Century Aluminum Co (CENX) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the third quarter 2017 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Peter Trpkovski. Please go ahead, sir.

Thank you, Greg. Good afternoon, everyone, and welcome to the conference call. I'm joined today by Mike Bless, Century's President and Chief Executive Officer; and Shelly Harrison, our Senior Vice President of Finance and Treasurer. After our prepared comments, we'll take your questions.

As a reminder, today's presentation is available on our website at www.centuryaluminum.com. We use our website as a means of disclosing material information about the company and for complying with Regulation FD.

Turning to Slide 2, please take a moment to review the cautionary statement shown here with respect to forward-looking statements and non-GAAP financial measures contained in today's discussion.

With that, I'll hand the call right over to Mike.

Thanks, Pete. Thanks to all of you for joining us this afternoon. If we can just turn to Slide 4 please, I'll give you a quick update on the quarter.

We're very pleased with the progress we made during the last several months. Importantly, our safety performance has been generally very good across the company. All plants have been stable and performing well. And the financial performance came in precisely as we predicted. We saw excellent operating leverage on the increase of revenue, very good product mix. We believe this continues to validate the investments we've made in our value-added product strategy and very strong cash flow conversion, if you've had a chance to look at it.

The industry environment remains volatile on multiple fronts. I suppose that's an understatement. Pete is going to give you some more detail on the macro situation in just a moment. But let me make just a couple of points to put the rest of my comments into context.

The fundamentals, we believe, remain reasonably positive. Demand is holding up well in almost all regions. It's clearly the case in our markets in the U.S. and in Europe. Identified inventories are down significantly across the world. And even so-called hidden stocks are being chipped away.

When we talked to you last, the metal price had been strengthening. And obviously, then it took a leg up in August and September. It seems now to be holding at or above $2,100; in fact, today nicely above.

A significant new development since we talked to you last time is the alumina price. The index skyrocketed from around $300, where it had been stuck for some time, to almost $500 a ton now. All that happened in just a couple weeks' time, beginning a couple weeks ago.

As you may remember, we saw a similar pattern in the fourth quarter of last year. As we expected, the index price fell early in the year this year. And like last time, we don't think the current situation is sustainable for a couple of reasons. Let me go through them.

First, you need to understand why this has happened. As those of you who follow these markets know, this index represents a very thin market of traded alumina. And thus it exhibits really poor price discovery. It thus can move significantly based upon the small number of buyers and sellers in this market, and that's precisely what happened here.

Several refineries in China curtailed ahead of the closures of smelters that obviously we're seeing now. And a number of smelters in China and also in India got very short on alumina. They needed to find cargos literally at any cost for the obvious reason. And that created the predictable herd mentality.

In addition, the smaller part of the price increase is in fact explained by a cost push. Caustic soda, of course, the key raw material in the refining of bauxite into alumina, has recently hit recent highs. Again, as those of you who follow these markets know, it's a very volatile commodity. In recent memory, this commodity has traded as low as 0; i.e., you could pick it up for free from the suppliers.

Second, the world has plenty of alumina, even with the curtailments in China. This is especially true in the Atlantic. Of course, we procure all of our alumina both for our U.S. plants and for Iceland in the Atlantic Basin, where we recently had a 1.6 million-ton refinery restarted in Jamaica. The owner of this refinery said they're considering building another larger refinery in Jamaica. We're hearing increasing rumors of capacity restarts in other parts of the Atlantic region. And thus, we believe the medium- and long-term supply-demand equation in alumina is quite favorable.

Last, the current economics are simply not supportable in the current environment. The current index price implies well over 22% of the LME price, which is just not sustainable on a fundamental economic basis. If you look back over the last couple of years, the historical relationship has moved around between, say, 15% and 18%. And at the current metal price, this implies an alumina price in the mid-$300 per ton.

We've also seen a run-up in other commodities that we believe isn't sustainable, the most significant example being calcined petroleum coke. Again, this is driven by the rapidly changing environmental rules and other conditions in China. We're confident these commodities will return to historical relationships in the not-too-distant future. But at their current values, obviously this environment will squeeze our cash flow somewhat versus what it would normally have been, with an LME around $2,100 or above. And Shelly will give you some detail on the raw material impacts, both in the third quarter and our forecast for the fourth quarter, in just a moment.

Moving along, quick update on the trade front. The administration has been quite up front about where it sees this issue in its list of priorities. We know they continue to work hard on several potential avenues, they've been in touch with us on a frequent basis. In addition, you've recently seen some key members of Congress anxious for a resolution on this matter. We believe the administration remains absolutely committed to making sure the playing field is level for the long term. And we continue to believe it's critical that there's follow-through on the already-announced actions, the major ones of those, of course, being the filing of the WTO case earlier in the year and the President's order under Section 232 a couple months ago.

Moving along, all operations, as I said, have been stable. Been operating with good production metrics, and importantly improving through the year. And I'll give you some more detail on the operations in just a few moments.

There is a new operational challenge that's emerged over the last couple months. This is one over which we had no control, but we need to make sure that you understand how it affects us. It's been widely reported on. And this is the problem with the 2 locks, Locks 52 and 53, on the Ohio River. You've probably read -- it's, again, been written extensively in even the popular press. Several mechanical and other failures have left the river unpassable for significant periods of time. So it's really a significant, significant condition.

Like thousands of other industrial agricultural companies, we depend on the Ohio for our logistics. For example, it's the only means by which alumina has historically been transported to our Kentucky smelters. Goes without saying, a catastrophe ensues if an aluminum smelter runs out of alumina. So we've thus been forced to find alternate means to mitigate that huge risk.

The principal thing we've been doing, we've been unloading barges downriver of the blockage. The blockage has now been fixed. The river traffic is flowing again, but this condition did exist for several weeks. We were unloading alumina downriver of the blockage and transporting the last distance to the plant by truck. This requires a significant amount of vehicles. Just to give you a sense of the math required, one barge holds 1,500 metric tons. And that's enough to supply our 2 Kentucky plants -- well, just shy of enough to supply our 2 Kentucky plants for one day. The 2 plants at their current production rate use just shy of 1,700 metric tons a day.

So the barge holds 1,500 metric tons; a truck can take 20 metric tons. So you get a sense of the logistical challenges. We've had 75 trucks on given days going back and forth, just to keep the plants on a pari passu basis.

We have other mitigants as well. We can take extra cargos, if need be, in Charleston, South Carolina, and rail the material to Kentucky. Charleston is where we, of course, unload ocean-borne alumina from Mt. Holly. These measures during the last month, month and a half, combined with some of our barges actually getting through the locks, has kept the plant stocked. But it will result in some increased logistics costs during the fourth quarter. Shelly will give you some detail on that in just a moment.

Okay, moving along, as you may have read, a federal judge about a month ago in South Carolina did dismiss our antitrust lawsuit against the state power company. We studied the order very carefully, as you would hope. And we do respectfully believe the decision was incorrect. We continue to strongly believe the power company structure today is not in compliance with antitrust laws. Those laws are quite clear: The entity must be actively supervised to be exempt from the antitrust laws. That's clearly not the case here. So we do see a real path in an appeal to the Circuit Court. And that's what we're in the process of doing.

We do continue to believe, however, that the right path is to reach an agreement that will support the restart of the second potline. As you know, for the last almost 2 years, 1 of the 2 potlines has been curtailed, so the plant has been running at 50% capacity. We're absolutely convinced that a simple structure exists that will allow Mt. Holly to purchase all of its power needs at full capacity in the wholesale market. And at the same time, that structure would keep the power company absolutely whole versus the revenues they're receiving from us today.

Time is of the essence here. As you know, our current agreement with the power company expires at the end of 2018. Thus, we need to reach an agreement with them by early this coming year, so that we can procure additional power for the post-2018 period. An agreement like that would allow the restart of the second potline, and it would create immediately 300 very good jobs at the plant, and even more indirect jobs throughout the region.

We're very hopeful that the power company management will look at the facts on an objective basis. As we've maintained, there's only economic logic for the restart of the second line at Mt. Holly if we can get to 100% market power for the entire plant.

It's a very different situation at Hawesville. Power prices continue to be quite favorable in the U.S. Midwest. Just to remind you, those of you who've been following the company know we've been operating 2 of 5 potlines, so 40% of capacity at Hawesville for almost the past 2 years, for just about the past 2 years now, frankly.

Again, power markets continue to be good in the U.S. Midwest. The delivered price has decreased every quarter to Hawesville this year, versus it increasing throughout the year at Mt. Holly. We believe the situation will continue in Kentucky. The fundamentals are good, and the power markets are stable. And thus, we believe is a growing case to restart some capacity at Hawesville. We're right now doing some preparation work in that regard. Our technical people have developed a new cell design that should enable us to squeeze more performance out of this older technology pot.

Just to remind you, we'll need to rebuild, whether we restart 1 line or 2. We'll need to rebuild a significant number of cells, as we've been cannibalizing cells in each of those curtailed lines to feed the lines that have been running the last 2 years.

We're going to be test-grading this upgraded pot technology over the coming months to confirm that the benefit is truly there. Using this upgraded technology, the restart costs would be somewhat higher than using the current technology. But the IRR is significantly better and even a simple payback shorter. This next couple of months, while we're doing this testing, will also allow, hopefully, the Ohio River operations to stabilize and the alumina market to settle down.

And with that, I'll turn you over to Pete to go through the industry.

Thanks, Mike.

If we can move on to Slide 5, please, I'll take you through the current state of the global aluminum market. The cash LME price averaged $2,011 per ton in Q3, which reflects a 5% increase over Q2. Shelly is going to provide the quarter-over-quarter impact on realized prices.

The LME price on a 2-month live basis was pretty flat quarter-over-quarter, at around $1,900 per ton. In the last month, aluminum prices have broken through the 2,100s, a level we haven't seen since late 2014 and, as Mike said, are currently sitting right around $2,175.

In the third quarter, regional premiums average approximately $0.08 per pound in the U.S. and $141 per ton in Europe. However, premiums have ticked up and are currently approximately $0.095 per pound in the U.S. and $155 per ton in Europe.

In the third quarter of 2017, global aluminum demand grew at a rate of almost 6% as compared to the year-ago quarter. We saw 7% year-over-year demand growth from China, 4% growth in Europe and 3% growth in North America. Global production growth was up 7% in Q3 versus the same period last year, driven almost entirely by increases in production of China, which increased 13% year-over-year. As a result, for the first 9 months of 2017, the global aluminum market recorded a modest surplus of approximately 50,000 tons, a nearly balanced market.

As discussed last quarter, since the U.S. has taken specific action upon WTO trade case and launching the Section 232 investigation earlier this year, we have begun to see some initial positive supply-side responses from China. The first response, announced shortly after the WTO case was filed in January, is the winter heating season curtailment program managed by the Ministry of Environmental Protection.

Under this program, aluminum producers, as well as alumina and petroleum coke producers in certain provinces in China, will be required to curtail 30% of their production during the winter heating season lasting between mid-November and mid-March. Given the timing of this program, we have yet to see if and to what extent the cuts will be enforced. But we have certainly begun to see the price of alumina and petroleum coke rise significantly in anticipation of these cuts.

The second response, announced shortly following the initiation of the Section 232 investigation, was initiated through the National Development and Reform Commission and requires the curtailment of illegal, unpermitted production in several provinces. In order to restart this curtailed capacity, producers will need to obtain new licenses or purchase new licenses from curtailed legal capacity.

Given the attempt at supply-side reform in China, experts are now predicting a 2017 global market deficit of up to 525,000 tons, an almost 2 million-metric-ton deficit in the world excluding China. The implementation of these supply-side reforms in China remains uncertain, and we believe the Chinese overproduction still needs to be addressed with concrete actions and clear remedies.

While these cuts are helpful, Chinese production still will expand in 2017. And much of this production remains uneconomic without continued Chinese government subsidies. We continue to believe that the industry must remain vigilant in pursuing remedies resulting from the ongoing Section 232 investigation and WTO trade action or otherwise to ensure all participants are operating on a level playing field.

And with that, I'll hand it back to Mike.

Thanks, Pete.

If we could turn to Slide 6, please, just a couple details on the operations. Some of this stuff I've already gone through, so I'll go through it reasonably quickly.

As I said earlier, we have generally a few very good months on safety, specifically in the U.S. plants. And we're especially proud of the performance over the summer there. As you know, all of our plants are in parts of the country that get very, very hot during the summer. Hot and humid, I should add. And we had 0 recordable incidents over the summer months due to heat stress, which really is an admirable result, and we're very proud of the folks who -- the previous [stat] result in our U.S. plants.

Production, as I said, was generally good. That small issue there that you see at Hawesville was produced by a small number of cells during the middle of the quarter that weren't operating. This was due to some crane issues that we had in the middle of the quarter. And the crane damage caused the repair of failed cells to get bogged down for a few weeks. That problem is now solidly behind us.

Production metrics, as I said, were quite good across all of the plants. I don't really have anything to add there.

Let me just give you a little detail on what went on in conversion costs. So you see that increase in Hawesville there. About half of that is raw materials, principally coke and pitch. And the other half are the beginning investments to which I referred in beginning to prepare the plant for a restart of one or more potlines.

At Sebree, that entire increase that you see there is raw materials. And at Mt. Holly, that improvement there, about 1/3 of that improvement is the early benefit of our recent SAP conversion from the old business system at Mt. Holly. The remainder is really spread over a variety of items.

And with that, I'll turn it over to Shelly.

Thanks, Mike. Let's turn to Slide 7. I can walk you through a few high-level points on third quarter results.

On a consolidated basis, global sales were up 3% quarter-over-quarter, reflecting an increase in shipments and increased value-added product sales. Higher shipments in Q3 primarily relate to a reversal of the timing impact we discussed last quarter. On a land basis, the LME and regional premiums were fairly flat with what we saw in Q2. But our realized price per ton was up about 2%, reflecting the increase from value-added products.

Looking at operating results, adjusted EBITDA was $48 million this quarter. And we had adjusted net income of $0.15 per share. Adjusting items this quarter primarily related to the mark-to-market of our remaining forward sales contracts and onetime noncash gain related to the settlement with the Ravenswood retirees.

Okay, let me take a moment here to give you some background on this gain. Accounting rules required that the original accrual for the retiree settlement be booked on an undiscounted basis, because the agreement had not yet been fully approved by the court. In Q3, the agreement was officially approved, at which point accounting rules require the liability be adjusted to reflect the discounted amount. This resulted in a reduction in the liability and a $5.5 million noncash gain.

During Q3, we had a $5 million realized loss related to our LME hedges that settled during the quarter. As we discussed on our last call, we don't adjust EPS for realized losses on our hedges. So our bottom line, both reported and adjusted, reflect the loss incurred on hedges that settled in Q3. In Q4, we'll settle the last of these hedges. So you'll no longer see these losses in 2018.

Turning to liquidity, cash increased by $43 million to $174 million as of September 30. And availability under our revolving credit facilities was essentially flat, at $137 million. We're very pleased with the strong cash flow generation in the quarter. And I'll talk about this in more detail in a couple slides.

Okay, let's go to Slide 8, and I can walk you through our Q-to-Q bridge of adjusted EBITDA. During Q3, we've reduced $48 million of EBITDA as compared to $34 million in Q2. As we anticipated on our last call, we had a $14 million increase in EBITDA driven by the effect of lower lagged alumina prices, partially offset by higher coke and pitch prices. We also had a $6 million improvement driven by higher shipment volumes and value-added products, partially offset by a $5 million increase in other costs, primarily a result of higher SG&A.

Based on the forecast we provided at the beginning of the year, we anticipate that SG&A spending will be about $10 million per quarter. Q3 was higher than average due to several ongoing projects, including the relocation of our IT department to be closer to a large talent pool. As we've discussed on previous calls, we're in the middle of a multiyear upgrade of our SAP systems, which can cause some lumpiness in our SG&A costs for items that aren't capitalized.

As Mike mentioned, raw material prices continue to climb, and alumina prices have risen dramatically. For Q4, we expect the EBITDA impact of raw material cost increases to be around $20 million. This is made up of about $15 million for higher alumina costs and $5 million for other raw materials, primarily carbon-related. For alumina, the $15 million includes both the impact of the price increase to about $340 per ton on a 3-month lagged basis, as well as about $4 million for additional transportation costs due to the river issues that Mike talked about. Based on what we know at this point, we don't anticipate any further costs related to the transportation issues beyond this $4 million in Q4.

On the revenue side, we've seen LME prices continue to move up nicely and expect the increase in a 2-month lagged LME will drive about $30 million in additional EBITDA for Q4, more than offsetting the cost increases.

Okay, let's turn to Slide 9, and we'll take a quick look at cash flow. We started the quarter at $131 million and were able to convert almost all of the $48 million EBITDA into cash on the balance sheet. Capital expenditures during the quarter were $5 million, bringing us to a total of $24 million year-to-date. For full year 2017, we continue to expect CapEx to be around $30 million.

We also paid $4 million for LME hedge settlements during the quarter. And as LME prices remain near quarter-end levels, we'd expect to pay an additional $6 million for hedge settlements in Q4.

As I mentioned earlier, the court formally approved our proposed settlement with the Ravenswood retirees in September, and we made the first installment of $5 million. Our next payment under the settlement will be in September 2018, at which point we'll pay $2 million per year over the next 9 years, for a total of $23 million.

Lastly, we had an $11 million cash inflow from working capital reductions in Q3. For the fourth quarter, we're not anticipating any material changes in working capital, other than normal quarter-to-quarter swings due to timing of collections and payments.

And with that, I think we can open it up for Q&A.

Thanks, Shelly.

Greg, if you could go ahead and kick off the Q&A, please?

(Operator Instructions). And our first question comes from the line of Jorge Beristain with Deutsche Bank.

I just wanted to clarify again a little bit of that commentary on the alumina. So basically, because of the lag effect, you're kind of locked already for upcoming 4Q results. I just wanted to understand, though, based on where we're seeing market rates of alumina, if you could kind of talk about when we would start to see the impact possibly into 1Q results, and maybe what you're penciling in for 1Q.

Yes. Thanks, Jorge. You're absolutely right. So we are locked. I think we have enough information based on the historical pricing and the pricing mechanism that you just cited. And as we said, the way -- it's a little bit different every quarter, I'll call it the inventory effect. But it generally lengthens it out to something close to 3 months, 2.5 to 3 months is where it generally lengthens it out. So as Shelly said, we can with reasonable accuracy predict Q4.

Q1 is a crapshoot at this point in time, depending upon where the index heads here. If it were to stay at the current rate, it would have a material and significant effect.

Right, right, as I mentioned…

So in Q1 -- go ahead.

Yes. So Q4, the underlying price will be that lagged $340. But year-to-date, Q4 actuals, which will drive Q1, again, as Mike said, if it stays at this level, we're at an average of $460 roughly quarter-to-date. Obviously, we're early in the quarter right now, but significant impact.

So $340 to $460, $120. You can do the math. We use -- we don't want to predict production for next quarter, we don't generally do something like that. But you can just use the shipment tons as a proxy for production this past quarter, Jorge, 185,000 tons, 1.92 tons of ore per ton of metal, and do the math; it could be significant, if the market stays where it is.

Right, that's what I was trying to understand. (inaudible)

Now on the flip side (inaudible)…

That we should be aware of in terms of maybe lagging the index a little bit, or maybe having some inventories, or if there would be anything else that would mitigate sort of the raw market price effect that we would get off of the index?

No, the only -- no, not inside alumina itself, if I understand your question. The only mitigant, of course, is the same favorable lag, quote-unquote, that we'll continue to experience in the LME price itself, if the LME price stays where it is. So the actual price that Shelly referenced, that we can use to predict Q4, was our average LME price, Shell, of --

Just under $2,100.

Just under $2,100. And we're just shy of $2,200 today. So we'll have that same headwind, get this right, that we'll have on alumina. All else being equal, with spot prices today, per your question if I understood it, were to persist for the rest of the next quarter, the next 2 months, we have a tailwind on the metal side.

Got it. And if I could just maybe ask about the Santee Cooper situation, it did not seem like the judge threw off favorable comments. I think he was almost of the position that he would be fine with your plant filing for Chapter 11. Could you just kind of discuss, if you were to be allowed to exit their monopoly pricing and, as you said, get, quote-unquote, market power, would that have a negative impact on consumers? Because it seems like the utility's position is, if they were to sort of effectively lower your rate, they would have other customers have to pay more.

Thank you. Not one bit. Again, the math goes as follows, just to deconstruct it a little bit, or the structure goes as follows. And without being precise on the math, given that it's a private contract, of course -- today, we're paying them two revenue streams. One revenue stream is a transmission fee on the power that we're importing from outside of their system. That's 3/4 of the power we're using today or 150 megawatts. And the second revenue stream is a demand charge; i.e., a capacity charge or a demand charge, a fixed charge on the power they're selling to us directly. We're assuming that -- not we're assuming, we know that they never make a profit or a loss on the energy that they sell us. We pay the energy costs, so we're paying the demand charge. So two energy streams. What we're proposing and have been proposing for the past several years is that we'd like to import all of the power acquired to run the plant, so 400 megawatts. We would pay them that same per-unit per-megawatt hour transmission fee to import all the power, and that that fee, compared to the two revenue streams in aggregate we're paying today, would be essentially equal. So rate payers -- the power company and obviously the rate payers -- because the rate payers are the power company here, it's obviously a state agency -- would be at par with where they are today.

Next, we turn to the line of Novid Rassouli with Cowen and Company.

Michael, on the release, you guys had mentioned the distorted relationship between the LME and key raw materials. I was wondering if you could just expand your thoughts here and, I guess, give us a sense of whether you're expecting LME prices to rise or raw materials to fall. I'm just trying to get a sense of, do you think LME moving up from here to kind of normalize that ratio is unreasonable? Just any of your thoughts there would be helpful.

Thanks, Novid. That's a tough one, I don't want to duck it. But you're really -- what we do know is that because of the structure of the industry, the cost structure of the industry, I should say, that the current relationships can't persist because the industry as a whole, even the better parts of the cost curve, can't bear these kind of relationships, where coke is right now and where alumina is right now. Those are the two principal drivers. Where the adjustment is going to be, it's usual in the business and in life, it's probably -- it could be some of both. On the metal price, it really does depend, really does depend -- not to try to dumb it down or oversimplify it -- on the development in China here. I mean, everything else -- and at the risk of oversimplifying it -- is really just noise. But you've seen the price here start to react to perhaps a growing consensus, all the dangers of consensuses, that maybe these cuts are for real. And maybe these market deficits -- as Pete said, the non-China deficit is significant, it's a couple million tons. And if China now is going to, through these actions, get to something close to a balance, you could see -- we think you could see similar upside to metal price. It's not a prediction, there were a lot of ifs in there. Clearly, if -- and we think, certainly not a failsafe, but we really do believe what we said, is that the government, the Administration, is committed to this. It's clear, this was one of the important things that the Administration talked about in the early days. And we take them at their word, they are committed to this. So I guess the way we -- one way to look at it is, one way or another, that situation; i.e., the excess, subsidized, illegal, capacity, all of the above, has got to get worked out, one way or another.

Got it. And then, just switching gears over to China -- so you spoke about alumina being plentiful. And so if we see the kind of bauxite mining and alumina refining restrictions that we've seen in China, and there's actually longevity there, does that preclude alumina from moving back down to kind of a $350 level that you said would be supported by the current LME-to-alumina ratio? Or maybe you'd just give us your sense of that, if these regulations are here to stay.

That's a great question. We really think that the alumina situation here -- I talked about the timing, but let me expand or expound on the timing a little bit -- is really just due to the winter cuts. So you see the winter cuts obviously, as they've been well talked about, coming on the smelting side. What's been -- I suppose other than in the strict trade press, quote-unquote, is the alumina cuts. Obviously, they cut refining capacity in anticipation of the smelter cuts, number one. And number two, it's outsized alumina versus aluminum. Because if you just look at the map, and you put a dot on each map for a location of a refinery in China versus a smelter, you'd see a much greater concentration of the refineries in the parts of the country; i.e., the East and the Northeast, where there are, quote-unquote, pollution problems related to the winter heating degree days. So a disproportionate amount of alumina is coming off, just given where those refineries reside.

Got it.

Ultimately, we believe that wherever the smelting capacity settles; i.e., where the cuts settle, the refining capacity in China -- because that alumina doesn't go anywhere else -- will adjust to feed that smelting capacity. And we've just got a little bit of a timing dislocation now.

And do I dare ask you how long you think this dislocation will take to dissipate? You kind of led me to the question there, Michael.

No, it's okay, it's a good question. Is it months and months and months and months and months? It could be. Is it a year? No, it can't be. Because the situation can't persist. But could it be months and months and months? I mean, a similar dislocation for a different set of factors, driven by a different set of factors, as you recall, happened last year. We were quite confident, as you may remember us saying, that the situation had to work itself out and, in fact, did. The price fell precipitously almost as soon as the year turned. We're not predicting anything in terms of timing similar here, because it's a different set of facts and circumstances. But the relationship just can't hold, to your point. It's got to go one way or another.

And next, we turn to the line of David Gagliano with BMO Capital Markets.

I just wanted to drill down a little bit more on a couple of topics. I'll save alumina for later. First on [hard sell on the] restart commentary -- could you just remind us again what, first of all, the annual production capacity of each potline is?

50,000 tons per line. So there's 100,000, David, producing now and 150,000 off. It's ratable, 50,000 tons (inaudible).

And then, on the cannibalization of some of the cells, I know it's early days, but you mentioned (inaudible) higher than typical. Can you, order of magnitude, what the restart amounts would be?

Yes. I mean, we've talked about this in the past. So depending upon which line we restarted and when we restarted it, the restart costs for each line, before cell rebuild -- restart costs being deferred maintenance and hiring and training, all that -- is several, several, several millions of dollars. And then you put the restart costs in. You have to rebuild, say, 100 cells per line, that's a $10 million investment as well. So you're up -- let's say you were talking about two lines. You'd be talking about a couple tens of millions of dollars. And then you might increase that by -- again, depending upon where we settled out, and without getting into the way the cell is rebuilt in the current technology versus the (inaudible) -- there's more and more expensive materials, I guess, is one easy way to say it, in the upgrading technology. You could be looking at a 40%-ish increase there. So you could -- if your question, David, is aimed at capital requirements or cash requirements, you could be looking at -- if we were to restart two potlines simultaneously, which is by no means -- it's certainly not required, and it's by no means an obvious conclusion -- you could be talking about a $40 million, $50 million investment.

Okay, and have (inaudible) idled lines.

Correct. Now to remind you, two of those idled lines are capable of producing high purity. And the newest line, line 5, is not capable of producing high purity. So that's why, as I was describing this earlier, I talked about one line or two. I would never say never, that the plant would operate at all five lines again. Because, of course, that's when you get your best leverage of your fixed cost, your best cost structure. But I think the way we're thinking about it now, and as we would ask you to think about it in the near future, meaning, let's make it a year even, is one or two lines restarted.

Okay. So that was my other question. So I think (inaudible) 12-month sort of lead time?

Yes. I mean, the way the timing work -- and that's what you're asking, David, is -- so we would take the next couple months to, in essence, prove these cells, to put them in technologies to service, to let the pot operate for a couple months, and then to cut it out, literally to cut the pot out, tap all the metal out, and then do an autopsy to look at the insides of the pot to see how the new technology held up against the stresses of the smelting process, of course. Then, assuming we're a go, and industry conditions dictate we're a go, obviously we would let our -- we'd let you guys know. At the time we fired the starter's pistol, you're probably looking at 6 to 8 months. I mean, just ordering cathode blocks -- that's the material that lines the cells -- that's probably the longest lead time item in the market right now. That's that sort of 6-, 7-, maybe even 8-month lead time. We do have a little bit of inventory on hand, but not much. We extend it out, as you would expect. So if you want me to take it to the very end, you might be seeing production towards the end of '18 and certainly going into full production in '19. Production on however many potlines we were to restart.

Okay. Perfect, thank you for that. And then, Mike, sorry, last one on that.

That's all right.

Would those be the high-purity lines that you're looking at restarting? (inaudible)?

Yes.

Okay, right. Then, switching over to alumina -- I don't want to beat a dead horse. I just -- given all the volatility, and given, I think, a lot of people trying to calibrate their models based on where we are now, and kind of that sort of math, you have one quarter lag (inaudible) alumina price was roughly $295 (inaudible). Shelly mentioned the $340 number earlier. I'm just wondering, what alumina price actually flowed through the cost of goods sold in the third quarter?

Yes.

Right. So Dave, that would be inconsistent with your $295. They look back to the Q2 average price, and that is roughly what flowed through our Q3.

$340 was for Q4.

Got it.

Sure. Look, you're not beating a dead anything, this is critical. And I think it's probably -- it's complex. And as you look at all the moving parts of our how our cost structure works as it flows forward, it's important to us that everybody have a good understanding of this. So please don't be shy.

I'm not shy.

I know. I know.

And next, we turn to the line of John Tumazos with John Tumazos Very Independent Research.

I don't mean to be too shy, but I don't know a lot about river locks. How long do they take for the Army Core of Engineers to fix? Would it be like a 2-week thing, or 2-month thing?

Thirty years. And here's the answer -- thank you, John, for that straight-man, straight-person question, that was excellent. So you can just go ahead and Google Ohio River Locks 52 and 53, you'll find hundreds of articles in the last couple weeks. In fact, there was a -- hate to cite any one media -- there was a New York Times, may've been front page, but a prominent New York -- yes, it's a front page article, when this got really ugly a couple weeks ago. And talking about, as you would suspect, the aging infrastructure of our company, especially given that the Administration has talked -- of our country, thank you, Shelly -- especially given that the Administration has talked about infrastructure. The reason for the flip answer of 30 years is that the Army Core of Engineers had designed and proposed a replacement for these locks in 1988. And so that's how long it's been known that we had a problem here. Over the last year, our operations people -- our COO took me through a recounting of sort of some of the minor mishaps over the last year here. But they had some reasonable problems, but nothing like has happened over the last month, where literally, for days and days and days and days at a time, the locks were closed. Just to give you a sense, at one particularly bad time -- got to remember here -- I believe there were 130 tugs stuck behind, each of those tugs is guiding six barges. So think about how many vessels that is that are literally queued up. It went back 34 or 43 miles, I can't recall. Forty-six? Thank you, 46 miles behind these locks. Just Google it, and you can see where these locks are. So John, that's perhaps more than you wanted to know. But that's the answer to your question. Oh, pardon me, the more salient answer to your question, is they now are almost completing -- the Core is -- the, hopefully, permanent fix, which is -- and that's why I said, which is slated for the fourth quarter late next year, late 2018. The traffic is flowing again. But that's why we've got all these contingency plans in place just in case, for the obvious reason.

Does it constrain Hawesville and Sebree?

Yes.

Both of them?

Yes, they're both upriver. They're both east of this problem.

And next, we turn to the line of David Lipschitz with Macquarie.

Have 2 quick questions. First, in terms of potential of restarts -- if we have the same market conditions today 3 months from now, is that something that -- what makes you go ahead or not go ahead in terms of market conditions to go forward? It seems like if aluminum is still at $450, $460, does that mean it's a no-go? But if it's at $350, like we're okay? Like what makes you make that decision?

$350, definitely. I mean, $350 in the current metal price, that's a sensible, if you just do the simple math, relationship between those two commodities. And it's a relationship we think is the right one in the medium to long term. And it's a relationship at which our cash flow would be very -- our EBITDA per ton, which is one of the key metrics that we use here, as you might suspect. And especially, David, the [incremental] marginal EBITDA per ton. Because again, you bring on those tons, and really all you're paying for is some additional labor but mostly just additional, of course, power and alumina and carbon; the materials that you actually use in smelting the ore into metal. And so absolutely. Now (inaudible) up to current conditions, that would be -- a deep breath -- that would be a tough one. I wouldn't want to give you a definitive answer either way, because I don't know. But it wouldn't be an obvious yes, David. It would not, by any means.

Okay. And would there be any thought of waiting to see how the winter cuts play out, like delaying till the spring and sort of seeing how this all sort of plays out before you made any decisions?

I think, effectively, the answer is, de facto, yes. I think effectively we will. Because the heating season is going to go on over the next 6 months. And so by the time we finish -- 4 to 6 months. The time we finish our R&D project here, I'll call it, we'll be into Jan and Feb. And by that point in time, we'll kind of know where things, if not have settled, where things seem to be heading in China. We, Century, will have more conviction, anyway, and hopefully the market as well, one way or another. And so yes, I think it'll all kind of come together, we believe, for us anyway, as it relates to the restart question during the first quarter of 2018.

And my final question is, in terms of if anode and all the other costs would stay where they are, how would that impact first quarter?

So if anodes -- calcite petroleum coke, I think, is what you're specifically talking about. Because our conversion costs in all of our [anode sites], but the ones that are integrated to our smelters in U.S. and (inaudible) in the Netherlands, and even our share of the (inaudible) in China, those don't change, of course. That coke is at least $100 a ton up today. So that's $50 per ton of metal, at about a 60% usage. And alumina we just talked about. (inaudible)

I was just wondering in terms of like, again, on a dollar basis, from a coke perspective.

Yes. So it's up versus where we are today, where we realized in the third quarter, probably -- just looking at my colleagues here -- $100? $80?

$50 to $100, close enough.

$50 to $100. And then, David, as you probably know, a typical smelter -- Pete's giving the thumbs-up here -- a typical smelter uses net -- I should give the net number, the net [cover] number, not the gross -- Shelly's correcting me here. So it's about [0.4% to] 42%, let's call it, of tons of carb anode per ton of aluminum. So you use that math times the -- so the price increase that we just cited at range, times that math, times our production in metal, to get to the dollars in millions impact from the carbon price, if that's what you're after.

Yes, that's what I'm asking.

Yes.

(Operator Instructions). And we have a follow-up from the line of David Gagliano with BMO Capital Markets.

Okay, just -- sorry, just another sort of (inaudible) type of question here. A lot of moving parts, input costs, everything, as usual. And I guess the basic question I'm trying to figure out here is -- lags, everything, set those aside, everything stays the way it is for as today, everything flows through, 6 months from now. In the current -- and everything's exactly the same in terms of prices. Would Century be cash flow-positive or be cash flow-negative?

Oh, sure. Positive.

That's a good answer, okay. That was a definitive answer, don't be shy. I like it.

That was an easy one.

Okay. So with current alumina where it is, aluminum where it is…

Yes. Oh, absolutely. Like marking everything to spot, David?

Yes, yes.

Oh, yes, absolutely. Yes.

And speakers, we have no further questions in queue.

We'd like to thank you all again for the time, and look forward to talking to you again in a couple months, and obviously [you have] follow-up between now and then. Take care.

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.