Century Aluminum Co (CENX) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the third quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to your opening speaker for today, Mike Dildine. Please go ahead.

Thank you, Doug. Doug, we've got some music going.

It should be taken care of at this point.

Hello, everyone, welcome to the Century Aluminum conference call, covering earnings for the third 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's basis for its forward-looking statements on current expectations and projections about the future. However, these statements are subject to risks, uncertainties and assumption, any of which could cause Century's actual results to differ materially from those expressed in the forward-looking statements. For more information about these risk, uncertainties and assumptions can be found in our filings with the Securities and Exchange Commission. Century does not undertake or specifically revise any forward-looking statements to reflect the occurrence of the anticipated or unanticipated events or circumstances after the date such forward-looking statements are made. Now, let's begin the conference call. Here is Century's Chairman and Chief Executive, Craig Davis.

Thank you, Mike. I guess one would have to say the uncertainties proved to come true in this last quarter. I would like to welcome all of to you our third quarter conference call. David Beckley and Jack Gates are here in Monterey this morning so we are all here. And David, as usual, will be providing the details on our financial results and Jack will discuss the operating performance. I will focus principally on the overall third quarter results. The third quarter operating results were negatively impacted by the issues which we outlined in our press release. While the aluminum prices have recently strengthened, the average price realizations for the third quarter were$0.03 a pound lower than the second quarter. David will go into this in more detail in his presentation. The current energy situation in the United States will impact the Company in the near term.

We have some feedback noise on this, Doug, I don't know whether there's someone who is dialed in with a mic in there or what, but hopefully everyone can hear this all right. In any case, carry on.

We will have an impact of the energy situation in the near term, the natural gas situation in the Gulf Coast will increase our costs at Gramercy. David will also discuss this somewhat further in his presentation. We are also experiencing an increase in electricity costs. Our surcharge that we have been experiencing at Mount Holly will continue for the balance of this year and into next year. It's important to note that 73% of our power at Hawesville is very competitively priced and it's a fixed price through 2010. The balance of 27% is unpriced beginning in January 2006. This power is currently available for Hawesville. However, the spot rates for 2006 are -- are quite high today. We are currently considering all of our options for this unpriced power.

Our power situation at Ravenswood is stable. We have been informed that a rate case has been filed for 2006. We do expect that this rate case will have some impact on our current rates, which are fixed and will continue to be so. That impact would come into play in July of 2006. Other than the remnants of the problems at Hawesville, our operations performed quite well in the third quarter. Operations at West Virginia, Mount Holly and Nordural all exceeded our operating expectations. The operations at Hawesville are basically back to normal levels and Jack will discuss this further in his presentation.

The management and employees at Gramercy Inc. and St. Anne bauxite did an outstanding job of coping with the weather problems we faced in the third quarter. Moving on to Nordural system continues to progress on a very positive bases. Our expansion is on schedule and on budget. We have experienced some increased costs arising out of the weak dollar, or the reverse being more than normal strong cornea. However, to date we have offset all of these with savings elsewhere in the project. Based on today's weaker dollar we could experience a very, very slight increase in the project at its completion but we do not expect any significant impact at all. We have been able to absorb these cost increases. At the same time, we continue to pursue additional expansion opportunities in Iceland

At this point I would like to turn it over to David to discuss the financial results.

Thank you, Craig. Century Aluminum Company reported a net loss of $20.1 million or $0.62 a share. Included in these results is an after-tax charge of $36.4 million or $1.13 a share for mark to market adjustments on forward contract that do not qualify for cashflow hedge accounts.

Our third quarter operating income, which was $22 million combined with our equity earnings of $3.1 million fell short of earnings --

Rare form or typical form.

-- Or short of 2005 results by $17 million pretax. $10 million of the shortfall was due principally through lower pricing. As you may recall, most of our pricing is on a one-month -- [ Inaudible ] A second quarter LME on this basis averaged $0.85 comparable third quarter was $0.81.3. LBE was lowered by $0.3.7

Further more the Midwest premium was in the third quarter compared to the second quarter. So it's not surprising that our price realizations were $0.03 lower than the second quarter.

I will take it up.

$7 Million dollars of the shortfall is the mid impact of the hurricane-related costs, power surcharges at Mount Holly and the lower pot count at Hawesville.

Let me -- would anybody listening in please put their phones on mute. We're getting some feedback here. Okay.

On a positive note, net cash provided by operating activities is up substantially year-to-date compared to last year, to $127.8 million, versus $71 million last year.

They announced a hike --

Excuse us there's somebody who has their speaker phone on that is coming into our conference call. Could you please turn them off or hang up and have your conference call elsewhere? Thank you.

With respect to former priced sales we did no further price sales. The release has not changed since last quarter for the period 2006 through 2015.

I will now give you a brief update of our exposure to gas. We used almost 9 million MMBTUs of natural gas in our facility and about 75% of this total is used to produce Alumina at Gramercy. As indicated in our recent 10-Q about 1.7 million MMBTUs for 2005 or slightly less than 20% of our annual usage was priced before the recent run up in gas prices associated with the hurricanes. Accordingly our results in the fourth quarter and possibly beyond will be impacted by higher natural gas prices. At this point, I will turn it over to Jack Gates who will talk about operations.

I will talk a little bit about the smelter operations first. Smelter operations at Ravenswood and Nordural continue to succeed expectations in the third quarter and are both on schedule for a record annual production. Hawesville expansive pot failure problems that adversely affected it's operation in both production and costs are basically over and the smelter is currently operating at its current pot count and operating efficiency. Pot failures are pots that we actually schedule out of operation for various reasons are also back to the expected level. I mentioned in the second quarter call that I expect to be back by the end of the this third quarter , while we didn't make it by then of September, we are extremely close and we are where we need to be.

Mount Holly's third quarter production performance was very close to forecast. But on the negative side as mentioned by Craig, the energy costs continued higher than anticipated due to excessive fuel charges. The Nordural expansion continues on schedule and at budget, incurred and/or committed funds to date, total 87% of the total budget. Start-up of the first cells remains on schedule for mid-February of next year and we should be completed by the third quarter.

In the bauxite alumna operations weather adversely affected operations. Excessive rain in Jamaica in June and the two hurricanes that hit the Gulf Coast affected cost. Both are currently operating at normal capacity but the energy costs remain high. I would like to echo Craig's comments about the extraordinary efforts by our St. Anne and Gramercy employees during the quarter. With the terrible weather experienced in Jamaica and South Louisiana they kept the operations running with minimum downtime.

Just a little bit about the sales and marking. The third quarter saw recovery in the Midwest transaction price increasing from September's $0.037 to today's $0.046 a pound. Some of our customers are reporting a strengthening in the automobile sector. This includes a foundry which suspension wheels, brazing, cooling systems and distributor. Aerospace, construction, and rod and cable remain strong. The recent hurricanes seem to have slowed the flow of metal into and through the port of Mobile, which has helped to push up the Midwest premium. Just today we received a report that the IAI inventories dropped from 39.9 days in August to 37.7 days in September. Now, I will turn it back over to Craig.

Thank you, Jack. At this point, Doug, we'll open it up for questions.

[OPERATOR INSTRUCTIONS] Please go ahead and ask your question.

Wait, Doug. Doug. Can we take the questions one at a time?

What do you mean? You'd like to have a question-and-answer session, sir?

I want to make sure that there's just one person speaking at a time asking questions.

Very well, sir. It will be a moment to adjust the computer system.

We've never had that before.

Okay. Thanks for holding. [OPERATOR INSTRUCTIONS] Our first question today comes from the line of Bruce Klein with CSFB.

Hi, good afternoon.

Hi, Bruce.

I was wondering on the energy and the prices you mentioned, I think you said Kentucky was -- power was 73% was set through 2010. What's the status of the rest?

The rest is we have a commitment, but it's unpriced starting in '06. We're price locked until then. So what is sort of the expectation on electricity prices next year, versus -- I think it's a bit -- into I mean right now the prices are quite high and we are waiting to see a little further how things develop and at that point, I think it's too soon to say where we think it will be or what impact it might have. But we're watching that very closely in terms of what we look at locking in and then how far we lock in as well, how far ahead.

Right. And then in Iceland, what -- I had in my notes, the rates were fixed through 19; is that accurate.

The rates in Iceland are based on the LNE.

Is there maturity to the -- it's just -- it's --

The contract goes through, I think you are right 2019.

It just flows with the LNE?

Basically, yes.

So that's not as concerning, obviously.

No. It -- I mean, obviously in higher LNE prices we pay more for electricity prices but also more for the metal. It's a piece of our natural hedge in Iceland

Okay. And then in terms of the overall, could you just give us the latest? I don't know if I saw in the press release in terms of the hedges in terms of how much is hedged for '06 and '07, and the percent that's represented by Alumina flow, versus forward sales.

Bruce, this is David. The numbers that are in the press release are identical to what they were in the prior quarter. The only thing is 2005, we obviously had some contracts mature from between the second and the their quarter, other than that, the numbers are identical to the second quarter.

We haven't added any hedges in that regard, Bruce.

Does it sum up here how much is hedged and what percent is forward versus natural?

No, it does not. It tells the price position.

Is it possible you have that handy, David.

I do not have it in front of me right now, but I did indicate what it was in the second quarter. I just don't have it in front of me right at the moment.

If you go back, Bruce, if you look at the piece coming in into Hawesville now is from Gramercy, that's no longer a natural hedge. The balance of our Alumina supply and the portion of our electricity supply at -- in Iceland, form the natural hedge and the balance is a forward hedge against metal. What percentage is that?

I don't have the exact percentages.

Okay. And then for the Iceland expansions how -- what's the latest things in terms of how that is going to be funded.

Well, we are continuing to fund it through a combination of a credit facility in Iceland and cash flow. Right now we have -- we have used less of the credit facility than we initially anticipated and put more equity into Iceland

Okay. I'm good for now. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of David Gagliano with CSFB. Please go ahead.

Hi. That was not planned to be back to back CSFB. I just have a quick one. On the quarterly results when I look at it versus our internal estimates here it looks like shipments and costs are actually not that far off. But it looks like where we are off is the realized price. I wonder if you could give me a bit of assistance in terms of explaining why even after we lag it for a month, it looks to me like the premiums were below what you typically enjoy. I wonder if you can give me a bit of color there and also to what extent, if any did your forward sales contracts play into the pricing and I do have a follow-up to that.

Okay, David, this is David Beckley. As I indicated in my remarks, and again there may have been some noise in the background, you may not have heard. On the one-month, the LNE in the third quarter verses the second quarter was down $0.037 and also the Midwest premium down was down quite a bit from the second quarter. So our pricing and more than accounts for -- our pricing was price based for most of our contracts. So it's not surprising to me that our price realizations would have been off by three cents.

Okay. All right. Sorry. I did have a bit of trouble hearing that. Just -- I guess this is a related question, perhaps you just answered it. In terms of more clarity moving forward, on the contracts that you have in place, moving forward which you have to go back and get, did the second quarter press release show the prices of those contracts or at least the terms of the contract?

No, David. We do not disclose what they are, just as a reminder, we -- our basic philosophy is we do not like to sell forward unless we achieve what is considered the long-term average price. All of the our hedges that we have in place are well above the long-term average. The long-term average, until the most recent year was 1,500 to 1,550 , $0.69 to $0.70 per pound and all of our hedges are substantially above that. Obviously the hedges that matured during the quarter did have an impact also in the price realizations but the principal driver was the fact that the -- the LNE which serves as the basis for our pricing on a lag basis was off 3.7 cents.

I think the other thing that might help you there is that as we disclosed in the last conference call, I believe, and in an earlier one on the prior hedge we put in late in '04, we generally sell forward against the screen, against the quoted price. It's not 100% fit, but it's very close to that. And if you go back and look at the prior releases I don't have the dates firmly in mind. But one was in November and the other --

June.

June. You look at the forward LNE and you have a pretty good idea where we were in terms of what we achieved in our forward sales.

Okay. Fair enough. Just -- just a quick thought perhaps, I'm just wondering if it's at all possible if there is any interest to disclose a bit more information regarding the terms of those contracts just because I think it might mitigate some of the volatility in the earnings which is having an impact in the share price.

It's a good thought. We have thought about it. I guess so far we have decided that we weren't going to do that but we'll take it on board. Thank you. Do we have any more questions?

Absolutely. Our next question comes from the line of Timothy Hayes of BB&T. Please go head.

Yes, good afternoon.

Good afternoon.

I have a question back on the Hawesville spot, electricity prices could you give some numbers on where that spot price electricity is now, and how it has increased over the past year or so?

Well, it's increased a lot over the past year. The problem was -- we can give you some idea. Everybody panicked a few years ago when Mr. Davis and somebody was quick to point out to me this morning, my name isn't Gray Davis, it's Craig Davis but when the state went in and hedged out forward energy prices right at the peak and, of course, got it all wrong. We don't know where it's going to go but it's at a very high level today. I think if you were in going to try to buy spot power and this is not normal smelter-type power you are probably in the 60 mill range. A year ago it was probably in the 40 mill, 45 mill range. So that's the kind of impact you are seeing with the world we are in right now. Where that will be in 30 days or 60 days we really don't know the answer but obviously we are looking very closely at how we deal with that and what we do with that.

Okay. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of Amir Arif with Friedman, Billings, Ramsey.

Hi, guys. This is Sam Arnold calling for Amir. A couple of questions for you guys. On the last operational update, you had given some guidance on the costs on Jamaica and then at Mount Holly and we didn't see anything broken out on the actual -- on the press release. And I was wondering if those costs materialized, basically what you were thinking or whether they were higher or lower or what the story was on that.

I think basically we are in line with what we had in our prior release. I think we indicated in the prior release that the impact on our P&L in the their quarter was expected to be around $2.5 million.

Right.

Or that for Jamaica or Gramercy and the power surcharges, and the numbers were very close to that.

Very close. Okay. Great. You mentioned you had some cost increases on Iceland smelter, and you think you can mitigate those going forward. Have you -- I guess, the cost savings that you had, were they actually cost savings or was it a contingency rundown. How were you able to mitigate that.

We didn't really have cost increases in the classic sense of what we had -- we did in that currencies were stronger.

Currency. Okay.

Okay. It's all to currency. And the answer on the other, they are actually cost savings that we've been able to achieve, which we -- has offset some of the increases we have incurred because of the currency.

Okay. Okay. But it wasn't just, oh, you took away half your contingency.

No, it wasn't.

Okay. Great. Okay. And I guess the power surcharges, you said -- mentioned earlier, you expect those to continue kind of at an equal pace. Power prices stay equal over the remainder of 2005 and into '06; is that correct.

I think the best prediction we could give today is, yes, unfortunately. It -- a lot of what we experienced, though, in the last quarter was in sort of a special circumstances where the power provider had some capacity done and had to go into a really bad spot market. So we don't know whether this is sort of now going to be inherent in the system or what. We are assuming, though, there will be increases through the surcharge side, certainly in this quarter and in the next year.

Okay and how is Hawesville along the Mississippi river? Things have settled down. Is that back to normal.

This is Jack. It's probably not back to normal but it's getting close. The barges are being shipped up the Mississippi river. We get a load up the river from the Alumina refineries from Gramercy, Louisiana; Hawesville, Kentucky and from Alcoa from Texas and they are shipping so it's back close to normal. It's probably not back exactly, but very close.

Okay. And if you could help me out with one more thing. If you could talk about the pot count at Hawesville when you had the down time there, and just generally, the reasoning for that and if you expect anything going forward or just a one-time event, I'm assuming.

It was a one-time event. We had some equipment failures in a part of the plant that affect the pot rooms. We normally take out a certain number of pots each month. That's a cycle. What happened in the second and third quarter is we had an excessive number of pots that failed. Now most of these pots were pots nearing then of their life anyway, but -- then of their life anyway, but due to some instability, we pushed them over the edge. To give you a for instance, we had 35 more pots in the second and third quarter than we normally would --

Out.

Out. And we had to realign them. So you have additional labor costs and material costs and then you lose the metal production. So we are through that. The plant is -- I was in the plant last week and the plant is back to normal and operating very well and looks very good.

Okay. Very good. Thanks a lot, guys. Appreciate it.

Thank you.

The next question comes from Daniel Roling with Merrill Lynch.

Thank you. Going back to the Hawesville you say 27% is opened January 1st, '06. Are you required to take that or could you shut the pot down if you're still not comfortable with the price.

We are not required to take it. We do have flexibility in our operating level.

Okay. And then going back to the cost of the -- the impact of the hurricanes. And maybe I missed this early on when there was some noise, but could you -- did you quantify the dollar amount that's related to the hurricanes?

Dan -- David, we had an earlier -- we estimated the impact in the quarter about $2.5 and it came in very close to that. $2.5 Pretax, yes.

And how much would you allocate to the gas in the quarter.

Actually, in the quarter, itself, gas had very little impact in the third quarter. It's expected, for the reasons I indicated to have more of an impact in the fourth quarter.

Okay. And have you put any number to that yet.

No, we haven't , Dan ,in my remarks I indicated the amount of gas we use overall and, you know, we -- we're probably -- for the fourth quarter, we're probably maybe 15% hedged in the fourth quarter and for next year we are a little less than 20% hedged in pricing for gas in the runup in the prices. So the rest of the gas we are exposed to.

Okay. And just to review, make sure I get those right, it was 9 million BTUs.

9 million MMBTUs for all of our facilities which about 75% is related to our share of the gas needs at Gramercy.

And's a full year basis.

Yes.

Thank you.

Thank you, Dan.

Thanks, Craig.

Thank you. Our next question comes from the line of Larry Peck with Capital Beach Capital.

Hi, guys. Here's a question, I'm just thinking aloud here. Just want to get your take on this. Is there a certain point where with the cost inflation that it would make sense and given where spot Alumina prices are, to actually shut down or at least temporarily idle one of your smelters and sell the Alumina on spot markets.

I think the honest answer is one must consider that if the -- if the -- if everything gets so out the whack that you really have to look it. Fundamentally, we're in the business of making primary aluminum with these plants and you want to run them at their most efficient level. And that is to run them at capacity, but if you have a situation where, for example, in the case where we have 27% of our power unpriced, you have to look at the impact of bringing spot power in to cover that, versus not running the capacity that that power will support, yes.

Is it something that you guys are considering?

We look at all the options to try to get the best result we can and, you know, you don't do this lightly. I mean, you -- you don't turn these things on and off overnight. But we -- we clearly are studying all the options and what we think will give the company the best results and at the same time take into account our long-term situation, and this isn't -- I think the last thing we want to do would to be say, well, geez, the power costs in January is too high and therefore we'll shut something down and then we'll start it back up in February. That would end up not being, I think economically intelligent. But what we will look at is if we see we have a problem that's longer term, and that we have to deal with, we have to consider the best way to deal with it.

I mean, one of the things is the power cost is an issue but natural gas is becoming more of an issue given Gramercy --is that filters right through to Hawesville so it seems to me natural gas is maybe a little inflated now but not -- I don't think anyone really thinks it will collapse in the next few years.

We look I think for two things. One, natural gas is not an issue at the smelters. It's a very small part of our cost. So it really doesn't relate to whether we decide to run or not run a smelter, or reduction plant. The natural gas at Gramercy, clearly affects Gramercy, but our Gramercy costs would certainly be well under the spot mark for Alumina so we are still much better off running Gramercy and supplying that Alumina to our own plant and I don't know what natural gas is going to do. But I know that before Katrina, everybody thought $6 was incredibly high and I think most of the world was saying we're not going to -- we're not going to buy forward to $6 and now here we are at a considerably higher price.

Once all these issues sort out, I don't think it will stay at the levels created by these issues related to the hurricane. Will it come down to where people thought it was, $3 or $5, I don't know. Will it stay at $6. We don't know that. But obviously, once -- once the production is back to where more normal levels. It's going to have some impact on the very high spike that we're in today, and so we're looking very carefully at how to deal with that and not going to rush in and hedge up at, say, a $12 price when that is really directly related to what's happened in the Gulf in recent months.

Okay. Fair enough. Thanks a lot.

You're welcome.

The next question from the line of Wayne Atwell with Morgan Stanley.

Thank you. If you could help us out here, understand the possible impact of some negotiations. You have some alumina contracts that are up for renegotiation and I'm assuming at that time old link was about 12.5% of the aluminum price and for modeling purposes, would it be fair to assume that might ratchet up to 14%. Could you give us a price on that.

I hate to say too much because we don't want the people talking with to think that we are going to pay them their prices, Wayne. I think 12.5% is pretty optimistic in terms of what we have been paying. We've had some pretty decent contracts but that's -- that's probably below what the world has been in recent times. I think the more recent average is between 12.5 and 13.5 and I would say we have been in that range. Not really 12.5, but in the range.

In terms of going forward, we are -- we are in discussions. We don't need to do anything until the beginning of '07, but obviously, we're trying to plan ahead for this and it's a bit, in a way like the energy thing. You are in a very, very strong spot aluminum mark, which will influence the contract market and so we're looking at what the options are. I would say getting up into the range that you are talking about is more realistic than the historic range, though.

Okay. And then could you give us your thinking again on the natural hedge? The company is changing pretty quickly and we tend to get out of whack in terms of the percentage that floats with the aluminum price.

Well, I mean, we -- we had up until we took over Gramercy, all of our Alumina, and we won't try to do the math now, because I'm not very good at that over the phone here, but if you go back and look at where we were, all of our U.S. capacity, the Alumina was purchase percentage LNE. We now have Hawesville being supplied out of Gramercy and so it's no longer percentage LNE. The balance of our contracts, domestic contracts are still a percentage of the L.NE and will be so through '06 and at least one piece of them into -- into early '08, I think it is. The new contracts that we're discussing are fundamentally percentage LNE as well. It's just that as you point out, correctly, that percentage may change somewhat. In the case of Iceland, I mean, again, those are all totals. So in essence, that's neutralized in Iceland We do have our power there, which is percentage LNE and I don't remember what percentage of the Icelandic purchase that relates to in terms of the cost. Do you? Does anybody remember that. We'll get that later and publish that but it's not across the -- across the whole company, it's not a big number in terms of the hedge position.

So excluding Hawesville, everything pretty much more or less just floats with the aluminum price?

That's correct.

And you guys have been pretty aggressive in growing your company in the past. I know you have been looking in Iceland. Is there anything surfacing there that's exciting that you might give the go ahead on?

Well, as we did -- I think we may have discussed it in the last call, I don't remember, but we did announce a letter of intent with a community in the south to work on a Greenfield project in the south near Keflavik near the air base there. We are working on that as we speak We are working on the preliminary environmental reports and so on. It's a very good site. It has its own port already. The port would require some expansion. It has some distinct advantages in that it is very close to the population centers of Iceland Keflavik which is a good-sized town, 15,000 or what ever . Anywhere else you look in Iceland, it's very small. Your talking very, very small villages. In addition the American base that has been there for years has been slowly reducing and there's some real interest in terms of the local communities in having employment. At the same time, obviously, we have to get the power in place, and we're working on that. We have an MOU covering that as well. So the answer is yes, we're very positive. We're very excited about our further prospects in ice LAN but those will take more time to develop, obviously.

And what size might that smelter be if you go ahead with what's being proposed.

Well, it's -- it's early days, but I think we would ultimately look for about 250,000-tons. And you might do that in two steps. So that's yet to be determined and it would really depend a little bit on how quickly the power might be available.

Would you own 100%?

We'd like to. But I think, again, as you know, Wayne, we try to be flexible and look at what works best for the company overall. So we don't rule out discussing it with somebody.

And then lastly, any other initiative, other than Iceland?

We have some others but we haven't discussed them publicly yet and so I think just the best thing to say is we continue to look upstream as we said we are going to do and we continue to actively look for opportunities both existing facilities and expansions in the primary aluminum area.

Great. Thank you.

Thank you.

Thank you our next question representing Prudential Equities, John Tomazos.

Over the company's history. Century has made a lot of risk management decisions of matching input and output costs. Your supplier industry the electric utility industry, doesn't always match things. You know, spot gas is often used for peaking units, coal mines say their typical contracts are 1 to 3 years but yet there's a lot of power contracts at long duration such as the traunch you enjoy in Kentucky and many others around the aluminum industry.

Yeah.

It, I guess, makes me kind of queasy to worry not about your company, but in general electric firms for the steel mills, the aluminum smelters where the power suppliers mismatch their fuel to their power contracts. And I guess it might make the power delivery commitment a little weak if the power generator doesn't have his fuel bought. Does century ever consider participating in a venture to generate your own power? Not a majority stake, but something so you have some control given the electric utility industry isn't always as well managed as your company?

Well, thank you for calling us well-managed, John. I appreciate that. You know, I would have to say, occasionally I get queasy as well. Certainly the power surcharge that we've experienced at Mount Holly is not a plus. The answer to your question is, as I said earlier, we are looking at all options and I think we clearly have to discuss this as a potential. One of the reasons we probably have not gone further in this area previously is that as you know, we do have limited capital resources and so we try to put our -- our capital work where it's -- we think it's most effective and it -- it -- it helps us achieve our -- our strategic options.. I do think, though, as a company using a lot of energy, we have to consider all options and that's one that we have to consider. We have -- I would have to say, very, very sort of early days kinds of had discussions in this general area.

Craig, of course, I have never had a power purchase contract, I don't know anything, but is it --

I don't believe that, John!

Is it possible in these notions for the large industrial user to buy the fuel and have them generating company coal? You do the coal purchase contract. You do the gas contract, whatever the fuel, you are aiming at whatever it is and let them just run a power plant.

John, for somebody would doesn't know anything, you come up with very good ideas. The answer is I think it's possible and we also have considered that and looked at that. It's a question on timing on an issue like that. I mean, unfortunately this has happened fairly quickly in some of the situations in the United States in general, not just for us but I think across the board which is what I think you are referring to and you really probably can't, when you hit it sort of in front of you at the -- at the one point in time, maybe we can't do any better than our -- our power provider, but over time, and with some concerted effort on our part and our partners and so on, I think that's something, yes, again, we have to look at and we have discussed.

Is it a reasonable demand when you negotiate a contract to say to the utility that unless you bought the fuel, we don't want to sign the contract because we don't want to enter into a contract that we don't know the utility can deliver?

I think it is a very reasonable demand and, of course, most of these contracts have been there for a long time, and when they were signed, in essence that demand was made or in essence, the power providers had the coal and had whatever their underlying resource was to provide the power. This has become more uncertain in recent times and as we look at where we are, with some of our power contracts and we look at going forward, that's clearly an issue we are looking at very clearly in terms of what type of coal contracts the provider has, have they locked them in, how strong are they and so on. So absolutely that's become a more important issue for us.

Congratulations and good luck. Thank you.

Thanks, John.

Thank you. Our next question is from the line of Victor Lazarovici with BMO Nesbitt Burns.

Well, good afternoon. Thanks.

Hi, Victor.

How are you.

You don't even bother to correct people anymore, when they pronounce your name.

No, I spent half my life doing that.

Okay, go ahead.

Your partner in Gramercy and St. Anne's is in the midst of a proposed merger.

Right.

And often in the partnership agreements, and you have two of them with them, a change of control provision gives you preemptive rights. Do you believe you have those rights under your current arrangements with --

I think it's a step removed, so I don't believe there is any such thing.

Okay. Because the -- it's a friendly merger, is that a reason?

No, it's -- it's -- the change in control is at a different level than the direct partnership so I don't believe there's a trigger like that.

Oh, okay. And the other question has to do with management. I think earlier this year, in the first quarter conference call, you announced your intention to retire at the end of this year. And we're getting within a couple of months of the end of the year.

Yes, we are.

Yes. Is that still your plan and with David announcing his retirement as well, what's the succession plan and when might you make it public.

Well, we're not going to let David go.

That's good!

No, I don't actually know whether I announced it or not, as you well know, I had actually retired once and came back, and the commitment was, basically through this year, which has been the commitment. We have, as I think we discussed in the last conference call, we have had a search going and I said then and I have to repeat now, we -- we're disappointed in the time it's taken. It's taken longer than we expected it would and should but sometimes these things work that way. We are -- I think we can say today, we are -- we basically -- we have a basic understanding with an individual to succeed me. We're not yet ready to announce that, but I think it should be quite soon.

I hesitate only because until something is finally done, someone is always reluctant to state, oh, here we are and we have done this. At least we are. We try to be a little bit conservative in how we say these things. I think we are very close, and we will have this done. At the same time we have picked up the process on a replacement for David, and that's well underway. And I think -- I think what we will have maybe not the kind of transition that we discussed, which would be many, many months but we have structured it so we have the making for a very good transition, where the new CEO will be in and will work closely with me and with the team that's here today and at the same time, we'll bring in the other -- the other senior people who will be involved in the company going forward. And everybody will have more than ample time to work together to make sure we have a smooth transition.

And to -- not to kid about it, David has certainly committed and agreed to the degree there's a requirement for transition that goes beyond the end of the year he's there to support us and support the company. So I think we're -- we're -- we're in relatively good shape there, Victor.

Okay. Although I think I like the first answer better.

Well, David probably -- he may -- I think he feels happy about that. You view him that way. But I still think he plans to retire.

If I could ask the last question on hedging.

Yes.

A few quarters ago as the metal price started to get above what you describe as higher than your long-term expectation, you started locking in those prices and the price continues to rise. ave you changed your view on where you want to hedge or are you using the same level of premiums to, you know, go further out in time, or are you buying protection at high prices.

I don't think we changed our view. We always said we have -- first of all, it's something that we don't have a formula for, it's a fluid situation. We try to achieve our objectives at the same time within an understanding and a view of where the market is at that time and in general where we think it's going. I think we certainly have seen some stronger pricing in the very recent times, especially the forward market. I think we also have always said we aren't going to try to pick off the peaks. We are not smarter than the market over time, and so we do a hedge when we find a comfortable level and a level that we can support and there's another interesting -- not interesting but important part of that, in that there aren't always counterparts available. We have done a number of large hedges in the last, say, nine, 12 months where we had a counterpart on either side so that we could actually put that kind of a hedge together. At this point, we are not actively looking at doing any long hedges for the near term next year. Next year we have a hedge position that's about as strong as we like to have it. We like to keep up side open for the equity investor and then beyond that, we have put hedges in place where we think it's the right position to be in today, to build the underpinning we want for the future of the company, and offset some of the higher cost operations we've had. I don't know if that's helpful, but, I mean, basically that's where we are on the hedging. Right now we have not done anything further, nor do we have anything that will trigger us necessarily to do anymore.

Okay. So the numbers that David talked about earlier are the ones that we should assume are going to be in place for a while.

Well, what we talked about is there. That's in place. The question that maybe -- that you are sort of, in a way, asking is: Is what's going on -- has what has gone on here affected our view or impacted our view of the long-term value of metal and that's a very good question. The answer is I think we have to watch that carefully, and I think -- carefully and I think if you have a continuation of the -- of the underlying costs in the industry, that are higher than they have been, there has to be some give in that. And the other thing I think we discussed- maybe we discussed in the last conference call is that actually a fair high percentage of the world's primary aluminum capacity is not what you call high cost. The United States, as a country, is a high cost producer. Europe is a high cost producer, and actually the biggest producer in the world, China is basically a high cost producer.

Now they approach it somewhat differently but nonetheless, their energy costs are high. Their Alumina costs are high and they are fundamentally a high-cost producer. This amounts to half the world's total capacity. I think logically we are going to need a reasonably good LNE price to support that much capacity. So is there -- is there a shift going on from the old people and view of people that the long-term value is, say, 14, 14 50 to 1500 to 1550, is that moving up? I think the jury is still out but there's a good argument it could be moving up somewhat. In terms of our hedging policy, we have to be careful to watch that.

Right. Right. That is kind of what I was alluding to.

Okay. But we are sensitive to it and we are watching it and the thing I think -- the danger is, just like with high energy prices today, or high gas prices, the danger we all have to be -- watch is that when things are very high, everybody then starts forecasting them to stay that way forever. Everyone says the sky is falling and it will be awful forever. Neither one of those tend to be the case and we are in a cyclical business that economy, the global economy is cyclical and I think our economy will be cyclical, will continue to be so that the current prices we are seeing, we should be quite happy they are very strong. I don't think we should necessarily say this means that the long-term price has gone up $200 or something. But I do think there's some underlying fundamentals that can drive you to the conclusion that the long-term price will move up somewhat.

Right. Okay. Thanks, Craig.

Thank you.

Thank you. Our next question comes from the line of Tim Adler with JP Morgan. Please, go ahead.

Forgive me if you already went over this. I got cut off briefly. I just wanted to get a little more detail on -- on Hawesville during the quarter. Specifically, I was wondering if you could tell me how much mix degradation you would have experienced as a result of the pot failures. I guess that question pretty much speaks for itself.

The pot failures really had no major effect on mix. As far as the quality of the aluminum we're producing. It has to do with the amount. A pot at Hawesville produces about 80,000-pounds of metal a month. When you lose a certain number of pots you lose that production. But as far as the quality of the metal coming out of the plant, very, very slightly affected. Not much that affected our mix at all.

It is truly a volume issue.

Okay. And second, I was wondering if you could give me a little better sense of what the total dollars -- the total dollar impact was of the pot failures, taking into account not just the -- the expense of repairing the equipment or replacing the equipment, but also the -- the lost tonnage, the negative absorption of overhead, et cetera.

You know, we -- as I told you, we had about -- in the their quarter we had about 30 pots. Each pot is about $100,000 so you're looking at $300,000 -- there's some additional labor costs and overtime and there's equipment. You're looking in the neighborhood of $5 to $6 million.

During the quarter. Okay. That's great.

That's higher than normal. Compared to the prior quarter, it may be 2 to $3 million in the prior quarter.

Thank you very much.

There was building in the second quarter so --

That's right.

Okay.

Does that answer your question.

Yes.

Okay.

Good.

Thank you. Our next question is from the line of Jordan Hollander with Jefferies & Company.

I think most of my questions are already answered. I just wanted to know if you could give me some type of update on what CapEx would be in '06, specifically to the Nordural project.

I will comment open. That the total project cost is $470 plus million. We expect to spend roughly 300 to $325 million this year. We spent, oh , about $90 million last year. So the balance of it will be in '06. For Nordural, CapEx, I think we'll come in somewhere near $20 million for '06. 15 to $20 million.

Okay. Great. And just if -- I think in the press release you say it should be out by mid'07. Is any of that going to be up in '06?

No. It's '06. We are actually coming on stream in February of '06. We'll begin sales start-ups in February of '06 and by the third quarter we should be at full capacity on the expansion. Still '06/07.

Your press release it says mid '07.

Does it?

Yeah.

That's the final that we were anticipating but the start-up is '06 and we'll have most of it at capacity in '06.

Okay. Great. That's it. Thanks, guys.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from the line of Steve McNeil with Jenison Associates. Please go ahead.

Oh, I was wondering if you could remind us again how you talked about the sensitivity of the company's earnings to the change in the commodity price, historically.

Steve, the -- for '05, we effectively were about 55% hedged, including the natural edge from the Alumina and so basically the way you do it is you take our capacity, times 45%, times a penny, times our tax rate. Our normal tax rate, since we are not accruing taxes at a U.S. federal rate anymore, is about 32%. So if you go through that math I think our sensitivity in 2005 is each penny is like $.014 per share.

in '06 --

And '06 -- the -- I didn't have the exact percentages with me now, but the -- assuming we renew -- we -- there's roughly 45% of our capacity, I believe, is hedged in '06.

All right.

55 --

55 is open. Times our -- our tonnage, and so forth.

So that would take it up higher than 14?

Yeah, it would.

What are the -- the cost assumptions behind that because it sounds like on the margin, costs will be higher than -- in '06, than -- theoretically than they have been this past year. So what is the interplay there? Can you just help us understand that?

Well, again, the assumption is absent, you know -- certainly, if cost changes either go up or down, if you look at it in the context of one, and change the price alone. The cost will not change when the price after hum numb changes as one cent per pound, except for the percentage alum that contracts you have. So basically substantially all of that will flow to your bottom line.

But you're right, we are anticipating some cost increases for '06 based on the energy situation today, but that becomes in essence fixed and when you start then looking at movement in the LNE, you have to look at the way David describes it.

Exactly and the percentage I indicated 45% effective hedge includes our percentage of Alumina contracts that are a natural hedge.

A 45% hedge in '06.

Yeah. Approximately 45%. That's we priced, as well as the -- the natural hedge associated with our percentage, at Alumina contracts and our total arrangement in Nordural.

Fair enough. Thank you.

Thank you. At this time, speakers, there are no additional questions in queue. Please continue.

All right. Well, we'll just wrap up then. Thank you very much for your interest today. I mean, the third quarter as we see it was very challenging for us. We had a number of issues to deal with. We had the storm-related issues which impacted our performance during the quarter. We really had pretty good performance in our smelters. They were very positive, other than the remnants of the issues we had at Hawesville. We have been sitting with actually our people earlier today, Hawesville is back where it should be and we expect much improved performance from Hawesville in the fourth quarter.

We -- we view that we have excellent continuing -- actually, excellent prospects for growth in Iceland We will be working on further expansion growth there and we will be concluding our existing expansion and hope to have most of it started up as Jack has said next year. We view our primary -- not primary aluminum but our primary challenge at the present time is, in fact , the energy situation in the United States. And I think what we covered today is the full spectrum of the energy and some of John's thoughts and comments are very, very appropriate in today's world. And we really are looking at all the options we have to try to manage these costs and to try to reduce our exposure and the risks in the future to the volatility of these costs.

We don't have all the answers today. I think we would be foolish to tell you we do. But we can assure you we are -- we are actively working on these and we certainly hope to have a better view of this by the time we speak at the end of the year for the next conference call. Anyway, thank you very much and we'll look forward to speaking to you -- I guess it will be early next year. That's all we have, Doug.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and for using AT&T executive teleconference. You may now disconnect.