Century Aluminum Co (CENX) 2006 Q1 法說會逐字稿

Welcome to the Century Aluminum first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to our host, Mr. Mike Dildine, Director of Corporate Communications. Please go ahead, sir.

Thank you, Ricardo. Good afternoon, everyone, and welcome to the conference call. For those of you joining us by telephone, this presentation is being webcast on the Century Aluminum website 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 actions 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 sections 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 President and Chief Executive Officer, Logan Kruger.

Thank you, Mike and hello everyone. Welcome to Century Aluminum's conference call covering the first quarter of 2006. We have just finished a strong quarter with all our plants operating well. Before we begin, I'd like to introduce to you Bob Neilson, our newly appointed General Counsel and Secretary. Bob joined us yesterday, succeeding Gerry Kitchen, who will continue to assist us with special projects over the next year. We are very pleased to have Bob on board, and thank Gerry for the outstanding contributions he has made to Century over the past decade. Jack Gates is here with me to describe our operating results, and Mike Bless will provide comments on our financial performance. Let's get started.

Our strategy remains unchanged. We will continue to grow our primary aluminum business capacity. In addition to increasing our assets and cash flow, execution of the strategy will provide critical mass and lower our cash breakeven point. We will continue to diversify our production capacity towards low-cost regions to improve our position on the global [inaudible-highly accented language] Iceland is the focal points of those strategies, and we have made encouraging progress in Iceland during the first quarter. We are actively pursuing our opportunities to expand upstream into bauxite and alumina. This is an attractive business with strong margins and return. Our hedging program is fundamentally to our strategy. This practice provides us with an important tool for underpinning cash flow throughout the market cycle, while remaining minimally exposed. Mike will describe our hedge position in more detail. A final but critical strategy is to maintain our strict focus on safety, productivity, and operational excellence. I am proud of the performance of our operations team in the first quarter, and Jack will have more to say on those points.

When you look at the first quarter overview, the first quarter was an excellent one for Century. We operated well and obviously benefited from the strong markets. Importantly, we made meaningful progress on our growth objectives. We were very pleased with our financial performance. Revenues of $347 million and operating income of $64 million were both records for the company. Operating income increased more than 150% from the fourth quarter of 2005. Mike will have more to say on this in a moment.

Jack will lead us through a discussion about our strong operating performance. The teams at our smelters and our aluminum refinery are doing an excellent job. Finally, we made progress in our growth objectives in Iceland on three fronts. Our expansion from 90,000 metric tonnes per year to 220,000 metric tonnes per year is ahead of schedule. We were able to accelerate our further expansion to 260,000 metric tonnes per year into the year of 2007.

And we progressed our Greenfield project at Helguvik. Last week we signed an agreement with the Reykjanesbaer municipal council on the proposed greenfield smelter site, as well as a separate agreement with the Reykjanesbaer harbor board for the associated harbor site. As I mentioned before, our proposed Helguvik site has a [plat-flat] profile, is nearby to the population and infrastructure, and has harbor access. We are working on the energy supply contracts, and are confident that we will continue to move this project forward.

If we look at the industry fundamentals, the global economy is strong, with significant expansion in developing countries, steady growth in the U.S., and an improving outlook for both Europe and Japan. Global and aluminum demand is expected to grow a healthy 4% to 6% in 2006 and 2007, and Chinese aluminum demand is forecast to be in the mid-teens. Based on the 2005 global consumption of 32 million tons, this indicates demand growth of roughly 1.5 million tonnes of new capacity each year. Aluminum capacity additions are expected to be only 2% to 3% over the next few years due to the lack of long-term power contracts at affordable prices and higher alumina costs. Greenfield capacity generally requires seven years from prefeasibility to production.

The Chinese government continues in its efforts to limit investment in the aluminum industry and shut down small, inefficient, and polluting smelters. These measures include replacement of the 8% rebate on told alumina with a 5% tax, Enforcement of the environmental standards and limitations on new products and alumina [inaudible-highly accented language] permits. The recent interest hike in China should also somewhat discourage overinvestment in the aluminum industry. We shall see as this progresses. There is 1 to 2 million tonnes of potential new capacity that has been bolt in China and has not started due to power shortages and expense of alumina. It must be expected that some of this capacity will likely start up over the next few years as power in various regions becomes available.

In Western Europe there is 500,000 to 1 million tonnes of aluminum capacity at risk of closure, due to high power prices. This includes 240,000 tonnes scheduled to close this year in Switzerland, France, Norway, and Germany. Idle capacity in the U.S. is unlikely to restart with power prices at current levels. Western world inventories are less than 40 days, reflecting the of flatness the aluminum market. Since the year of 2005, IAI stocks have fallen 200,000 tonnes, and Japanese [inaudible-highly accented language] stocks has fallen 60,000 tonnes. The alumina inventories are up 95,000 tonnes since year-end, as strong prices flushed our hidden stocks, But have fallen steadily since mid-March from 795,000 tonnes to our present 740,000 tonnes.

Consumers are showing science of restocking and inventories are expected to decrease further. Premiums for delivery and value added products are rising. The [inaudible-highly accented language] is close to $0.06. Jack will speak to this as well. Aluminum prices have increased more than 20% since the beginning of 2006 and almost 55% since the beginning of 2005, but has led other metals such as copper, which is up nearly 60% year-to-date, and 140% since the beginning of 2005. The alumina market is expected to remain tight throughout the rest of 2006 and possibly to the end of 2007. Chinese alumina production is forecast at 10 to 12 million tonnes in 2006, up from 8.5 million tonnes in 2005. But China will remain a significant importer of alumina in the near term. I'd now like to hand over to Jack Gates.

Thank you, Logan.. Smelter operations were excellent in the first quarter at all of our facilities, as Logan mentioned. The Hawesville smelter continues to improve in [inaudible] production, energy efficiency, and production cost. Production and energy efficiency records were set in March, and a total first-quarter production exceeded expectations by over 4,000 tonnes. The Ravenswood smelter continues to operate at a very high standard of performance, as measured in both total production and energy per pound of Alumina produced. Mt. Holly met its production goal for the first quarter, and increased to increase its amperage to its potlines in order to increase production. Nordural had an excellent first quarter in production, and in controllable cost. The start of a new potline is ahead of schedule, and final construction cost is projected to be under budget, including currency exchange losses.

As we announced earlier today, the tentative agreement that was reached with the United Steel Workers at our Hawesville smelter was not ratified by the members during the voting that was held on Monday, May 1st. Both parties have agreed to extend the previous deadline to permit further discussions. Probably worth mentioning that the agreement had been agreed to and recommended by the plant negotiating committee, international union, as well as the company. Negotiations for new labor agreement at the Hawesville smelter have not yet begun, but discussions should begin shortly.

A new three-year alumina supply agreement has been concluded for the necessary tonnage to supply our three U.S. smelters for the medium term. These contracts are variable price contracts linked to the LME metal price. Safety performance at all U.S. operations in Nordural was very good in the first quarter. The same cannot be said for our Jamaican bauxite mining operation, as we experienced a fatality in February, when a contract truck driver was killed when the truck he was driving rolled over on him. We continue to assess -- to stress the safety of our employees as our top value and are saddened by this terrible accident. The fatality investigation has been completed and corrective actions have been implemented.

Bauxite and Alumina. The bauxite operation in Jamaica had a very good first quarter as the weather co-operating, and the mining contractors performed better than expected. The mine is on schedule to produce and ship 10 to 15% more bauxite than it did in 2005. Gramercy had a very good production month in March, making up some of the February loss that it experienced due to the power outage. Gramercy finished the first quarter slightly behind projection, but close enough that it should make up this difference during the year. Natural gas costs continue in the 7 to 8 -- $7 to $8 per MMBTU range, but all the technical factors indicate natural gas prices should continue to fall. It remains a hurricane factor built into the winter strips that keep prices artificially high.

Demand for alumina remains strong with prices above the $1 per pound level, and the increasing Midwest premium. The LME cash settlement price closed in March at $1.10 with a Midwest premium of 5.6% per pountd. We have seen further increases in April already. Most of the markets we participate in continue very strong. Aerospace, which demands high purity alumina remains good, which fits the Hawesville high purity production very well. Automotive is the only sector showing continuing weakness. Total company shipments in the first quarter exceeded projections, ending March with only around two days of production in inventory. Now I will turn it over to Mike.

Thanks a lot, Jack. And good afternoon, everybody, thanks for joining us. As Logan mentioned, we're really pleased with the company's performance in the first quarter, and let me just go through some details starting on slide 10. And I'm going to reference also some information on slides 15 and 16 as Mike pointed out, some of the GAAP, non-GAAP reconciliation data. Excluding the mark-to-market adjustments, the company earned $1.30 in the first quarter of 2006. This compares with $0.50 in the fourth quarter of last year, and $0.83 in the first quarter of 2005, both of those numbers obviously before mark-to-market losses. Sequentially versus the fourth quarter, net sales were up about 18.5%, and as Logan mentioned,operating income up over 150% versus the fourth quarter of '05. Sequential sales growth of 54 million was based primarily on two factors. Number one, a realized prices on our direct sales -- if you had a chance to look, we're obviously up about 17.5% sequentially versus Q4 to just shy of $2,280 per metric ton. In addition, our total volume was up about 6% from the fourth quarter of last year, obviously, from the expansion capacity we're bringing on, in Iceland at Nordural. On this sequential sales increase, gross profit increased about $42 million versus the fourth quarter, with a gross margin almost doubling to 22%.

Two major impacts on gross profit I'd like to talk ,in addition to the price and the volume. The first is, our power costs were up a couple million dollars in the 2 to $3 million range versus the fourth quarter sequentially. It's a -- a mish-mash of items, quite frankly, with some increases and some decreases, and let me just give you a sense of -- of what made up that 2 to $3 million increase. First on the increase side, obviously our power costs at Hawesville increased, as we priced out the previously unpriced piece of power at Hawesville, at prices above the long-term contract price. In addition our electricity costs in Iceland increased, as many of you know, we pay for our electricity at Nordural as a percentage of the LME, given metal prices increasing, obviously our power costs up. On the other side, we have a little bit of easing in our fuel surcharges at Mt. Holly. As you remember, we got hit with some surcharges in Q4, and those eased a little bit this quarter, and in addition, our natural gas costs were off versus Q4.

In addition to power, Alumina costs were up about $3 million net Q1 over Q4. Again, the impact of an increase -- a market-based increase of about $7 million, as you know, we paid for our alumina at our Ravenswood and Mt. Holly smelters here in the U.S on a percentage LME basis, so, due to the market rise, those costs were up. Going the other way as you recall, we were required to purchase some spot alumina last quarter, which hit us for a couple million dollars, and we did not purchase any alumina on spot market this quarter. I might note that we have contracted to purchase a small amount of alumina, obviously, at spot market prices for Q2, so that'll hit us in the current quarter. That's obviously good news on a net-net basis because the requirement for that additional alumina is based on production in excess of our expectations, principally at our Ravenswood smelter.

Walking down the income statement, SG&A, as you will see, is up a little bit. We still think -- continue to plan on 7 to $8 million per quarter being a good run rate number for SG&A. This quarter, as you can see, about $4 million higher than that number. Principally from two items. Solely from two items, really. The majority of it is from the costs of bringing on new senior executives to the company. And most of that is due to the FAS 123-R expense of expensing options and restricted stock units. In addition to that cost, we did bear a little bit higher incentive compensation payments or expense this quarter, due to the company's financial performance.

You've seen the mark-to-market charge on the derivative accounted for in sales this quarter. Obviously driven by the higher metal price. I will give you some more detail on the next slide in a moment. As we've noted before, these are very long-term contracts that produce much -- most of this mark-to-market loss, and the longest of which extends through the middle of the next decade. Again, to remind you that the volumes under the two long-term contracts, the financial forward contracts that settle in fiscal '06 and '07 are relatively small, only about 11% of the total volume under those contracts, and again I'll go through some more detail on those in a moment.

Lastly free cash flow, is back on page 16 is -- is some data on the cash flow. Came in at about -- as expected this quarter. As you might have seen, if you've gone through the balance sheet or the cash flow statement, we had a use of cash for working capital this quarter, two items there I might note. Number one, the market-based impact of that, obviously, as metal prices go up, are trade accounts, receivables, inventory, other trade accounts, rise with it. I would note that if you look at the various measures that we track very closely of the company's working capital intensity and productivity, things like day sales and receivables, inventory turns, and the like, the company continues to perform very well there. In addition, we had some items in Q1 that are -- that do not repeat every quarter. There's seasonal items, I'll point ut a couple. For example, if you take interest payments, incentive compensation, and tax payments together, those aggregate to almost a $25 million use of cash during Q1. Those obviously don't repeat every quarter. And our new power contract at Hawesville, two items there. Increase in restricted cash that you can see on the balance sheet that we needed to post. In addition to that, we prepaid the first portion of that and those two items together are about $7 million. We obviously get that back as we go through the balance of the year. Bottom line, we continue to expect a good strong cash flow year for the company.

Moving on to slide 11, we have shown you this slide before. This is updated. These are our forward price sales, as of March 31st of this year, that settle in each of the next five years, and then we've shown you the cumulative period 2011 to 2015. You'll note the additional volume line. Again, those of you who follow the company understand what this is. This is the doubling of volume from the two large financial forward contracts that we executed in November of '04, and June of '05, respectively. We have assumed here, as you can see in the footnote for the purposes of this analysis and importantly for the purposes of our accounting on our derivative contracts, that these volumes do indeed double every period, as the current market prices far in excess of the contract price.

Moving on to slide 12 we've given you a little bit more information here on the company's hedge position. Let me just take you through it. You see to start off with the forward sales volume, both base and additional that we detailed on slide 11 on the prior slide. In addition to that, we have added the other items that, in effect, are naturally hedged, based on contract terms that we have, that fluctuate based on the price of metal. I'll go through them quickly here. Number one, Nordural, our toll business in Nordural is on a percentage LME basis, so obviously, that additional volume there fluctuates with the marketplace. Alumina for Mt. Holly and Ravenswood. Again, we have contracts there that are percentage LME. And lastly, we paid for our electricity, as I said before at Nordural on a percentage to LME basis, and with that I'll turn it over back to Logan.

Thank you, Mike. To summarize, 2006 is a transformational year for Century. We were pleased with our progress in the first quarter. As I mentioned earlier, strong execution and robust market conditions yielded record financial results. We were able to proactively address some critical issues in the United States, including our power at Hawesville, and our midterm alumina need for both Ravenswood and Mt. Holly. We are continuing to work with the steel workers on our labor agreement for Hawesville. Finally, and perhaps most importantly, we have made meaningful progress on our growth objectives in Iceland. Our expansion to 220,000 metric tonnes per year is ahead of schedule and on budget for the fourth quarter of 2006. We were able to accelerate our further expansion to 260,000 tonnes -- metric tonnes per year into 2007. We have made encouraging progress on the proposed Helguvik greenfield project. The first quarter has positioned Century well for the balance of 2006. I'd now like to open the discussion for your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] And our first question comes from the line of Mr. [Ong Yu Ka]i, Goldman Sachs. Please go ahead, sir.

Hi, good afternoon. Congratulations on the results. My question is about the Hawesville power contracts, I noticed that it expires until 2010, but you -- you only negotiate, as far as I remember, you only renegotiate 27% price for 2006. I wonder if -- if I remember it correctly? And if that's the case, are you still in negotiations for the -- for the contract beyond 2006, and do you have an update on that front?

Yes. Thank you for that question. We have contract up to 2007 but you -- 2010, but you're correct , there is an unpriced portion which we are busy negotiating. In addition, we have a long-term proposed arrangement with Big River Energy Company, so that we can get power up to 2023. As I have explained previously, this will probably take some time to resolve, and we probably won't be able to report much progress before the first quarter of next year. I don't know if Jack would like to comment in addition.

That covers it.

Thank you.

Can I follow up on that?

Sure.

For 2007, have you already settled yet for that --

No. We are in the -- busy negotiating it, and we'll let you know as soon as we've concluded.

Okay. And for 2006 you said is higher than the long-term contract price, but compared to the spot price, is it lower or higher?

If you take 2006, we had an unpriced portion of about 27%. If you look at the prevailing spot price of power in that area, it's approximately in that number.

Okay. Thank you very much.

Thank you. And our next question comes from the line of Mr. Amir Arif, Friedman Billings. Please go ahead, sir.

Hi. Good afternoon, guys. This is actually Sam Arnold. Just a couple questions for you. What is the CapEx outlook currently for 2006 at Nordural. It looks like you guys spent a little bit more than I would have thought, maybe in the first quarter. And secondly, a couple of housekeeping items. It looks like on your balance sheet, other assets, that category increased quite a bit, and then also your due to affiliates, if you could just make some comments regarding those items, I'd appreciate it.

Yes, Sam. Thanks for the question. Let me go along, and I'll take the first piece. Nordural, up to date, is spent around about 409 million, and we plan to spend about an additional sum of around 65 to 70 million for the balance of this year. That's for Phase IV. As you're aware, we have already initiated the Phase V further expansion of 40,000 tonnes, and we expect that to progress right through to the last quarter of next year, and you can probably estimate somewhere between 30 and $40 million of that in this year. And the work has already commenced on that. On the housekeeping items I'll ask Mike to answer them.

Yes, the other assets -- the principal growth there is the growth in the deferred tax asset. That obviously has to do with the tax accounting for the mark-to-market loss. And the same issue -- same root issue on your question on the due to. That is simply the -- given that the counterparty is an affiliate in this case, Glencore, obviously, the liability gets accounted for under that caption due to affiliates both the short and long term.

Okay. That makes sense.

Yep. Thanks.

Thank you.

Thank you. Our next question comes from the line of Mr. David Gagliano. Please -- Credit Suisse. Please go ahead.

Hi. Thanks very much. I just have a quick question, Mike -- Mike, I believe you alluded to this in the presentation, but I didn't quite catch it. On the alumina contract. That three-year Alumina contract that you concluded at the end of the quarter. Can you give us some metrics, in terms of how that was priced in terms of a percentage of LME price, I'm assuming, and what that percentage was relative to your previous contract?

David, we've fully funded [inaudible-highly accented language] our alumina needs for Ravenswood and our portion of Mt. Holly through to 2009. And if you looked at the alumina pricing in LME percentage terms, traditionally, you may have looked at somewhere around 12.5 and 13%. Going forward, these prices have obviously increased, and I would use somewhere around about 2% on average going forward. But obviously over a three-year contract, David, as I think we've spoken before, it's front-end priced. So year one, which is 2007, will be higher than 2008, and will be higher than 2009. I don't know if Jack would like to make any other comments on it?

No. That covers it.

Hopefully that answers it, Dave.

That does. That does answer it. Thank you very much. And just a quick question. Is it -- I believe you're referring to a presentation. Is that up on the website, or is that somewhere available? Has that been sent out?

Dave, it should be on our website, Century Aluminum.com, did you check --

Yeah. I've been looking for it. I can't find it., but that -- we'll track it down.

Okay.

No worries. Thanks.

Thank you.

Thank you. Our next question comes from the line of Mr. Carlos de Alba ,Morgan Stanley. Please go ahead.

Yes, good afternoon. I have a question regarding the Ravenswood power rate potential increase or the -- the situation that you have there, where they want to increase the rate starting July 1st. Is there any update on that?

There has been a rate or tariff adjustment applied for. It's in discussion with ourselves and the interested parties. We haven't got any updates on that. We hope to hear soon, and then we'll let you know, Carlos.

Okay. Thank you. And the other question is regarding the power surcharges in Mt. Holly. Last year for the year '04 -- '05 versus '04, they accounted to around, if I remember correctly, to around $12 million. So what is the expectation in 2006 to be around 10 -- $10 million, would that be a good estimate?

Carlos, it's very -- sorry -- Logan, and Mike can comment as well. It's very difficult for us to estimate. . You've got to tell me what units the Santee Cooper used, and where they priced their gas market or their coal market to that point in time. So it would not be appropriate for us to give you an estimate. Mike can you comment.

No, I wouldn't give any more than Logan did. As I told you before in other contexts, it -- we plan on it continuing just for our business planning purposes, but it's real -- it's a real-time thing, and every month, we get a charge, or we don't get a charge, and it's -- it's really that simple. The data that we just -- that I just gave, obviously, simply compares -- compares Q1 to Q4 that we just finished.

Okay. Thank you very much.

Sure, Carlos. Thank you.

Thank you, Carlos.

Thank you. And, we have a question from the line of Mr. Brett Levy, Jefferies & Company. Please go ahead.

Hey, guys. You know, clearly aluminum has been a windfall for most of the people in the industry and you guys have, in the long run, probably smartly, hedged, and yet at this point it's probably -- it's probably hurting you. Can you guys talk about when the hedges start to roll off here, and if we're looking at $1-plus aluminum for a long time, when you start to feel the benefit on various parts of your business?

Yeah. We are not going to really, I think, take a view on where the pricing will go on the forward. If you look in our 10K, I think it's got some very good information on the volumes going forward, so you have to assume -- you make your own assumption on pricing going forward of what the impacts are. But I'd like to just reflect, if I may, for one second, and say that these were put in place in November of '04 and July of '05 as a -- as a means of underpinning our cash flow requirements while we were doing the Nordural expansion, and it's very much as a defensive position in times of cyclical markets, and when you have high capital requirements. Obviously, we are very happy now to be exposed to the market for the balance of our tonnage. Mike, can you comment.

No, not at all. As Logan said both the slide that we took you through just a little while ago, on slide 11 with more details in the K, gives you both of the major contracts, as Logan said, when we executed them, and when the volumes pushed through, and we're happy to take you through it in more detail offline.

All right. And then more specifically, as you guys look forward, are you looking to reverse any of these positions, or now that the real risk is out of the Nordural project, are you looking to more significantly be free-floating, with respect to aluminum prices?

I think -- there's two parts to what I would say. One, we're in a cyclical business, so these are spread out over a long period of time, right through to 2015. And our exposure directly is fairly small in -- in years six and seven. I think Mike indicated something like about 11% of our volume. So I think the balance is there, and we have no intentions to change it at this point in time.

All right. Thanks very much, guys.

Sure. Thank you.

[OPERATOR INSTRUCTIONS] And we have a follow-up question from the line of Mr. Amir Arif -- or from the line of Amir Arif. Please go ahead.

Hi, guys, Sam again. Just a couple more quick questions. Could you comment on what the sticking point is with the ratification of the contract, and just kind of your overall thoughts on how easily you're going to be able to get over whatever concerns of the -- the steel workers had whenever they voted on Monday? And then the second, if you could talk a little bit more about your new Greenfield smelter in Iceland, just kind of the major milestones you see going forward.

I'll start off with the second one first, the Greenfield site, and then I'll ask Jack to comment on the Hawesville contract. On the greenfield site we signed a memorandum of understanding last year in May, and with the local community and the development bank of ,and we've been progressively working on the [inaudible-highly accented language] agreement. The next hurdle is really to secure the power, and we are in intensive discussions with both HS and OR, which are power companies in Iceland. The thing that we have an advantage about, is we are adopting a phased approach to our development of our Icelandic smelters, and so we would take pieces of power as they develop, and then bring them forward. We'll update you as we go forward. The plan, at this point in time, is somewhere around 2011 and 12.

Okay. And do you have any potential like first-phase size, or have you discussed that at all?

Yes, we've been quite public about that. Somewhere between 1150,000 and 180,000 tonnes per year, and Jack can comment on the negotiation.

Sam, this -- the vote was held on Monday, and we actually only got the count -- the notice about two hours ago so --

Oh.

It's a little early. We're trying to set up a meeting right now with the international union and the bargaining committee. As I mentioned earlier, we had an agreement with the bargaining committee and the international on the contract, so the first thing we've got to do is have a meeting with them, sit down try to understand in their mind what happened, why it was not ratified. I would say this. There's a genuine effort on both parties' side to get this done. I feel good that we will get it done, but we -- to sit down right now and tell you why, I can't tell you. We just have to wait until we sit down with the union and -- and talk to them to find out what their thinking is.

Okay. And how many employees does that cover again?

A little over 600 bargaining unit employees.

Okay. Great.

Thanks for the question.

Thank you.

Our next question comes from the line of Mr. David Gagliano, Credit Suisse. Please go ahead.

Another quick follow-up. You mentioned your thoughts on the primary aluminum global supply and demand outlook. I'm wondering if you could share your thoughts with -- with regards to the alumina global supply and demand outlook. Are you expecting a surplus, deficits, and how much in '06 and '07?

David, thanks for the question. We don't really comment on surplus and deficits, but our views are that the market on alumina will remain tight for 2006, and probably through potentially to the end of 2007. There seems to be, as has been reported by a number of commentators, a large amount of potential capacity coming on in China. And we have commented that the numbers seem to be between 12 -- 10 and 12 million tonnes of alumina production in China this year for 2006, up from the 8.5. So still a tight market for '06. Probably easing towards the end of 2007. That's the way we see it. But I do want to caution that, at the same time, the demand for primary metals going up by somewhere between 4 and 6%, and if that's the 1.5 million tonnes per year,, you need another 3 million tonnes of alumina, David. So the numbers are quite challenging.

Okay. Fair enough. I appreciate that. And then on the -- I know in the past, you've alluded to the alumina. The interest in -- in moving more into the upstream alumina business. I'm wondering if you could just remind me again what your -- you know, what your preference is there. Is it greenfield, is it buying -- what's the preference there in terms of the expanding upstream?

David, we have no particular preference. We are looking at both existing businesses and new greenfield projects. Obviously, we were looking for an attractive risk-adjusted return. It must make business logic. We like the business on its own basis. It's not a process to make us an integrated -- so-called integrated producer. The business itself must produce good return. We also like to see if we can do something about the -- if it's an existing business, can we leverage to do better? So we're looking at both the greenfield and existing brownfields or existing businesses.

Okay. Thanks very much.

Thanks, David.

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

Thank you. It's -- two questions. The first is, what was your effective natural gas price that you paid at -- for -- in Q1 at Gramercy? That's your spot purchases combined with your hedge price?

Okay. Timothy, as you well know, we had a hedge position from 2005 for a portion of our gas requirements in 2006. On November, December, we saw prices over 10, $12 a million BTU. When those prices started coming off, we looked to put in layers of gas -- of hedges to protect us, particularly on the nearby, because the last part of the year, as you still see -- as Jack, I think, mentioned in his notes, this was so-called hurricane effect, so you still see $9 or $10. So for the end of March through to the end of December this year, we're about 24% covered, and if you look at the strip on those months as we've gone forward, you'll see -- get a good idea of what we hedged at somewhere -- in between the ranges of the -- 7, 8's a good number for you to look at.

Would it be fair to say that the -- the unit costs at Gramercy in Q1 were below that of Q3 of last year?

I -- we don't comment on unit costs but -- so I really -- and I don't know, Timothy. And we don't generally comment on it.

Okay. And then my second question was of your total gross profit for the company, about how much came from Nordural?

Tim, it's Mike. We don't -- we don't break out Nordural versus the U.S. operations. We have given -- and we can talk about this again offline, a lot of facts about how the Nordural business model works, but -- but we don't break it out.

Okay. Thanks.

Sure.

Thanks, Tim.

Our next question comes from the line of Marty Pollack, NWQ Investments Management. Please go ahead.

Yes. Just a quick one. I'm sorry. I was not tuning in to the entire call. But I'm looking at that chart which suggests what the forward sales has been, and again I do not see the chart somehow, on the website. But what is the unhedged position that you currently have in that? And the way you've broken it out in the past, the hedging, by way of forward sales as well as cost? Can you just describe that total position?

Sure. The easiest way to look at that, whether you want to look at it including the so,-called hedged costs, or just including the -- the forward sales, is to take our capacity in each of those years, and just multiply by the percentages in that chart there, the same percentages in the 10K, the chart is obviously more current because we brought it current to March 31. And so we've laid out what our expected capacity is going to be in each of those years and it's just simple math in terms of what the open position is. If you want it in volume or in percentages, it's obviously just the reciprocal of those percentages. Is that -- is that responsive to your question?

That is the -- that's on the forward sales side.

Correct. You got it.

And what about on the cost side?

The same thing. I mean the costs obviously make a bunch of assumptions about -- about contract terms going forward -- alumina contracts and things like that. But it's really the same. It's really the same reciprocal. If I'm understanding your question correctly, maybe I'm not.

Yeah, okay. I think that's the question, yeah.

Okay. And Marty, just -- it's Logan -- just a bit more to add. When you're looking at the tonnages for 2006, you have to take into account, we expect half of the new tonnage from Nordural to come in for the whole year. So the additional 130,000 tonnes of capacity at Nordural, we expect to see metal of about 50% of that, this year.

Okay.

Thank you.

Thank you.

And, Mr. Dildine, there are no further questions at this time. Please continue.

Okay. If there's no further questions, Logan?

Thank you very much, everyone, for joining us today. We look forward to talking to you again soon. Thanks, Mike.

Thanks very much.

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