices. See Note 13. Derivatives .
Income tax benefit (expense) (in millions) 2021 2020
Three months ended March 31, $ 2.3 $ 2.8
We have a valuation allowance against all of our U.S. and certain foreign
deferred tax assets. The period to period change is primarily due to improved
operational results at our foreign entities that are not subject to a valuation
allowance. See Note 7. Income Taxes to the consolidated financial statements
included herein for additional information.
Liquidity and Capital Resources
Liquidity
Our principal sources of liquidity are available cash and cash flow from
operations. We also have access to our existing revolving credit facilities and
have raised capital in the past through public equity and debt markets. We
regularly explore various other financing alternatives. Our principal uses of
cash include the funding of operating costs (including post-retirement
benefits), debt service requirements, capital expenditures, investments in our
growth activities and in related businesses, working capital and other general
corporate requirements.
We believe that cash provided from operations and financing activities will be
adequate to cover our operations and business needs over the next twelve months.
As of March 31, 2021 , we had cash and cash equivalents of approximately $26.3
million and unused availability under our revolving credit facilities of $63.8
million , resulting in a total liquidity position of approximately $90.1 million .
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On April 14, 2021 , we issued $250.0 million in aggregate principal amount of our
2028 Notes and used a portion of the proceeds to purchase $195.9 million of our
2025 Notes pursuant to a cash tender offer for any and all of the 2025 Notes. We
also called for redemption on May 14, 2021 of all of $54.1 million aggregate
principal amount of the 2025 Notes not tendered in the tender offer. On April 9,
2021 , we issued $86.3 million in aggregate principal amount of Convertible
Notes. The remaining proceeds from the issuance of the 2028 Notes and a portion
of the proceeds from the issuance of the Convertible Notes will be used to
redeem the remaining 2025 Notes on May 14, 2021 . The remaining proceeds from the
Convertible Notes offering were used to repay borrowings under our revolving
credit facilities and to pay for the cost of the capped call transactions in
connection with the issuance of the Convertible Notes. With these transactions,
we have effectively extended the maturities of our principal debt obligations,
reduced the interest rate on these obligations, and raised additional liquidity
through the issuance of convertible senior notes.
Available Cash
Our available cash and cash equivalents balance at March 31, 2021 , was $26.3
million compared to $81.6 million at December 31, 2020 .
Sources and Uses of Cash
Our statements of cash flows are summarized below:
Three months ended March 31,
2021 2020
(in millions)
Net cash provided by (used in) operating activities $ (49.8) $ 34.6
Net cash provided by (used in) investing activities (7.4) (5.9)
Net cash provided by (used in) financing activities 0.4 81.0
Change in cash, cash equivalents and restricted cash $
(56.8)
The increase in net cash used in operating activities was primarily driven by an increase in net loss and changes in working capital. The changes in working capital are primarily attributable to timing of receivable collections and timing of raw material receipts.
The increase in net cash used in investing activities was primarily due to
higher spending on capital projects during the three months ended
The decrease in net cash provided by financing activities was primarily due to lower net borrowings on our revolving credit facilities. Availability Under Our Credit Facilities TheU.S. revolving credit facility, datedMay 2018 , provides for borrowings of up to$175.0 million in the aggregate including up to$110.0 million under a letter of credit sub-facility, and also includes an uncommitted accordion feature whereby borrowers may increase the capacity of theU.S. revolving credit facility by up to$50.0 million , subject to agreement with the lenders. TheU.S. revolving credit facility matures inMay 2023 . Any letters of credit issued and outstanding under theU.S. revolving credit facility reduce our borrowing availability on a dollar-for-dollar basis. We have also entered into, through our wholly-owned subsidiary Nordural Grundartangi ehf ("Grundartangi"), a$50.0 million revolving credit facility, datedNovember 2013 , as amended (the "Iceland revolving credit facility"). TheIceland revolving credit facility matures inNovember 2022 . The availability of funds under our credit facilities is limited by a specified borrowing base consisting of certain accounts receivable, inventory and qualified cash deposits which meet the lenders' eligibility criteria. Increases in the price of aluminum and/or restarts of previously curtailed operations, for example, increase our borrowing base by increasing our accounts receivable and inventory balances; decreases in the price of aluminum and/or curtailments of production capacity would decrease our borrowing base by reducing our accounts receivable and inventory balances. As ofMarch 31, 2021 , ourU.S. revolving credit facility had a borrowing base of$139.6 million ,$50.4 million in borrowings and$75.4 million in letters of credit outstanding. Of the outstanding letters of credit,$16.2 million are related to our power commitments,$41.1 million are related to hedging collateral, and the remainder are primarily for the purpose of securing certain debt and workers' 32 -------------------------------------------------------------------------------- compensation commitments. As ofMarch 31, 2021 , ourIceland revolving credit facility had a borrowing base of$50.0 million and no outstanding borrowings. As ofMarch 31, 2021 , our credit facilities had$63.8 million of net availability after consideration of our outstanding borrowings and letters of credit. We may borrow and make repayments under our credit facilities in the ordinary course based on a number of factors, including the timing of payments from our customers and payments to our suppliers. Our credit facilities contain customary covenants, including restrictions on mergers and acquisitions, indebtedness, affiliate transactions, liens, dividends and distributions, dispositions of collateral, investments and prepayments of indebtedness, including in theU.S. revolving credit facility, a springing financial covenant that requires us to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 as of any date of determination availability under theU.S. revolving credit facility is less than or equal to$17.5 million , or 10% of the borrowing base but not less than$12.5 million . We intend to maintain availability to comply with these levels any time we would not meet the ratio, which could limit our ability to access the full amount of our availability under ourU.S revolving credit facility. OurIceland revolving credit facility contains a covenant that requires Grundartangi to maintain a minimum equity ratio. As ofMarch 31, 2021 , we were in compliance with all such covenants or maintained availability above such covenant triggers. Senior Notes OnApril 14, 2021 , we issued$250.0 million principal of senior secured notes that will mature onMay 1, 2028 , unless earlier refinanced in accordance with their terms. Interest on the 2028 Notes is payable semi-annually onApril 1 andOctober 1 of each year, beginning onOctober 1, 2021 , at a rate of 7.5% per year. The indenture governing the 2028 Notes contains customary covenants which may limit our ability, and the ability of certain of our subsidiaries, to: (i) incur additional debt; (ii) incur additional liens; (iii) pay dividends or make distributions in respect of capital stock; (iv) purchase or redeem capital stock; (v) make investments or certain other restricted payments; (vi) sell assets; (vii) issue or sell stock of certain subsidiaries; (viii) enter into transactions with shareholders or affiliates; and (ix) effect a consolidation or merger. OnApril 9, 2021 , we issued$86.3 million in aggregate principal amount of convertible senior notes due 2028, unless earlier converted, repurchased or redeemed. The principal included the full exercise of the option by the initial purchasers of the Convertible Notes to purchase$11.3 million of additional principal amount. The Notes bear interest semi-annually in arrears onMay 1 andNovember 1 of each year, beginning onNovember 1, 2021 , at a rate of 2.75% per annum in cash. We applied the net proceeds from the offering of the 2028 Notes and a portion of the net proceeds from the Convertible Notes described above toward payment of the total consideration amount to holders whose 2025 Notes were accepted and purchased in the tender offer and to fund the redemption of any remaining 2025 Notes. Hawesville Term Loan OnApril 29, 2019 , we entered into a term loan agreement withGlencore Ltd. pursuant to which the Company borrowed$40.0 million . Borrowings under the Hawesville Term Loan were used to partially finance the second phase of theHawesville restart project. The Hawesville Term Loan matures onDecember 31, 2021 , and is being repaid in 24 equal monthly installments of principal that began onJanuary 31, 2020 . The Hawesville Term Loan bears interest, due monthly, at a floating rate equal to LIBOR plus 5.375% per annum. The Hawesville Term Loan is not secured by any collateral. As ofMarch 31, 2021 , the outstanding balance of the Hawesville Term Loan was$15.0 million . Supplemental Guarantor Financial Information The Company has filed a Registration Statement on Form S-3 (the "Universal Shelf Registration Statement") with theSecurities and Exchange Commission pursuant to which the Company may, from time to time, offer an indeterminate amount of securities, which may include securities that are guaranteed by certain of the Company's subsidiaries. As ofMarch 31, 2021 , we have not issued any debt securities pursuant to the Universal Shelf Registration Statement. However, the securities that we may issue in the future may limit our ability, and the ability of certain of our subsidiaries to pay dividends or make distributions in respect of capital stock. "Guarantor Subsidiaries" refers to all of our material domestic subsidiaries except forNordural US LLC ,Century Aluminum Development LLC andCentury Aluminum of West Virginia, Inc. The Guarantor Subsidiaries are 100% owned by Century. All guarantees will be full and unconditional; all guarantees will be joint and several. Our foreign subsidiaries, together withNordural US LLC ,Century Aluminum Development LLC andCentury Aluminum of West Virginia, Inc. , are collectively referred to as the "Non-Guarantor Subsidiaries". We allocate corporate expenses or income to our subsidiaries and charge interest on certain intercompany balances. 33 -------------------------------------------------------------------------------- The following summarized financial information of both the Company and the Guarantors Subsidiaries ("Guarantors") is presented on a combined basis. Intercompany balances and transactions between the Company and the Guarantors have been eliminated and the summarized financial information does not reflect investments of the Company or the Guarantors in the Non-Guarantor Subsidiaries ("Non-Guarantors"). The Company's or Guarantors' amounts due from, amounts due to, and transactions with the Non-Guarantors are disclosed below: March 31, 2021 December 31, 2020 Current assets$ 266.6 $ 252.4 Non-current assets 971.6 972.3 Current liabilities 270.3 169.2 Non-current liabilities 516.2 483.7 Three months ended March 31, 2021 Net sales $ 276.2 Gross profit (loss) (19.7) Income (loss) before income taxes (121.5) Net income (loss) (140.0) As ofMarch 31, 2021 andDecember 31, 2020 , an intercompany receivable due to the Company and Guarantors from the Non-Guarantors totaled$13.2 million and$14.6 million , respectively, and an intercompany long term loan due to the Parent from the Non-Guarantors totaled$555.7 million and$554.9 million , respectively. Contingent Commitments We have a contingent obligation in connection with the "unwind" of a contractual arrangement betweenCentury Aluminum of Kentucky ("CAKY"), Big Rivers and a third party and the execution of a long-term cost-based power contract withKenergy , a member of a cooperative of Big Rivers inJuly 2009 . This contingent obligation consists of the aggregate payments made to Big Rivers by the third party on CAKY's behalf in excess of the agreed upon base amount under the long-term cost-based power contract withKenergy . As ofMarch 31, 2021 , the principal and accrued interest for the contingent obligation was$27.0 million , which was fully offset by a derivative asset. We may be required to make installment payments for the contingent obligation in the future. These payments are contingent based on the LME price of primary aluminum and the level ofHawesville's operations. Based on the LME forward market atMarch 31, 2021 , we believe that we will not be required to make payments on the contingent obligation during the term of the agreement, which expires in 2028. There can be no assurance that circumstances will not change thus accelerating the timing of such payments. Employee Benefit Plan Contributions In 2013, we entered into a settlement agreement with thePension Benefit Guarantee Corporation ("PBGC") regarding an alleged "cessation of operations" at ourRavenswood facility. Pursuant to the terms of the agreement, we agreed to make additional contributions (above any minimum required contributions) to our defined benefit pension plans totaling approximately$17.4 million . Under certain circumstances, in periods of lower primary aluminum prices relative to our cost of operations, we are able to defer one or more of these payments, but would then be required to provide the PBGC with acceptable security for deferred payments. We did not make any contributions in the three month periods endedMarch 31, 2021 and 2020. We have elected to defer certain payments under the PBGC agreement and have provided the PBGC with the appropriate security. The remaining contributions under this agreement are approximately$9.6 million . Section 232 Aluminum Tariff OnMarch 23, 2018 , theU.S. implemented a 10% tariff on imported primary aluminum products into theU.S. These tariffs are intended to protectU.S. national security by incentivizing the restart of primary aluminum production in theU.S. , reducing reliance on imports and ensuring that domestic producers, like Century, can supply all the aluminum necessary for critical industries and national defense. In addition to primary aluminum products, the tariffs also cover certain other semi-finished products. All imports that directly compete with our products are covered by the tariff, with the exception of imports fromAustralia ,Argentina ,Canada andMexico or imports that receive a product exclusion from theDepartment of Commerce . Other Items 34 -------------------------------------------------------------------------------- InMarch 2018 , we announced our intention to return ourHawesville smelter, which since 2015 had been operating at approximately 40% capacity, to full production and upgrade its existing reduction technology. The first phase of the project, which involved the restart of the three potlines and approximately 150,000 tonnes of production capacity that had been curtailed in 2015, was successfully completed on budget and ahead of schedule in early 2019. The second phase of the project involves the rebuilding of the pots from the two potlines that had continued to operate past their expected life cycle and the implementation of certain new technology across all production. These two potlines were taken out of production in February andSeptember 2019 , respectively. The rebuild of the first of these potlines was completed in the second quarter of 2020 with total project costs to date of approximately$108.3 million . OurHawesville facility experienced several equipment issues in lateDecember 2020 that partially reduced the plant's production level; however, we expect the process of returning to our planned operating level of 80% of capacity will begin early in the second quarter of 2021. The rebuild of the fifth and final potline and the completion of the technology upgrades is expected to be completed over the next several years subject to market conditions. InMay 2018 , we temporarily curtailed one potline at ourSebree aluminum smelter due to an equipment failure.Sebree was returned to full capacity by the end of the third quarter of 2018. As ofMarch 31, 2021 , the claims process was concluded and we received all$21.3 million in insurance proceeds to offset against such losses. In 2011, our Board of Directors approved a$60.0 million common stock repurchase program and subsequently increased this program by$70.0 million in the first quarter of 2015. Under the program, Century is authorized to repurchase up to$130.0 million of our outstanding shares of common stock, from time to time, on the open market at prevailing market prices, in block trades or otherwise. The timing and amount of any shares repurchased will be determined by our management based on its evaluation of market conditions, the trading price of our common stock and other factors. We made no repurchases during the years ended 2018, 2019, and 2020. As ofMarch 31, 2021 we had$43.7 million remaining under the repurchase program authorization. The repurchase program may be expanded, suspended or discontinued by our Board, in its sole discretion, at any time. InNovember 2009 ,Century Aluminum of West Virginia, Inc. ("CAWV") filed a class action complaint for declaratory judgment against the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial andService Workers International Union ("USW"), the USW's local and certain CAWV retirees, individually and as class representatives ("CAWV Retirees"), seeking a declaration of CAWV's rights to modify/terminate retiree medical benefits. Later inNovember 2009 , the USW and representatives of a retiree class filed a separate suit against CAWV,Century Aluminum Company , Century Aluminum Master Welfare Benefit Plan, and various John Does with respect to the foregoing. OnAugust 18, 2017 , theDistrict Court for the Southern District of West Virginia approved a settlement agreement in respect of these actions, pursuant to which, CAWV agreed to make payments into a trust for the benefit of the CAWV Retirees in the aggregate amount of$23.0 million over the course of ten years. Upon approval of the settlement, we paid$5.0 million to the aforementioned trust inSeptember 2017 and agreed to pay the remaining amounts under the settlement agreement in annual increments of$2.0 million for nine years. AtMarch 31, 2021 , we had$2.0 million in other current liabilities and$7.7 million in other liabilities related to this agreement. We are a defendant in several actions relating to various aspects of our business. While it is impossible to predict the ultimate disposition of any litigation, we do not believe that any of these lawsuits, either individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or liquidity. See Note 10. Commitments and Contingencies to the consolidated financial statements included herein for additional information. Capital Resources We intend to finance our future capital expenditures from available cash, cash flow from operations and if necessary, borrowing under our existing revolving credit facilities. For major investment projects we would likely seek financing from various capital and loan markets and may potentially pursue the formation of strategic alliances. We may be unable, however, to issue additional debt or equity securities, or enter into other financing arrangements on attractive terms, or at all, due to a number of factors including a lack of demand, unfavorable pricing, poor economic conditions, unfavorable interest rates, or our financial condition or credit rating at the time. Future uncertainty in theU.S. and international markets and economies may adversely affect our liquidity, our ability to access the debt or capital markets and our financial condition. Capital expenditures incurred for the three months endedMarch 31, 2021 were$2.3 million , excluding expenditures of$5.1 million associated with the restart project at Mt. Holly. We estimate our total capital spending in 2021, excluding the Mt. Holly restart project, will be approximately$25.0 million related to our ongoing investment and sustainability projects at our plants. 35
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