Century Aluminum Co (CENX) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by, and welcome to Century Aluminum Company fourth quarter earnings conference call. During our meeting today, we will have all of your phone lines muted or in a listen-only mode. Following the presentation today, there will be a facilitated question-and-answer session. Instructions will be given at that time. If for any reason you should require assistance during the call, please press star zero, and an operator will assist you off-line. As a reminder, this conference call is being recorded. I would now like to introduce Century Aluminums Director of Communications, Mr. Mike Dildine. Please go ahead, sir.

Thank you, Christina. Good morning everyone, and welcome to the conference call. For those of you joining us by telephone, this presentation is being webcast on the Century Aluminum web site, www.centuryaluminum.com with an accompanying slide presentation.

The following presentation, accompanying press release, and comments include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and expectations and involve known and unknown risks and uncertainties. Century's actual results or actuals may differ materially from those projected in these forward-looking statements. These forward-looking statements are based on our current expectations, and we assume no obligation to update these forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements. For risks related to these forward-looking statements, please review Annex A and our periodic SEC filings including the risk factors and management discussion and analysis section of our latest annual report and quarterly reports. In addition, throughout this conference call, we will use non-GAAP financial measures. Please refer to the appendix which contains a reconciliation of the most directly comparable GAAP measures.

I'd now like to introduce you to Century Aluminum Company's Chairman, Craig Davis.

Thank you, Mike. I just would like to take a few minutes and take the opportunity to thank all of you who are listening in for your support of Century over the last few years and to also look for your continued support. We, as you know, a new team will be ta -- has taken over and will lead this conversation today. The good news is you won't hear me talking about the Company today. You'll hear Logan and his team.

I think we've gone through in the last few years some -- some very difficult times and also some very positive times. We're sitting at a point in the industry now where it's very strong. The pricing is very strong, and I think the company is well-positioned to take advantage of the opportunities that are in front of the Company today. It -- it took us a little longer to get to this point than -- than we would have liked, and then some of you noticed that it was taking a bit longer. I think sometimes you must wait for good results, and where we sit today we have an excellent team. I don't want to overdo this for Logan because it's likely he'll be talking to me about it later. But, in any case, we've put together an excellent team. I think you'll see that the team that's in place will in fact be able to achieve more than we have done over the last five to ten years, and my expectation and the board's expectation is the Company will achieve even -- even greater results going forward with the leadership of Logan and his team. At this point, I'd like to turn it over to Logan.

Thank you, Craig, and hello everyone. After my first few months I'm pleased with the opportunities I've seen at Century. I've spent a good deal of time in the field and can say with confidence that we have well-managed facilities staffed by experienced and dedicated people. We have both attentive management team who have the background and skills to create real value. The markets will go up and down, as you know, but we are excited about the opportunities we have in the longer term. More on this in a moment.

You've already heard from Craig, and I thank him for his remarks. Craig Davis' leadership has been truly defined through tentry -- Century's performance in the last decade. As you know, Craig will continue to serve as Chairman of the Company's Board of Directors, and I personally look forward to his wise counsel and guidance as we continue to grow this Company. I'd also like to introduce some of the new members of the team. We are pleased to have Mike Bliss, our new CFO, and you'll be hearing from him directly. David Beckley is also with us this morning, and David, you know, has contributed in large amount to Century and its success. David has agreed to hand over and is assisting the transition. We'd also like to thank him for his contribution. Finally you all know Jack Gates. Jack is very well known to you all, and Jack will describe the operating results.

If we look at our strategy, I'd like to just brief you about it. It's really consistent with what the team has been doing over the last several years. We'll continue to grow our primary aluminum business as well as capacity. We will continue to diversify our production capacity towards low cost regions to improve our position on the global cost good. You are well aware that our focus is on Ireland -- Iceland, which is a variety of reasons, our existing in pre -- presence, establish relationships, political stability, and competitive energy costs and of course this makes a loss of sense for Century. I've just returned from my first visit to Iceland, and I'm happy to report that we just successfully energized the first parts of our new expansion which will increase our capacity from 90,000 to 220,000 metric tons of triamine metals per year. This is a great achievement. It's on budget, and it's on time. We are continuing to explore opportunities to expand the upstream into bauxite and aluminum. Both to support our primary aluminum supply chain but also because we consider this as a good business with attractive margins and returns.

Selective [INAUDIBLE - accent] metals as well as the hedging of certain input costs provide us with an important tool for underpinning cash flow through the market cycle while remaining meaningfully exposed to the full market. A final, but critical strategy, to maintain strict focus on safety, productivity, and operational excellence. Jack and his team, I must compliment them, are doing and excellent job and will -- he will talk for more about it.

Industry fundamentals were strong in 2005 and have continued to be so in 2006. The global industrial production grew by over 4% in 2005 with some 16% growth in China. Global demands for aluminum increased 6% in 2005 led by the mine increase of over 17% in China. In spite of record metal prices, supply continues to be idled through high energy and high aluminum costs. In the United States, over 460,000 tons of capacity were idle in 2005. And additional closures are possible. East Alco has recently been drived in December. It's interesting to note that most of the smelting closures in the U.S. Pacific Northwest that occurred in the last several years have not restarted. Even in this period of high metal prices.

In Europe, over 375,000 metric tons of closures have been announced. The latest one was in Sticks Mauser (ph) in Switzerland which will close in April. From our vantage points, global demand for aluminum should remain strong in 2006 driven by favorable global economic conditions and further bolstered by the continued double digit demand growth in China. On the supply side, cost driven production constraints in the U.S., Western Europe and China may make it difficult for the volume growth to be met in the near term.

Inventories remained at low levels, although they've grown a bit this year. The industries is obviously cyclical and major geopolitical events can have an impact on an otherwise favorable market. In summary, in the absence of a turn -- of -- of a downturn in global economic downturn, we look for the aluminum market to remain robust in 2006.

Turning to 2005 in an overview, this was the second best year on record for Century Aluminum. Buoyed by stro -- buoyed by strong markets and a full year of Nordural production, Century's production revenue current cash flow from operations was all at record levels. All of our plants finished the year in excellent shape, running full out with no lingering after effects of the operational and weather related events that impacted us in the third and fourth quarters. It is good to note, and John will talk somewhat on this, Oswald has been operating in full capacity in the last three months. As we reported in the third quarter conference call, the extreme weather conditions in the Gulf directly affected the supply and therefore the cost of energy and other critical raw materials. The storms impacted St. Ann and Gramercy particularly in the fourth quarter. At Nordural, the expansion to more than double of our capacity from 90,000 to 220,000 metric tons preceded on schedule and I'm pleased to note on budget. The project team is able to keep the expansion on budget even though the currency of the Icelandic krone has increased dramatically. And we've made progress on our Prudential new green fill smelt in Iceland.

In May last year, we announced the signing of agreement with Hitaveita Sudurnesja and Reykjanesbaer municipality on the tar development, sight and harbor development for a new aluminum smelter in Helguvik, approximately 30 miles from the city of Reykjavik. An initial study was completed in September confirming favorable conditions in Helguvik and a positive outlook for geothermal and energy development. In November we announced the signing of our joint action plans with Reykjanesbaer Municipality and the Invest in Iceland Agency which is owned by the Ministry of Industry and Commerce and the Trade Council for Iceland. In January, HOV Engineering Consultants issued the outline for an environmental impact statement and assessment for those proposed projects. I might say, after my visit there, this is an excellent site.

Overall, 2005 was a strong year for Century and a good base from which to move forward in 2006. If we move to look at 2006, we enter 2006 with strong metal markets. Healthy operation and low cost Nordural output capacity that will more than double. We will also have challenges. We continue to address our electricity cost at our Euro smelters and are cautiously optimistic about natural gas prices which have dropped from well under $14 to under $8 per million BTUs since November. I think in the last day or so, it's near 7. Jack will have more to say about these issues shortly.

As you know, collective bargaining agreements are coming up at both Hawesville and Ravenswood this year, and Jack will discuss this subject. Our production capacity has grown rapidly in recent years. And in 2006, we are transitioning to a full rated capacity of 745,000 metric tons. And that will be at full level in 2007 for the total period. We are continuing to explore additional growth both in primary aluminate and in bauxite and alumina. The market is very dynamic and we are working on some interesting opportunities to grow our asset base, diversify operations, reduce aggregate costs and create value. With that, I'll turn over to Mike Bliss who will provide further details on our financial performance. Mike?

Thanks very much, Logan. As --as those of you who have followed the Company for some time know, David Beckley and the senior team hear have built a terrific, terrific financial organization. I just want to say at the outset I am really pleased to be a part of it and look forward to working with the team going forward.

On the next slide, taking a look at the fourth quarter, sales, as you can see, increased 8% and operating income 13% versus the third quarter. Operating income was $3 million higher in Q4 driven by higher volumes and realized prices. However, energy costs were $9 million higher, and we were required to purchase some alumina on the spot market due to problems with some of our suppliers which cost us about $3 million versus Q3. The net loss for the quarter, as you can see, was $4.62 per diluted share. Included in this result was a non-cash after-tax charge of $5.12 per diluted share from mark to market adjustments on our forward contracts that don't qualify for cash flow hedge accounting. Excluding this adjustment, our earnings were $0.50 per diluted share.

I think it's important for everybody to understand that these forward sales contracts, these ones that don't qualify for our cash flow hedge accounting extend over a very long period of time. In this case, from 2006 to 2015. The volumes which settle in 2006 and 2007 are relatively small and represent only about 13% of the total volume that we've sold forward. Another way to look at this is that of the total liability at December 31, the amount attributable to 2006 and 2007 is only about $40 million after tax.

The Company's cash flow has also been strong. Though it's not on the chart, 2005 free cash flow, which we define as net cash provided by operations less capital expenditures, other than that CapEx for the Nordural expansion, was a record $117 million. This level represents over 140% of net income excluding the mark to market adjustment and 10% of sales. The strong cash flow has enabled to the Company to increase our future flexibility by contributing more equity to the Nordural expansion than we had planned, thus reducing our borrowing require -- requirements.

Going on to the next page, as you'll see, this slide summarizes our forward price sales. The second line shows the additional volume which would be triggered at current market prices. The natural hedge associated with our toll and electricity contracts at Nordural and our percentage LME alumina contracts at Ravenswood and Mount Holly add about 20% to our effective hedge. This rate assumes that the alumina contracts expiring this year renew at current market levels. Thus, adding the forward price sales and the hedged input costs, we are about 50% hedged for each of 2006 and 2007.

To remind you, the Company has had a well thought out and well executed hedging program in place for some time. Our strategy has been and continues to be one of balance. First we want to lock in enough sales at what historically have been attractive long-term prices to unner -- underpin our cash flow during weak markets as Logan explained. We also want to remain meaningful exposed to the market in order to exploit strong market conditions. And -- and with that I'll turn it over to Jack who will talk about our operations. Jack?

Thank you, Mike. Turning to slide 10, my comments today will cover the operating performance for the total year as well as the fourth quarter. The excessive pot failure problem that Hawesville experienced in the second and third quarters of 2005 are over as evidenced by the production records set in December of '05. Operating pot count is back to normal, and December's energy efficiency was the second highest in the smelter's history. Hawesville operating performance continues to improve as the January '06 numbers broke the production records set only in December. The new automatic sow casting machine installed late in 2005 is now fully operational, which will significantly reduce the cost of casting at Hawesville.

Ravenswood had an excellent fourth quarter to finish 2005 with several plant operating and efficiency records. Plant records were set in total pot room production, power efficiency per pound of alumina produced and labor productivity. Mount Holly's fourth quarter pot room production exceeded forecast. The total 2005 pot room production was slightly before -- below the stretch goals that we set for 2005. This variance was basically due to the earlier in the year extra pot failures that Mount Holly experienced. The smelter continues to increase production capacity by increasing average on the two pot lines. Energy cost is a challenge that we continue to work on every day.

The Nordural smelter's fourth quarter pot room production was above forecast and for the total year the smelter exceeded every production and efficiency goal that was set. Pot room production exceeded the annual forecast by 1.5 million pounds and was a plant record. The plant continues to operate at a level equal to the best smelters in the world. As -- as Logan has mentioned, our Nordural expansion continues on schedule and on budget. The first pots were energized on the 14th of this month with the expansion projected to be completely operational by year end which will take the smelter to 220,000 metric tons per year. Just kind of in summary for the smelters, all four smelters finished 2005 operating above their rated capacity and that trend is continuing in 2006.

Safety results throughout the Company were excellent, setting several new plant records. The contract -- the labor contract expires at Hawesville March 31, '06 and at Ravenswood on May 31, '06. While these negotiations are just now getting underway, we're confident that a settlement at both locations will be reached that meets the needs and expectations of all parties.

Further about the operations of bauxite and alumina. After the -- after a a rough third quarter due to the hurricanes that hit the Gulf coast, both Gramercy and the St. Ann bauxite mine returned to normal operations in the fourth quarter of '05. For the complete year '05 Gramercy operated better than 94% of rated capacity even with the natural disasters that occurred. The refinery personnel did an excellent job under some very difficult circumstances.

We've talked about natural gas. The price of natural gas peaked in the fourth quarter of '05 and continues to fall due to improving supply as additional capacity comes back on stream and the milder than expected winter that we're now experiencing. The St. Ann bauxite mine missed its fourth quarter and annual production forecast due to the five hurricanes that either touched Jamaica and the excessive mobile equipment down time that we experienced during the year. The joint venture partners have committed a significant recapitalization of the mobile equipment fleet which will result in increased bauxite sales in 2006 over 2005 and in the future years, while improving operating costs.

In the market part of it, physical demand for aluminum remains strong as evidenced by the -- the current high [INAUDIBLE] price and the continuing improvement in the Midwest transactions premium. Aerospace plate business continues very strong with Boeing taking several large orders from Middle East customers. Scrap is available, but demand out of China seems to be increasing. The demand for high purity alumina has increased, pushing these premiums up due to a tightness in supply. This increased demand for high purity fits the Hawesville order book very well as the majority of its production is high purity aluminum. Century is booked out on its bullet sale -- billet sales for 2006.

We talked a little bit about natural gas. Let me kind of summarize natural gas. We talked between August and October, natural gas prices at the Henry Hub doubled which impacted our pre-tax costs during the quarter of about $9 million as Mike mentioned. The good news is supply has been coming back on stream. Inventories are building. And as you can see by the chart, prices seem to have peaked and are now headed lower. We're obviously watching this very close.

Looking at overall capacity, primarily on the capacity of the chart on page 13 illustrates the growth in Century's primary alumina capacity from under 300,000 metric tons in 2000 to 525,000 metric tons in '03 and now at 615,000 metric tons in 2005. By the fourth quarter of this year, we'll have the capacity to produce 220,000 metric tons of primary aluminum on an annualized basis in our Iceland smelter. This will provide us with a full year global capacity of 745,000 metric tons per year for 2007. Now I'll turn it over to Logan for his closing comments.

Thank you, Jack. 2005 was the second best year for Century's history. Revenue and free cash flow were at record levels. Operating income was strong despite some real cost pressures, and we are working very hard on those. We continue to expand at Nordural and it's on time and on budget. With few exceptions, our U.S. operations have performed well, and we managed our way through some unforeseen challenges in the year, especially for energy costs and weather related supply disruptions.

I'd like to look at 2006. As we enter 2006, electricity prices continue to be an ongoing challenge in the United States, and we are taking proactive steps to manage this. We are guardedly optimistic about the spike in natural gas prices will continue to moderate. So far this year, operations have all done very well, consistently across the board. Jack has just described our growth potential in Iceland. 2006 will be for us a transformational year for the Company as we ramp up to 745,000 metric tons of capacity in the fourth quarter of this year. With full protection from the expansion available for the whole period of 2007, 30% of our total production will be sourced outside the United States in a global cost competitive facility. Finally we are evaluating opportunities in both primary aluminum and box -- bauxite and alumina to make Century stronger and more globally competitive. I'd now like to open the discussion for any questions.

(OPERATOR INSTRUCTIONS) And first we'd like to go to the line of Brett Levy with Jefferies. Please go ahead.

Hey, guys. Just to kind of get a little bit better sense as to what's coming in the next couple of quarters, can you either give direct guidance for the up and coming quarter and years or could you also potentially just give us a little bit sense of a metric with your hedges where every penny movement in aluminum might be a driver of a certain amount of operating income and then also could you give some sense as to sort of how, with the hedges, movement per MMBTU, dollars per MMBTU of gas might be a driver?

Thanks, Brett, it's Logan, I'll pass it onto Mike Bliss.

Sure, let me -- let me take it one step at a time. First we -- we have talked about this. We appreciate the comment. At this point we're going to choose to continue to go with our historical -- with what we've done historically which is not to give direct guidance on a quarterly or annual basis. But let me try to provide some help and context as you've asked it. A penny a share in the LME price, if you take it through our volumes, our percent hedged, as you correctly pointed out, equals about 15, maybe $0.15.5 per share in the Company's earnings. So you can model it however you like, but that's -- that's the variability. On the natural gas side, as we said before, we use about 9 million -- million BTUs of gas per year, and we're at this point for the balance of the year, March through December, about -- hedged on a little over a third of that. We're about 36% hedged to be precise. So again, based on $9 million annual usage, you can, depending upon your -- your own estimates for natural gas,you know where it is today, the -- the near end contract is in the low 7s, and those going out upwards of 12 months are almost $1.50 in excess of that. You can -- should enable you to make some estimates.

And then as you guys look into alumina or bauxite potential acquisitions, can you guys talk a little bit about your thoughts with respect to preferences, whether it be debt or equity, in terms of financing these -- these acquisitions.

Yes. Brett, it's Logan. I suppose it depends on what you're looking at. And wee look at both -- both pathways. It's a bit -- it's a bit early for us to even discuss that, but I think we obviously look at both pathways. So, I think, Mike, you want to make any comment?

No. The only thing I would agree with that. The only thing I would add, obviously, it depends on market size and market conditions. We'd look at our option, the Company I think has been very creative in the past about gaining the most flexible and lowest cost financing. We'd have to look at market conditions.

i would just add a bit of a comment on that and perhaps a bit of color. The St. Ann's facility is going to be recapitalized on its mobile fleet. So our ability to produce more bauxite in the next 18 months is going to improve as we go on, work further this year with deliveries. So I think Jack made that remark. You may well have picked it up.

And last one and then I'll pass the ball. Have you guys heard any rumblings of people potentially starting any of the northwest capacity in aluminum?

Not as far as we know, and I've got a general consensus around the table here no one's heard anything.

Thanks very much, guys.

Thanks for your questions.

And next we'll go to the line of Amir Arif with Friedman, Billings, Ramsey. Go ahead please.

Hi, guys. It's actually Sam Arnold. Couple of quick questions for you. First touch on the first question. You guys said for natural gas use you used 9 -- what were the units again? That does -- that seems extremely low.

That was for the usage. Mike?

9 million was the usage.

9 million BTUs or 9 million million BTUs?

9 million million BTUs.

Okay. Okay. That makes much more sense. Okay.

Yes. We'd enjoy having the lower number.

[ LAUGHTER ] Okay. Great. I just wanted to clarify that. And the second point would be on the actual acquisition market, you had mentioned the primarily upstream components. Would management consider looking at any downstream considering that some other majors are looking at selling out some of those assets?

Sam, I don't think it's on our list. It's not where we want to go. I would be remiss of me to say never, but unlikely.

Okay. Okay. That's not your primary objective. But if the right deal came around, you wouldn't be opposed to looking at it.

Yes. And don't -- please don't lead anything from our comment. That's the way we are in our strategy.

Sure. That makes sense. Okay. That's all I had. Thank you, guys.

Thanks, Sam.

And next we'd like to go to the line of Terrence Ortsland with PSO and Associates. Go ahead please.

Thanks. Just to follow up on the acquisition and the futuristic plans, the -- are we looking more like a partnership sense in Brownfields or Greenfield capacity on the upstream -- I'm sorry, on the primary end of the bauxite alumina opportunities?

Hi, Terry. It's Logan. Terry, we've been looking at everything, but I can tell you one of the things that we're looking at very hard at the moment is how do we go and bring on stream our full 260,000 tons in Iceland. As you know, we've just powered up to the 220, and we're looking at all the ways to -- to bring on the additional and that's Brownfield as you well know up to the 260. But in terms of the other productions, we'd be open to anyone.

Just on the Icelandic currency, I don't know why the currency is so strong, except alumina I don't see anything else. What's the impact on the currency on the -- on the cost, and how much -- what's the component of the -- again in a futuristic sense of any Greenfield plant, how much of the domestic cost component of a -- of a capitol of plant in Iceland as an example?

Terry, just to make clear, we also are impacted by the Euro and the Icelandic krone, and I don't have those answers to -- to hand, but we'll get someone to come back to you. Certainly in the prices we have managed to ameliorate the impact of the increase in the value of the currency, particularly the Icelandic krone. So we're well within our abilities and budget on that particular expansion.

Thank you very much. And, Logan, good luck with your new responsibilities.

Thanks, Terry. Nice to hear from you.

And next we'd like to go to the line of Vladimir Jelisavcic with Longacre. Please go ahead.

Good morning, gentlemen. Thank -- thank you very much for being on the call and hosting it. Just a couple of quick questions. I didn't understand the -- your -- your comment. I didn't get the actual facts regarding your comment on where your forward prices are locked in. I believe in response to the first question on -- on penny per pound sensitivity in aluminum, I think you -- I think you made a statement regarding the -- the average pricing year by year of the forwards. Is that correct?

Yes. The -- the best way to look -- this is Mike.

Hey, Mike.

Hi. How are you? The best way to look at the forwards is -- and this is consistent with what we've said before is if you go back and look at the time that we've sold those amounts forward, specifically the two large forward sales we did in late '04 and mid '05 respectively, we did them -- first they were done on an LME basis so you've got to add in a Midwest premium on top of that, but in terms of the LME we did them pretty much consistent with what the forward screen was showing at that point in time. So again, if you were to go back and look in November of '04 and June of '05 at what the forward screen was showing and look at those forward years for whi -- during which we sold forward, that's about what we achieved on a -- on an LME basis. And then you have to add in whatever you think the right Midwest premium is over time. It's a nickel plus or minus a half a penny sitting right here today.

And how do those two ma -- large transactions, how do they spread out through '06, '07 and beyond?

The -- the volumes, as they kick in, are in-- I believe we've had them in our documents in the past. The first sale that we did, just to -- just to tell you what it says in that-- the first sale is from 2006 to 2010, and the second sale doesn't even kick in until 2008, and that lasts through 2015, and so the volumes under the first contract do start this year.

Okay. I appreciate that.

No problem. And if you want to get into more specifics, we can obviously provide you more off-line.

Thank you very much.

Just -- you can actually get the detail in our 10-Q I think if you look at that.

Very well. Very well. I'll take a look at it. Thank you for that. And with the -- with the -- with the anticipated conclusion of -- of -- of your Icelandic expansion in the fourth quarter of '06, do you plan on starting to pay down debt in '07? Can you shed some light on your expected uses of your free cash flow in '07?

Sure. The -- as you've correctly pointed out, the expansion will be completed in the third quarter of this -- this calendar year. The -- the -- by the fourth quarter of this calendar year. The -- the facility is cash flow positive today and has been and will obviously become more cash flow positive as -- as the additional capacity comes on as Jack detailed. So we will be producing cash flow significantly in Iceland if that's what you're asking about. We have obviously a debt facility there upon which we've drawn. You see it on the December 31 balance sheet. And obviously we'll have the ability to pay down that debt. It's a good facility with good and well priced flexible financing. But we'll have to look at what other alternatives are coming out of that - coming ouf of that facility. Again, the debt is prepayable without a penalty, so we do have the ability to just paydown that debt.

And just in terms of the -- the contribution margin from that incremental 130 million tons per year of told capacity, can we just sort of look at the -- the sort of change that occurred in your financials when the 90 million ton per year Iceland facility came online and just basically kind of extrapolate that for an additional 130 million tons? Would that be -- would we -- would be -- would we be very far of if we did that?

Well the first thing I -- we need to point out is the whole incremental 130 million tons will be bey on as of the end of the expansion in the fourth quarter, but the actual production from the expansion will be about half that this year. So that's the first thing you need to understand. Second, I guess the only additional guidance I'd give you is, if you go to the fourth page of the financial statements we filed with the press release last night, you can see what the average realized towing revenue -- revenue that comes out of that facility is on a per pound basis. You can just calculate it.

Sure. I'm looking right at it.

Okay. And that will give you at least a sense for what the incremental revenue is coming out of it.

I just want to go back -- It's Logan, to your question of the use of funds in Iceland. I just want you remind you of the comment I made about looking very seriously at going from the 220,000 up to the 260,000. So there will obviously be some use of the funds.

For an additional 40 million ton per year expansion?

4040 thou -- 40,000 tons. Correct.

I'm sorry. 40 -- 40,000 tons per year expansion. Right. Right. Right. Right. Right. Okay. That's -- that's definitely very, very helpful. Other than that additional 40, just looking at -- and let me just take a step back. When do you -- when do you anticipate building out that -- that 40,000 tons per year? Is that -- is that a first half of '07 project?

We're looking at it now, and it's -- the preliminary work's well in hand. And when we have further information, we'll let you know. So we haven't got timing on it as yet.

Okay. Definitely -- definitely that's -- that's -- that's fair enough. Thank you very much, gentlemen.

Thanks for the questions.

Appreciate your help.

Thank you.

And the next question comes from the line of Timothy Hayes, Davenport & Company. Please go ahead.

Good afternoon.

Hi, Tim.

The question I had is on hedging, and in looking at it for '06, you've increased the amount of forward sales from the -- your previous release. Am I to infer that during the fourth quarter of '05 put on for '06 additional hedges for '06?

Yes. That's correct.

And does that mean -- can I take a straight difference and that implies that you put on 66 million pounds of hedges during that fourth quarter?

That's pretty close to it, yes. You got it.

And was that -- was there any particular point of the quarter when you put those hedges on?

I will have to come back and get you that. I can't -- I can't cite you that specifically. Good question. We'll get you that, Tim.

From my memory, it's from late November.

Late Nov -- very well. Okay. And then a couple other line items. What's your expectations for SG&A for '06? And then the -- could you explain more the deferred tax asset on the cash flow statement, why that was such a big negative? Please.

Sure. The run rate cash flow for '06 good number to use is in the 7 to $8 million range per quarter. And then on the deferred taxes, obviously the big -- the big number you're seeing is related directly to the mark to market adjustment as we've obviously provided a tax benefit against it but obviously didn't get in cash from that. It's just a book provision.

Okay. And the the last question is the unpriced power at Hawesville I think we came into the year with 18% on price. Could you give us an update on where -- what happened with that and the ability to price that power?

We've -- we've recently actually secured that, so we're feeling a lot more comfortable that we've got secured power there. Jack, do you want to make any further comment?

That says it. We're basically covered with substantially all of our power for Hawesville for this year.

Okay. And any update on the -- your endeavors to extend that contract for the entire smelter out to -- what is it? 2023?

2023, and we've done the MOU, and we continue working on -- on getting that in place, as you're well aware.

Thank you very much.

Thanks, Tim.

And the next question comes from the line of Jonathan Goldberg with Highline Capital. Please go ahead.

Hi. Good afternoon.

Hi, Jonathan.

I was really just hoping you could expand a little further on your thoughts on the overall aluminum markets. Anecdotally, from what you were saying, it sounds like markets and demand are strong. We've seen the Midwest premium tick up, and yet if I just focus on the LME inventories, that's risen pretty perceptibly year-to-date, and I'm just wondering if you could help investors kind of reconcile that.

I think there's two parts to it and the demand is cyclical, as you well know, so I'm not trying to get at that, and we really don't talk to the future. The -- the Chinese program and the way they operate and continues and the oil stake in China as you saw grew about -- about 17% last year. But on the supply side, I think things are constrained. It's not that easy to bring on new supply. And -- and so that will be -- continue to be part of the challenge. A large amount of the smelters are obviously seeing cost pressures as well, and I think to bring new projects into fruition are going to take a couple of years. And on the inventory side, if you look at the -- I think it's 700 plus thousand tons. As a total of the whole business, it's a very, very small number of days of inventories. It's growing a bit, but I think the market remains robust and healthy.

Great. Thank you.

And the next question comes from the line of Carlos De Abajo with Morgan Stanley. Please go ahead.

Good morning. I have three questions if I may. The first one is I would appreciate if you could quantify for us the impact of the weather related additional costs that you faced in the fourth quarter.

Yes. Certainly. I'll take that. As I said in my comments, about $9 million -- this is all versus the third quarter now, about $9 million related to increased energy costs and about $3 million given the fact that we had to go out on the spot market and purchase a little bit of alumina given that some of our suppliers were having delivery pro -- and transportation problems.

And those 9 million include both natural gas and the additional power charge in Mount Holly?

That's correct.

Okay. Second question would be I assume that the ramp up of the Nordural expansion in 2006 is going to be a lean year. I'm trying to for modeling purposes understand how that is going to impact your -- your bottom line. I assume that you're going to be paying interest on that debt and also you're going to be depreciating a part of the -- the expansion. Do you have any idea of how -- how that might impact your bottom line?

I'm looking at Jack. When you said linear, I think the idea is we're going to bring on so many pots per day, and we're going to be at the end of the year, fourth quarter we're going to be fully ramped up. That's the process. For modeling purposes, you can adopt a number of ways of doing it but your thought about linear seems to be more or less right. I think Mike made comments on the other part.

The only thing I might add to that is as it relates to the debt, i.e. the financing of the additional expansion, it's unclear as to exactly how much incremental borrowing we'll have to do. At current metal prices, or anything close to current metal prices, we'll be able to finance a good chunk if not all of the remaining expansion out of cash flow directly from Nordural. And so, it's a moving target obviously given the metal price, but we're feeling very confident that number one we will not put anymore cash equity from the United States in, and number two we may not have to borrow too much incremental out of our Icelandic fac -- debt facility.

Just a follow-up on that question. Is your debt appreciation related to volume or is more related to just timing and charge, period?

It's timing. Timing.

Okay, good. My third question is I saw a 23% increase in your SG&A costs for the fourth quarter both on a year-over-year basis and on a quar -- sequential quarter. I wonder if you could give some -- what were the drivers behind this? And also what can we expect for Q1 and for '06

Yes. As I -- as I said, to answer your -- the second part of the question first, a good number to go forward on on an average quarterly basis is in the 7 to $8 million range. There could be a little variance on a quarterly basis, but that's a -- that's a good estimate for '06. In terms of what happened in the quarter that just completed, we did have some one time costs for mainly personnel matters. Got a new team going, coming in here, some retirements and what not. That did drive just a little bit in the fourth quarter and that's the variance that you're correctly pointing out.

Just a final question if I may. Craig mentioned the new -- sorry. Greg mentioned the new -- the new power or the secure power for the Hawesville smelter. Are you paying sort of a spot prices or were you able to come up with a, say, one year contract term?

It was Logan, and we have come up with a price with -- with the supplier. So it's not on the spot.

Okay. Thank you very much, gentlemen.

Thank you.

And the next question comes from the line of Larry Peck With Copper Beach Capital. Please go ahead.

Hi guys. Couple questions. The first one is regarding the Hawesville power contracts. Can you just sort of give a framework as to what the renegotiation or the -- or the negotiation would look like? And is that going to be sort of net present value positive in terms of is there any give up on the near -- near term pricing to get some benefits from the later term? If you know what I mean.

We're all looking somewhat perplexed at the question. Can you --

Well, here's my question. Are you -- is there any -- are you negotiating prices through -- are the current -- is the current contract, which I believe goes through 2010 or 2011, being renegotiated to your detriment at the -- for the benefit of getting more preferable pricing later on? In other words, should we see power prices go up again near term when it gets renegotiated or no?

I understand the question. Jack?

And I guess the answer to your question is -- is we would give up a little bit if we could -- if we could negotiate a power contract that takes us through 2023. We would give up a little bit on the near term.

Okay. But -- but net net in a present value basis it would still be -- still be a win for you guys? I'm trying to gauge how much you would be willing to give up though in the near term so I can start modeling '07 is what I'm getting at.

We're try -- we're try -- we're trying to help you. We're obviously -- you also lose your exposure to the near term by giving up at this point in time. I'm trying to think of how we can help you, but I haven't got any bright answers at this point in time. Can we try and come back to you?

Sure. My other question is just philosophically the desire to get sort of the more of the -- the bauxite alumina business more so than you are. You guys have obviously some very astute guys on you board from Glencorp. Is there anything that's -- what's driving the decision to -- or the desire to want to get into that business? Is there something that -- that you guys are seeing from a future tightness -- continued tightness in alumina? What's -- what's kind of the impetus behind that?

I think, without being facetious at all just to answer the question, I think it's a good business. It's got good margins. In the industry it seems to be that you make fairly good money upstream, and I think that's -- perhaps an earlier question we were asked, it's a lot of other companies getting out of the downstream business. So we think it's good business. It's got good margins. And the market for alumina is seems to be tight. How long that will continue, we don't know. We think long-term it's actually a good business to be in.

Okay. Thank you.

And the next question comes from the line of Alex Latzer with Merrill Lynch. Please go ahead.

Yes, thanks. And congratulations on the new assignments, Mike and Logan.

Thank you.

Congratulations on the retirements of David and others.

Thank you.

Yes.

You should see the smile on this side of the table.

I hope you're having some global warming in Minnesota for your sake, David.

[ LAUGHTER ]

Otherwise, good luck. I had a question following up on the alumina. I've been hearing more and more about -- I know the Chinese are still significant importers of alumina but that they were investing -- investing aggressively to increase their capacity, and that -- whether that had really -- should factor in, I mean, I know that the percentage in the LME alumina contracts has -- has certainly come up nicely, but I'm just wondering if you had factored that into your analysis on the -- on the market outlook and the returns versus the aluminum side.

Yes, we have. We look at that. Again, it's a moving feast, if I may use that term. We're looking at what the numbers are today. You've got a model that's some ways through a longer term and try and pick -- pick a range of numbers that show attractive returns. Again, we do like that business, but it doesn't mean we want -- won't take on opportunities in the aluminum, in the metal portion. If good opportunities come along, we'll look at those very seriously.

Yes. That's helpful. You have a little ways to go anyway to first become fully reliant on your own supply of alumina before you even talk about getting long, for instance.

Yes. I think that's early days for us in this process. We certainly have [INAUDIBLE - accent] at this point in time.

Okay. And my other question was -- for -- to get to the 260 -- well, let me before I get to that, what rate, I just want to confirm, you mentioned that Nordural in the fourth quarter, do you expect to be at the 220 rate, for -- you said for half the quarter? Was that right?

No. We expect to be -- we expect to be at -- at the rated capacity in the fourth quarter. We're -- we're leaving that in the fourth quarter. We're put on the pot with Jack and his team last week, and we're now -- we're going to bring in pots on a regular daily basis. And looks by the fourth quarter we'll be fully rated up. And we think, Jack, for the 150 we'll see about a half --

About half of it, yes.

Okay. Great. That's helpful. To get to 260 then again, what would be the -- if you could remind us of the critical path to getting there -- obviously I guess it's just a simply a power arrangement? Is the power available? It's just a matter of reaching an agreement with the power provider or does the power have to be completed?

That's a good question. And obviously the answer is all of those. The power we're working on. On the con-- contract on the project side, we've got an operating and project team in place, and we've got engineering facilities and obviously we've got the finances Mike Bliss has pointed out. So it's a matter of putting all those pieces together and then being able to say we're ready now to go for the next level and take it to 220 to 260.

And on the construction side, we -- the infrastructure is in place. Really all we have to build is the pot rooms and the environmental system that feeds the additional production. Everything else is in place.

Okay. Thanks for that, Jack. And my last question here is any cost targets, Jack, I put you not too much on the spot, but I know we have this wonderful smelter coming in at an expanded rate, a very low cost attractive and I was just wondering -- and they also have your -- your operational targets for -- for costs in the United States. I was just wondering what kind of a sort of year on year sort of sense per pound benefit would you expect full year in '07 versus '06 from -- from bringing on Nordural and then what are you doing on a operational basis at the existing --

Well, we're -- we're always battling costs, to bring the costs down. Right now in the -- in the market -- the energy market we're in is kind of a crazy market. A lot of that depends on energy costs. You tell me about what natural gas, electricity is going to do. And I'll tell you that -- I will just say this, the -- the -- the Nordural smelter is one of the more efficient smelters in the world, and it will bring our overall production costs to our Company down.

You didn't finish your sentence. It will bring it down by how much?

$0.01 to $0.02 a pound.

Oh, 1 to 2, sorry. That's excellent. Thanks and good luck going forward.

Thank you for the question.

And next we'll go to the line of Dan Whalen with Bear Stearns. Go ahead, please.

Hi everyone. Just another question here on hedging. It sounds like you got a bit more aggressive in the latter part of the quarter. I was wondering, given where current prices are -- aluminum prices -- would you be willing to hedge a greater percentage of your production than versus the past?

That's a good question. It's one that we're wrestling with. I really have no view or comment to make today, but that's a good question. I mean, there are some favorable prices. I think the forward screen looks at about $2,100 a ton. We obviously would look at that. It's also been good being exposed to the market as well. We have to balance that as well. Okay. Thanks.

And next we'd like to go to the line of Shaun Nicholson with Kennedy Capital. Go ahead. Please.

Hi, guys. I just have a quick question on -- you mentioned a lot of capacity was idled in -- in the U.S. and Europe. Were those direct competitors or what happened? Why did that happen in this environment?

Sorry. We missed that question. Would you mind repeating it?

I'm sorry. You guys mentioned on the call that -- you stated in the U.S. and Europe you saw some capacity remained idled. And you -- could you give a little more color on were those competitors of you guys? Were there -- were those just -- what was going on in the market for that to happen?

It's just an observation. They've remained idled and our observation is that these metal prices, no no one has actually brought that capacity on.

And remember, too, it's very, very expensive to start a smelter that's been shut down. So to do that, you have to have a long-term power supply and an alumina supply to do that. It's just not there, even in today's market.

Okay. So you're not obviously worried about that into '06 of that coming back online at all.

I think the point we're trying to make is the supply side remains constrained. And although the metal prices have been somewhat attractive, we haven't seen any movement to bring back already moth balled, already shut down capacity.

Okay. Thanks, guys. That's all I had.

And next we'll go to Lloyd O'Carroll with Davenport and Company.

Hello, guys.

Hello, Lloyd.

One -- one bit of detail in Q4 was the income from equity income from joint ventures was down. If memory serves, this is basically third party bauxite sales and hydrate sales out of Gramercy. Was -- was that mostly a function of -- of storms, either lost production, gas, and we'll bounce back or is there something more going on?

Hey, Lloyd, it's Mike. And it's -- it's both. Obviously the storms did impact the Jamaican operations. Absolutely. And they're back. They obviously to point out to you and this will obviously be in the K, we did change a little bit after discussing with our accountants the presentation of that equity income. It's a slight change. It doesn't affect the bottom line. From a high level, I'll take you through it quickly, and if you want more detail, we can talk about it off-line. The way we used to do it was in all of our joint venture interests to bring over the income on a pre-tax basis, fully pre-taxed, and then provide a tax provision for it in our own tax line. After looking at Jamaica specifically, the preferred treatment that we came to as agreed to by our accountants was to bring over the Jamaican income net of Jamaican taxes, so you're deducting Jamaican taxes before you bring it over. Therefore we're providing a little less taxes on our own tax line. Bottom line is the same. Just a little bit of movement between that equity income line and the tax provision line on our income statement.

Okay. So a little squiggle in our model.

Little squiggle, yes.

Okay. Thank you.

You bet.

And next we'd like to go to the line of Timothy Hayes, Davenport & Company. Go ahead please.

Thanks. Just to follow-up on that, do you have any tax guidance, the tax rate guidance for '06 then?

Sure. At -- as -- as you guys know, followed it -- David has discussed this in the past. It's a bit of a moving target given metal prices and what not, but a good number to use for '06 on a book basis is in the kind of the 30% range. Effective tax rate.

Thank you.

And now we'll go to Tony Rizzuto with Bear Stearns. Go ahead please.

Thanks very much. Congrats to all on the organizational moves. I've got a question on Jamaica and the labor situation which currently seems a bit unsettled. Been seeing some of the other players that having some issues. And in regards to your bauxite mining operations there, should we expect some type of impact in -- in the first quarter? And -- and more importantly from a strategic point of view, could you describe for me some of the things you're looking at as you're -- as you're viewing opportunities out there in the global landscape for your upstream activities and potential further activities in bauxite and alumina in terms of where you are thinking are possibly the more attractive places and is pricing becoming more of an issue for you today?

Yes. That's quite a number of questions.

I'm sorry to lump it all together.

Let me see if we can work our way through some of them and just pick up -- pick up with us if we've messed any up. And I'll ask Jack to comment.

All right. Thank you.

I think just on the labor situation in Jamaica, it has its challenges, but it also has its upside, so I think in ours and Dan's business we're pretty settled at this point in time, and we don't see a spill over in the first quarter. I'm not sure why you asked that question, but we don't see any spillover. But it can be volatile on occasion. In terms of looking at opportunities upstream, we're really not restricting ourselves. We've got a small team working on it. You probably know one of the individuals, Julio Castillo, and he's working with Jack and myself and Mike, and really we're looking at a number of opportunities, some small, some large. And no more comment than that. But in [INAUDIBLE] St. Ann's, we have the capacity with the new equipment coming on with our partners to actually leverage some more bauxite, and we're going to do that.

Okay, Logan. All right. Thank you very much.

I'm going to -- let's ask Jack, he may have some additional comments.

I agree, Logan. As I said, the -- the issue -- the contract was we settle our labor contracts, our part of it. They're still an issue with the government that the union's talking to the government about. That hasn't been recon -- rec -- reconciled, but I think it probably will be. But as Logan said, we don't anticipate that'll be a problem. The other thing we've done is we have -- we brought in some outside contractors to help us with mining. We currently have three outside contractors that are -- that are helping us mining which will also help us in increasing our production in St. Ann's this year. Logan said it's an issue down there. It's not totally settled yet, but I think it will be settled.

Okay, gentlemen. Thank -- thanks very much. Appreciate it.

And next we'll go to Jai Zing with Fora Research. Please go ahead.

Hi. Good afternoon, guys. Can you hear me?

Yes, we can. Hi.

Hi. I just had a quick question on the power supply contract on the Ravenswood facility. Sorry if this question has already been asked. If I remember correctly, the old contract expires by the end of 2005, and it is a fixed price contract, and obviously you guys are already had a new deal - new contract starting in '06. Can you give us a little bit -- quantify how much? Is that going to be high -- higher price under the new contract? And how does the new contract work? Is that fixed or kind of schedule price? Can you quantify the potential increase in the power costs?

It's -- it remains about the same. Jack, you want to comment?

Yes. It's the same price contract. It's an evergreen contract. We have the right to terminate with 12 months notice. But it's just an evergreen contract, and it's basically was same price -- same unit price.

Okay. Thanks.

Thanks for the question.

And if there are any additional questions, please press star 1 at this time. And next we'll go to the line of John Emerich with Iron Works Capitol. Go ahead please.

Hi, thanks. Could you just clarify the -- the free cra -- cash flow number for the year? How much of it was in the fourth quarter.

Okay. Thanks for the question. I'm looking at Mike.

We'll get back to you.

That's fair enough. Thank you.

Sure.

And next we have Milan Gupta with Southpoint Capital. Go ahead, please.

Hi, guys. A couple quick questions. How much non-Nordural CapEx do you expect in 2006?

I think the range we use is somewhere between 15 and 20 million on an ongoing basis. Those are good numbers.

And that would include Nordural as far as maintenance CapEx but not the expansion CapEx.

Got it. And you said 9 million of energy charges this quarter included the Mount Holly surcharges?

It did.

And how much were those?

Of the 9 million, most of it was natural gas. Between $1 million and $2 million was -- was Mount Holly electricity and the rest was gas.

Okay. And then just on the alumina front, you said that there's a problem related to supply. Can you talk about what exactly that was? I don't know if that was St. Ann or an external supplier. Is that resolved? And if you could just provide any update on what you're seeing in the market for linkages as some of your contracts expire at the end of this year.

It's -- it's an external supplier and had to do with the hurricanes that hit the Gulf Coast which interrupted our supply. And then -- and right after hurricanes cleared, there was an explosion for most of plastic that -- that affected the supply of caustic soda that our supplier uses, and they [INAUDIBLE] because of that. That is -- it's -- it's over. They're back and operating now.

And then on linkages, do you just sort of -- do you expect sort of 13% or -- I mean, 14, 15% in the market? What are -- what are you guys looking at?

I -- I really don't want to comment on -- on that. It -- it could be anywhere. This market's pretty volatile at this moment. You see some of the numbers that are spoken about going on spot cargos, and I really -- I don't think it's appropriate for us to comment.

All right. Thanks.

And we'll also go to Carlos DeAbajo with Morgan Stanley. Go ahead, please.

Another question was I noticed that the liability -- due to affiliates went up around 240 million from Q3 to Q4. I wonder if you could comment on -- a little bit on that, please.

Sure. It's Mike. That's just simply the balance sheet accounting for the mark-to-market liability.

Related to the -- to the hed -- to the hedges?

That's correct.

That's correct.

That's correct. Because Glencorp are the counter parties there. It gets booked on the balance sheet as due to affiliates.

Okay. And a final question would be I noted that, if you compared the quality of shipments in '05 versus '04, they went down every single quarter. Could you -- could on comment on --on the -- the big drivers for that? Is that -- is that the production issue that we saw in Hawesville?

Yes. That's the basic reason.

Okay. Thank you very much.

Thanks, Carlos.

And we have no further questions at this time. Please continue.

First of all, we want to thank everyone for coming on and being on the call today. We appreciate your time. We look forward to interacting with you in the future. We've got an exciting year ahead of us. 2006. And bringing on Nordural up to 220,000. The operations are all going well. We're happy and settled with the team. And looking forward to having a good year. And thank you very much and wish you all the best. Thank you.

And, ladies and gentlemen, that does conclude our conference for today. We do thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.