Century Aluminum Co (CENX) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Century Aluminum second quarter 2005 earnings conference call.

At this time all participants are in a listen-only mode. And later we will conduct a question-and-answer session and instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder this conference is being recorded.

And I would now like to turn the conference over to our host, the Director of Corporate Communications, Mr. Michael Dildine. Please go ahead.

Thank you, Rochelle. Hello, everyone. Welcome to the Century Aluminum conference call covering earnings for the second quarter of 2005.

Before we begin let me say that this conference may include forward-looking statements within the meaning of federal security laws. Century has based its forward-looking statements on current expectations and projections about the future.

However, these statements are subject to risks, uncertainties and assumptions, any of which could cause Century's actual results to differ materially from those expressed in its forward-looking statements. More information about these risks, uncertainties and assumptions can be found in our filings with the Securities and Exchange Commission.

Century does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date such forward-looking statements are made.

Before we get started I have a correction to announce. Net cash flow, net cash provided by operating activities in our cash flow statement, was transcribed incorrectly by Business Wire. The correct number for net cash provided by operating activities for the first half of the year is $58,724,000.

Now let's begin the conference call. Here is Century's Chairman and Chief Executive, Craig Davis.

Thank you, Mike.

For those of you listening today we are spread around quite a bit so neither David nor Jack or I are in the same place so if we have a little bit of hesitation we're trying to make sure that we move from one to the other/ Please excuse that. My principal focus today will be on the overall second quarter results and year-to-date and we'll go through our normal process of having David and Jack will update you on the other aspects of the Company and the business.

We had a solid second quarter and a very excellent first half. Our second quarter results were not as positive as we would have liked because of continuing operational difficulties at Hawesville.

Even with these issues our first half operating income of just over $80 million represents an all time high for the Company.

The aluminum markets remained fairly strong in the second quarter but were down from the first quarter. The alumina cash price declined approximately $0.05 during the quarter. We however believe that the supply demands fundamentals for aluminum remain positive.

Our focus continues to be on improving our operations and reducing cost. With the exception of Hawesville, all of our plants exceeded our expectations during the quarter.

As Jack Gates will describe shortly, we believe that we're on track to resolve the operating issues at Hawesville.

We executed a significant eight-year forward sale which will begin in 2008 during the quarter. By selling forward in a strong market we were able to continue our policy of putting a significant underpinning in place to protect the Company during a down market, while at the same time leasing a substantial amount of unpriced tonnage for the upside in stronger markets. David will cover this in more detail.

We continue to have good progress on the expansion project in Iceland. As you know we're expanding from 90,000 to 212, and in fact, I believe we will be ultimately going to 220,000 tons.

We remain basically on budget and on schedule. We also are actively pursuing additional opportunities in Iceland at this time.

David, now would you please cover the financial results for the second quarter?

Thanks, Craig.

Century reported second quarter net income of 40.7 million, or $1.27 a share. As indicated in the release, the mark-to-market adjustment on forward sales contracts added $0.49 a share to the results.

I will now briefly comment on income taxes, the change to the FIFO inventory valuation method, our performance in the quarter and finally, an update on our hedge position.

With respect to income taxes our normal tax rate is now in the 32 to 33% range instead of 36%. We are no longer accruing or assuming that Nordural earnings will be subject to U.S. income taxes.

The change from the LIFO inventory valuation method to FIFO had an immaterial impact on second quarter results, well less than a penny a share.

With respect to our performance price realizations were slightly lower in the first quarter as expected, as the alumina price of aluminum was lower. The midwest premium was also lower in the second quarter.

Our costs were basically where we expected them to be with the exception of Hawesville and Jack will comment on this in a few minutes.

As Craig indicated, in June we put in applies a significant eight-year forward sale that begins in 2008. The detail of our forward price sale position as of June 30, 2005 is included in the selected operating data accompanying the release.

Factoring in the natural hedge associated with our percentage alumina contracts, and the total arrangement and percentage electricity contract at Nordural, we are effectively hedged 53% for the second half of 2005, 44% for 2006 and 45% for 2007.

These percentages do not include the potential additional volume associated with the long-term contract we put in place in November of 2004. The percentages also assume that we renew our expiring percentage alumina contracts in 2007.

Jack Gates will now talk about operations.

Thank you, David.

I'll first go over the smelter operations. Ravenswood, Mt. Holly and Nordural smelters exceeded expectations during the quarter. Ravenswood and Nordural are on track for record production years.

Mt. Holly has recovered from its first quarter pot room and casting problems and metal production and shipments are back to normal ma'am.

While I announced in our first quarter conference call at Hawesville was improving [inaudible] to expectation in the second quarter, it's taken a little longer than I thought. Hawesville experienced more pot failures in the second quarter than projected and thus missed its second quarter production targets.

Hawesville has accelerated its pottery lining program and expects to be back to normal in pot count over the next several months. Operating efficiencies, which slipped a little bit in the second quarter, are back to normal now.

The second quarter was an excellent shipping period, shipping 339.5 million pounds leaving us with an ending inventory of only about one and a half days of production.

The safety performance in the first half of 2005 in all four smelters has been excellent as we continue to stress safety as our number one private. Hawesville and Nordural are exceeding their 2005 stretch safety goals while Ravenswood and Mt. Holly are just slightly over their goals.

Talk a little bit about the Nordural expansion.

As Craig has mentioned, the Nordural expansion continues on schedule and at budget. Projects pending to date totals $178 million while total commitment to date is 81.4%, or $378 million. The lining of the new cells has begun and the new 70,000 ton alumina silo is almost complete.

Also during the second quarter the Century board of directors approved $9.1 million for Phase IVB which will increase annual production by an additional 8,000 tons per year bringing the total rated annual capacity to 220,000 tons a year.

A little bit about our bauxite alumina operations

The bauxite alumina operations met most expectations with our biggest problem being the recent two hurricanes which affected mining operations in Jamaica. While there was no major storm damage, we did loss several days of mining due to the rain caused by the hurricanes.

During the quarter we also completed a multi-year bauxite supply agreement with a third party which will allow to us maximize bauxite production and also revenue.

The Gramercy alumina refinery continues to operate very well and projects to meet or exceed its 2005 projection goal. The demand for alumina hydrate remains strong which is reflected in higher pricing.

Just a brief comment about the market.

The second quarter began with the LME cash settlement price of $0.89.9 per pound with a midwest premium of $0.07.5 a pound. We saw some softening during the quarter, quarter ended at 78.5 and $0.05.4 respectively.

The market experienced softening in most sectors related to automotive but other sectors mainly aerospace, construction, rod and cable and general purpose remained strong. The softer market conditions had some effect on primary demands as scrap is more available and imported metal is arriving steadily.

I would mention that today's alumina price has moved back up to $0.82.8, but the midwest premium has dropped to [announced] at $0.04.4 a pound. Alumina stocks today went up 7,000 tons and ended at 533,000 tons.

Craig, I'll turn it back over to you.

Thanks, Jack. Rochelle, we'll now turn it over for questions.

Certainly. [Operator instructions] Our first question comes from the line of Tony Rizzuto of Bear Stearns. Please go ahead.

Hi, gentlemen.

Hi, Tony.

Hey, Craig. I'm just trying to figure out, just get a better handle on these issues at Hawesville with the pot line failures. And I'm also, in front of what is a labor expiring next year and also you've got obviously a lot of negotiations going on right now for power, at least one fourth of your power needs there. I wonder if you can discuss is there any inter-relation between these factors and the issues that you're incurring at Hawesville?

I'll try to discuss the inter-relation, maybe Jack has some further thoughts, but Tony, I don't really think they're inter-related. The situation at Hawesville I believe is more one of sort of the averages.

I mean we normally project certain pot failures and a pot count and sometimes it doesn't hit the average to, I guess to the get to the average you have to have times when it's more and times when it's less, and I think that's been the fundamental issue there. They also had a few problems in their efficiencies but I believe that's now been addressed.

But overall, I don't think there's any relationship between the other issues. Jack, would you add to that?

I agree, Craig, there's no relationship in the issues.

All right. Well if I can follow-up then, you guys obviously had a fixed priced contract that's going to expire at Hawesville for power. If you were to enter into an agreement today for one fourth of your power what would that do to your costs? Can you give me some kind of indication that'd be helpful.

Right now obviously the spot markets are pretty high. It would increase. I don't have a number and we haven't entered into anything at this point.

We're very closely monitoring the marketplace and trying to determine when we should look at putting in that open power, Tony, and also how long we want to go, whether we want to stay relatively short for a period of time or if the opportunity is there to go a little bit longer with a better price. And so I think it may be a bit early to give you a hard number in terms of the overall impact. I don't know, David, or Jack, do you have anything further on that?

I don't think so, Craig. Again I'd remind people that the power we're talking about is 2006 through ten. And we're working on the issue. We're trying to use the process within the state to see if we can get some relief from the very high rates that are right [inaudible] right now.

That's mostly a coal problem in today's world, I believe is what we're facing.

With the coal surcharge. So if you guys, I'm sorry I've not totally looked at the details here, but did you disclose or quantify what the impact of these maybe abnormally high pot failures were and could you, if you haven't could you quantify that for me, now?

David, do you want to.

Tony, I think that the loss production and extra cost is probably in the $3 million range pretax in the quarter.

That will revert back to more normal level in--

It should come back in hopefully most of it will come back in in the next quarter.

During the quarter we won't get it all back until the end of the quarter, I think, Jack.

That's correct. We're increasing our pottery lining program and as the quarter goes, by end of the quarter we should be very close to back to normal.

Okay. And then your utility down there is Big Rivers. Is that right?

Yes.

Great. Thank you.

Okay. Rochelle?

Okay. Thank you. And our next question comes from the line of Kevin Cohen of Credit Suisse First Boston. Please go ahead. Mr. Cohen your line is open.

I think we lost him.

He may be on mute. Okay, I'm going to release him and go on to the next. It's Barney Pollack of NWQ Investment Management. Please go ahead.

Yes, Marty Pollack. If I may on Ravenswood, just wondering if you can elaborate on what you know is Alcan's, or believe Alcan's strategy is? Clearly, we're assuming that with the current environment Ravenswood is making fairly good money. Perhaps if you could just comment on that.

I think in terms of Alcan, we can't really speak for Alcan. They continue to run the rolling mill, I think they're having a pretty good year and it's improved over what it had done in the last couple of years, but for the longer term we really don't know. We continue to deliver all the metal at the high-end of the contract. And again Ravenswood's having a very good year.

I think just in case you're not aware of the history of the situation with the rolling mill next door, we have put on our own casthouse, a very simple casthouse at Ravenswood so that if that rolling mill were ever to cease to operate we would cast it and sell the metal ourselves on the outside. There would be some, obviously some costs associated with that because we'd loss the savings of sending hot metal next door. But it's not a disaster, it just takes away some of our margin.

I'm just wondering whether you believe, though, that to your knowledge they're actually still required to divest that or deal with that?

No, to my knowledge they're no longer required to divest that because what they did was just hold off for virtually all their other rolling business. I think that's correct. Does anybody know it differently? So at this point they can keep it if they so desire.

The other question just regarding the small spread on midwest premium, what do you think accounts for that? I mean especially you're suggesting this is even with a little bit of a price move back into the low 80s.

I think it's a combination of freight differentials and availability of metal in the States. Jack?

I think the scrap is more in balance, I think that's having an effect, too. More scrap which is what drivers it down.

Which is really availability of metal but in a bit of a different form, but yes.

And just one last swing back to Hawesville. The issue of the reline, I'm just wondering if you assess the plant there overall, is there, while it may be one time in nature, is there a longer term strategy here to do more to upgrade the smelter there?

It's not so much in upgrading but Jack, why don't you try to answer that?

Marty, I'll talk to about it. It's the pot lining, I guess the good news in all of that is the excess sales that we lost were all old sales. We had a couple of issues that hit us this year.

Line five, which is a new pot line, was started in 1999 and if you do the math what happened is the original pots all got over 2,000 days old so you start trying to decide when you start taking out pots. So we got behind a little bit in the first quarter.

We caught up and then we had some equipment problems that caused some problems and we lost some but they were old pots so it's, I guess the only good news out of it the pots were old. We normally reline about nine a month and we got if we're having to line a few more that that, and of course, the weather's pretty hot right now so trying, we do most of the accessory lining on overtime, so it's just taking us a little while to get caught back up but we hope to be very close to normal as far as the number of operating pots by the end of the quarter.

And the equipment problem, I mean we're addressing or have addressed.

We've addressed that, yes.

It's more really when sometime the averages just work against you. You get a whole bunch of pots go at the same time so we will be a little bit behind until you catch up, and then the next time around you won't have so many fail and so you'll actually be operating at a higher level and over the years, of course, you end up with the average.

Okay. Thank you.

Our next question comes from the line of Wayne Atwell of Morgan Stanley. Please go ahead.

Thank you. Could you explain your comment about looking for other opportunities in Iceland?

Well, I mean we would like to do more in prime areas we've said, that's a basic part of our strategy, Wayne. And we have looked at what opportunities exist in Iceland. We're quite comfortable in Iceland. We like the business environment and so on. We have signed, which I believe was made public, what, two, three weeks ago, Jack?

Yes.

A letter of intent with a local community in the Southwest to work together to develop a greenfield project there. So that certainly is one of our focuses.

We have in the past looked at other parts in Iceland and we also have from time to time considered an additional expansion, a significantly large expansion at Grundartangi existing facility and that requires, again, new permitting and so on. So it's a combination of looking at those various things that really was behind my comment, Wayne.

If you were to do a greenfield would it be AP30 or AP50 and how large you think it might be and would you be 100% or have a partner?

You always ask a lot of questions at once. I don't think it would be AP50 but it's a bit soon. We haven't gotten to the point of saying exactly what technology we would look to use. And we might or might not have a partner.

It would it really depend on the size of the project or the natural size of the project and how all the pieces fall out. I mean you might end up taking a partner who provides technology, for example, but we haven't decided any of that at this time. We're quite flexible as to how we would do it.

Can you put a bracket around the potential size and capital cost?

I don't think I could do capital cost, now maybe Jack would attempt that one. But the size would be in the range of two to 300,000 [tons].

Yes. That'd be, that's in that range, yes.

And presuming this would require new power so it could be quite a long lead time, five, six years total.

It's a long lead time, that's correct. If you're doing a greenfield it would be quite long.

Thank you.

Thank you. Our next question comes from the line of Brett Levy of Jefferies. Please go ahead.

Hi. This is Jordan Halder for Brett. Just to follow-up on you guys went through the all new prices and where they're now. Do you just have some sort of outlook of where you think they'll be third quarter or where your realized price would be and any pick up from the automotive sector? You talked about some softness there?

Well, again, I mean, first of all we don't try to forecast these prices. I think you have to look at the global economy and the global supply demand situation which seems to have picked up a little bit in the latter part of the last quarter, which to us will be a plus.

Our realized price, you have two things you have to look at. One is the hedges we have in place and the second things is, our prices have a lag, sometimes they're prior months sometimes some of the contracts are prior quarter.

So it really depends. I mean the price is going to depend on all those things coming together and as the LME comes out over the quarter, but I don't think we would try to forecast where it will be.

Any kind of outlook on aluminum prices?

We follow it like anybody else. And the last time I looked at it, I have to confess it's been a little bit of time now, the spot prices were still relatively good and the long-term market is, I think, sort of trying to settle in and decide where really it's going to be and how tight the forward aluminum market's going to be. There seem to be two different views whether it's going to loosen up in a couple of years or that it will remain tightened.

At this point I'm not sure that, again, we have a certain view on that. In our case, since until we renew our contracts, our alumina is all tied up and the prices are all a fixed percentage of the LME other than Gramercy.

It's not a major impact today. It will be in the future when we start to renegotiate our contracts.

And just earlier you said the Nordural expansion's on schedule. Are you guys still guiding to a Cap Ex for '05 about 325?

I think that's right, David. We're pretty much on plan.

That's pretty close to where we think it will be.

Okay. Great. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Alex Latzer of Merrill Lynch. Please go ahead.

Thanks. Dave, you went over some of your hedge positions kind of there quickly there, but including the impact of the alumina, what did you say the percentage was in '07?

Okay, Alex, the percent for the remainder of '05 were effectively 53% hedged, for '06 we're 44% hedged, and '07 we're 45% hedged.

45%. Okay.

Now keep in mind that assumes that we renew our alumina contracts, that percentage of alumina contracts that --

As a percentage.

Yeah, as a percentage of the LME in '07. It also assumes that the additional tonnage, if you look at the table accompanying the release, it shows the additional tonnage that prices there at certain level, there can be some additional tonnage that would also increase those percentages. If we're in a very, very high market those percentages could go up slightly in those years in '06 and '07.

Okay. Thanks for that. As a follow-up here, you mentioned in your remarks, I believe it was Craig, on the bauxite production agreement and I wasn't sure if that was just sort of a basic agreement with Jamaica or whether perhaps had you some agreement to perhaps provide more bauxite in addition to what you're using at Gramercy and maybe you could clarify that?

We supply bauxite to a third party under contract and that's what Jack, it was actually Jack and that's what he was referring to. We have renewed that contract in the last month, Jack?

Yes.

And been very positive tonnage and a good price for the Company.

Okay. And so that's separate because you obviously supply alumina.

We supply bauxite to our own facility in Gramercy but we also supply to a third party.

Okay. Is there any volume increases implicit in that agreement or is it pretty much, in other words, are you looking for a potential would you interested in increasing your bauxite or is that pretty much for the --

We would be interested in increasing it, and I don't, Jack, you may want to speak to that, but we certainly, the customer would like more and we'd like to deliver more, it's a question of making sure that we can meet all the commitments that we would take on. Where are we in that, Jack?

We've got a plan together for 2006 to try to increase capacity. One of the issues has to do with mobile equipment. The mine, the mobile equipment in the mine was fairly ancient and we're replacing a lot of that.

As Craig mentioned, third party customer would like more bauxite and we think we can push up some more volume for the customer. They would like it and as soon as we can be assured of doing it we think the second half will be better than the first half of this year as far as shipments and we expect even a better shipment in 2006.

What order of magnitude Jack, are you talking about here, is it 10%, 15%?

We can be 10 to 15% more.

Okay. Good. All right. Thank you.

Thank you. And our next question comes from the line of Arthur Ross of Feneral Corp. Please go ahead.

Hi. Could you give us an idea as to what price these forward contracts are at? Then number two, what generally rate of return do you expect to earn of this $370 million of investing in Iceland?

Are you talking, Arthur, about the hedges?

Yes.

We don't disclose the actual price but what we have told people in the past, and I believe David is still consistent with this, is that we look to hedge against the forward screen. And so I think we said when we did it and we'll look the forward screen has been in backwardation during this period of time.

You get out to the far end of this, you don't have a screen but you have sort of a flattening out of the backwardation. And so we basically will, when we do hedge, first of all it has to meet our criteria of having a fairly strong price being basically beyond or equal to the our view of the long-term value of the commodity, and then we will hedge against the screen which is what we've done.

If one were to look in the period of time we did that and David can give you the dates, you can get pretty close but in terms of the exact number we don't have that in our public information. The second question was?

The possible rate of return on this $370 million investment in Iceland?

We generally look for [inaudible] in the range of 10 to 15% net. That's still in that range, yes, David?

Yes.

Thank you.

Thank you. Our next question comes from the line of Daniel Roling of Merrill Lynch. Please go ahead.

Thank you. A couple of thing going back to the Jamaica and the bauxite. David, you said 10 to 15% more than, what, second, or Jack, second half '05 or '06 better than first half of '05? What's the reference point?

Well, if you want to talk about the first quarter, I mean first half of the year we probably are looking at, due to some problems we had the first half of the year with mining, probably an increase of maybe 10 or 15% over the first half of the year and then we think we can, if we can get the mine to where we'd like to have it, we, maybe another 10 or 15% overall in 2006.

Ten to 15% more. Now, with all our other metals companies and mining companies there's a constant drum beat of very tough to get mining equipment, to get tires, backlogs. Is that part of the problem?

Yes.

And are we talking, you really think you'll be able to pick enough up by '06 to do that?

Yes.

Okay. That's good. And then the other question I had relates to David. Why the switch from LIFO to FIFO?

Dan, if you look back in our history, we've had market write-downs when the market has been weak. We had relatively high LIFO layer and then when we got back into a strong market we reversed those markdowns and put them back into the income statement.

I would also mention that the principal people in the industry use either average cost or FIFO so it's a more common practice in the industry. It's not a tremendously big factor, but the big thing is, it distorted the pattern of our earnings on a quarterly basis in the past.

Okay. So this is just bringing you into line with the industry standard and to take away some of that volatility?

That's exactly right.

Okay. Thank you.

Thanks, Dan.

Thank you. And our next question comes from the line of Timothy Hayes of BB&T Capital Markets. Please go ahead.

Thank you. How far out do the forward curves go out and then what is your view of the long run price for aluminum?

The forward screen is out through 2010. I don't think it's into 2011 yet.

That's correct, Craig.

And what you'll see if you follow that forward screen is the, in the kind of markets we have where we're in backwardation, the backwardation shrinks as you go further and further out and it gets very close to being flat and that's to project the market beyond the screen, that's basically how we've looked at it.

In terms of our view, I think what you'll find is the industry and the people who trade in the commodities look for a long-term value of, its been in the range of 1500 to $1600, two, three years ago, I think most people were thinking 1500, and today they're probably a little bit higher, they're probably more in the 1550 to 1600 range. And we have been sort of in between that all along and I think fairly consistently in terms of our view of where it is.

What is the backwardation in 2010?

I don't have a screen in front of me, I don't know if you have one handy, Dave.

I do. Based on yesterday, I don't have today's, but in 2010 the price was 1634 per ton or $0.74.

I mean what's happened here, interestingly actually, is even with a bit of a weaker nearby market if I remember correctly from the hedge we put in place late last year, we started seeing a phenomenon where the forward price was stronger than it had been. So the backwardation was less I guess is the best way to put that.

And it's one of the things that we took into account when we put these additional hedges in place. Because we had a forward market of 2009, 10, and then beyond the extrapolation, that was well above what one could achieve in late '04, and well above our view of the longer term value of metal.

So we looked at that and thought it was an opportune time to do a little more of this underpinning. But again, if you look at the total amount out there, I think it's around 10% which could double to 20%, so there's still a lot of the Company available for upside.

Would it be a fair assumption to take that backwardation in 2010 and then use it for 2011 through 15?

I mean that's one way to do it. I think in terms of, if you're trying to get at what we actually did it's probably, there's probably still some additional but not a tremendous amount once you get out past 2010.

Thank you.

Okay.

Thank you. And our next question comes from the line of Orest Wowkodaw of BMO Nesbitt. Please go ahead.

Thank you very much. Good afternoon. Just wondering, with the Nordural expansion how much production do you actually expect to extract from Nordural in 2006?

Jack, do you want to address--

We're going to start pots about the middle of February so you can extrapolate, we think we'll be at full production in the second half of the year so that that second half of the year will be 45,000 tons. It's kind of a guess but I would say probably 15 to 20 in the first half. So in the range of 60, 65,000 tons for the year.

And the additional expansion that you just approved I guess to 220, is that included in that or will that come off of that?

No, that's not included. That won't come on until 2007.

2007. Okay. And just another question if I could on the tax rate. Could we get, what's your forecast in terms of the break down between deferred and current taxes now on your new rate in terms of a percentage?

David, do you have that handy?

I guess what I would say is just so people understand it, in Iceland the tax rate is 18% and that's what will be accruing at on Nordural earnings going forward.

Most of those are deferred taxes because during an expansion mode you're able to [inaudible] your depreciation so that you don't pay any current income taxes. So for the foreseeable future we won't be paying a lot of income taxes in Iceland.

And it's a little more complex to go into what it is domestically so I'm not going to answer that.

Okay. You're going to or you can't today?

I can't and I'm not.

Don't appear uncooperative, just say you can't do it right now. Sorry about that. Carry on.

Okay.

Thank you. And we have a follow-up question from the line of Wayne Atwell of Morgan Stanley. Please go ahead.

Thank you. Can you tell me on your hedging contracts are you able to capture the midwest premium and where did these take place, what geographic region?

We elected not to do a midwest so it's on any price realization you must add the midwest on top what have we've achieved.

So let's say hypothetically you've got $0.74, I should then add the midwest on top of that?

Correct. Frankly the reason, Wayne, is that the forward market, first of all there isn't any real market that very far out on the midwest premium, and because of the volatility people have seen in the midwest premium over the last couple of years, anything very far forward is at a big discount to the present.

And we just didn't feel that we wanted to try to put a pin in that map. We felt that it was better to go with just a basic LME and then any midwest premium that existed at the time we would get.

Okay. And then lastly, I know you've grown over the years in a sort of a stairstep fashion adding capacity as its available. What are your thoughts in terms of bauxite and alumina now? Are there any, you probably won't be specific with me, but I'd be happy for any information and are there any opportunities there in generalities that they're exciting that you might be stepping forward to address?

Well, as we have said now for some time we are interested to go upstream. It is part of our basic strategy. So, yes, we're actively looking at what the opportunities might be in that area.

I have to say especially with the very tight markets we've seen in the last year or so and the very high spot prices it doesn't make it easier. So all I can say at this point is that it's a part of our basic strategy and we are actively looking and trying to uncover opportunities in that area.

Thank you.

Thank you. And we have a, one moment, please, we have a follow-up question from Daniel Roling of Merrill Lynch. Please go ahead. One moment, please. Go ahead.

Okay. On the hedging, David, as we go those long ones out there, do they qualify for hedge accounting and how do you handle that, that far into the future?

Dan, they do not qualify for hedge accounting because of the optionality in them, in other words there's a springing mechanism if a price gets to a certain level the tonnage could potentially double based on the month of settlement. The result is they do not qualify for hedge accounting. Those are the hedges that are running through our income statement.

And if you will you recall in the first quarter, we had a very large pretax loss and because of the decline in the market, we had a very large gain.

In the second quarter.

The second quarter, yeah. That's likely to be, as prices move significantly from one quarter to the next you can expect that we'll have a tremendous amount of volatility in that line and that's why we set that out separately in our information.

Okay. And that's just going to go an ongoing thing, ongoing occurrence.

Yes. That is correct.

Dan, we succeeded in reducing the volatility from LIFO to FIFO and increased it in hedging, what can I say.

We have to have some volatility in our lives.

Absolutely.

Going back to something else you said earlier where you said there were two different views and I agree. Can you give us a little flavor from your standpoint on where you think alumina supply versus demand, the tightness is it going to sort of loosen up '08, '07, '08?

I honestly don't know. I mean I guess my own view has been that maybe to some degree, I mean the tremendous pressure that's been on place by the Chinese, for example, and others maybe that would soften a bit. But in terms of the basic, the fundamental supply demand, I felt that it was going to be reasonably good from a demand standpoint.

And in other words it would be not tight but maybe not the real long or the real looseness we saw back when the spot price was, what, 125, $150. But we're actually looking at this now and studying and trying to get a better understanding of the different views and there are those who are quite couldn't convinced that alumina's going to get fairly long in the time frame you mentioned.

And we've asked for some information, which I'm not even sure it's come in yet because I've been a way now for a week or so, and we're going to be looking at this more closely and probably hopefully answer that question a little better by the next conference call. I'm not certain at this point, Dan.

Okay. Thank you.

Thank you. We have another question from the line of Tony Rizzuto of Bear Stearns. Please go ahead.

Thanks very much. Just a follow-up question on alumina while Dan had just asked that question. Your current contract with Glencore I think expires. Are you guys to going to just simply renew that at higher indexation to the metal?

We are going to look at all the opportunities, Tony, in terms of where the supply should come from next time, who our counter parties should be. Clearly we'll talk to Glencore because they're supplying now. But we, in the past had a contract with Alcoa. I think we want to see what the market really has to offer before we make any decision.

Okay. And can you provide some guidance, some basic guidance in terms of Cap Ex for '06 at this point? You mentioned 325 for '05. Any feel at this point for '06?

We know the balance for Iceland and David you can give him that. I don't think we have, and in our normal run rate but beyond that I don't think we have anything at this point we can get you guidance on, but go ahead, David.

Our maintenance Cap Ex is 16 to 20 million typically and then the balance of the Nordural expansion, the 460 plus million we'll spend 325 approximately this year and spent a little bit last year so the rest kind of accounts for the difference.

Okay. Great. And SG&A ran a little bit higher than we were looking for in the quarter. I know some of it's certainly variable, but could you, is there some, can you provide me some different guidance there or the guidance that you've been using more recently?

David.

Yeah, you know, we're having a very good year. Our SG&A is driven by our compensation plans, also our retirement plan and then our accounting and auditing fees and corporate insurance are also in there. So I would expect that if we continue to have a good year like we're having you would expect SG&A to be in the 7.5 to $8 million range per quarter.

Okay. Great. Thank you.

Which is up from what we thought earlier, Tony, but yeah, again it is related to a number of those issues.

Thank you very much.

Thank you. And we have a follow-up question from the line of Wayne Atwell of Morgan Stanley. Please go ahead.

If we fast forward a couple of years and you have a big profit on your hedging position would you capture some of that a few years out? I know did you that with Glencore a few years ago. If, let's say, the fifth, sixth, seventh year was hugely profitable, the price was depressed you could capture that and use that to maybe to buy an asset. Would you do that?

I certainly wouldn't say no today, Wayne. But by the same token the yes answer is much more difficult. In other words, you hit some of the issues we'd have to look at.

We'd have to look at what is going on in the market. What we saw for the future, if we thought it was too risky to open ourselves up we'd have to consider not doing that and then if we had a very good use for the money and on the assumption we could raise some capital that way that would be a factor. If we didn't have a good use for it, then we'd have to think twice about it so a whole number of things come into play at the time.

Well, under the circumstances that could be a real asset. Let's say the market crashes in a few years and assets available at a very attractive price because price of metal is down and you've got a big profit and you could close out the tail end of that and presumably get back into it a couple of years later --

You pointed out we did this once before and at the time we were getting very little credit in terms of the value to the Company for having those hedges in place, and we had an asset we wanted to complete the purchase of.

So we did just that and we used the cash to allow to us to buy the balance of Hawesville. And at the time thought, well, okay, we can get back in. The markets are, you know, they're going to go up and down, and so far that strategy has proven to be correct.

I think you have to look at the time what's going on, but it may, I think it is sometimes maybe a hidden asset or however you want to put that it has some real value in the future.

Thank you.

Thanks.

Thank you. We have a follow-up question from the line of Marty Pollack of NWQ Investment Management. Please go ahead.

Gentlemen, I just want to, this may be a sensitive question to ask, but clearly there seems to be, there's going to be some change at the helm. And there's a search presumably that will be taking place. Can you provide some status on that in terms of timing and how that's proceeding?

At the same time, it kind of behooves one to think about the Company as it emerges into a much bigger player. I think probably approaching 1 million tons of capacity and very uniquely one of the possibly one of the best properties out there, especially on those sort of valuation of the pieces or the individual properties.

I'm wondering whether as you might be departing whether there's a sense that the value of the stock has been maximized here?

Has been maximized?

Yeah, or perhaps there's still a lot left on the table. I know it's.

I can deal with the first one maybe even more easily than the second one, but in terms of the transition, I think we mentioned in the past, we have been mindful of this and in fact, yes, a search has been going on.

I have to say that it was our plan and our objective to have it completed by now, so sooner than is in fact going to be the case. But I think it's coming along well now and I think we will have a good and effective transition so that we don't loss some history, et cetera.

And as I believe we stated one of the prior conference calls we're going to change our approach in terms of the top jobs in the Company and go to what I guess is more now the British system but maybe the U.S. will head that way, which is to separate the Chairman's job and the CEO's job and so the new CEO will be the President and CEO and at this point the board has asked me to stay on as Chairman for a period of time. Partially for transition and partially because of, I guess, my knowledge in the business. So we will have a transition period in there and I think we're getting close to being able to have that completed.

In terms of the values, I don't know, I mean as we continue to do things with the Company and improve it and strengthen it I would hope the share value continues to reflect that and we continue to create value for shareholders that we'll get rewarded for that in terms of the share price. So I don't have any view in my own mind that this is sort of it, no. Does that answer your question?

Yes. Okay. Thanks.

Good.

Thank you. [Caller instructions] No, there are no further questions. Please continue.

Okay. Well, I thank all of you for your interest and for listening in today. If I can just do a quick summary.

I do believe the second quarter was basically a solid quarter for the Company. Even with the operating problems we've experienced in Hawesville we have had a record operating income for the first half of this year.

I will say, which I've said before, that we're not satisfied with having these kind of problems and we have a lot of focus and a lot of pressure on ourselves and everybody in the Company to deal with the Hawesville situation and to correct it and to make sure we're back where we should be and we're enjoying the strong markets by having all the production we should have. So there's a lot of focus in the Company on doing that.

We do think the fundamentals in the industry at this point remain positive. And we also believe we have some excellent prospects for significant further growth, certainly Iceland is our major focus today but we will ultimately look elsewhere depending on how that develops.

In terms of the basics I think you heard from Jack, that is a focus very much of ours that we stay with the basics, we try control our costs and we bring down some of the costs that have gotten a little bit higher and we improve our operating efficiency.

We look forward to speaking to you, speaking with all of you in the next quarter and thank you very much for your participation. I think that's all, Rochelle.

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