Century Aluminum Co (CENX) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2008 Earnings Conference Call. (OPERATOR INSTRUCTIONS.) I would now like to turn the conference over to our host, Shelly Lair. Please go ahead.

Thank you, Roxanne. 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. Please note that website participants have the ability to advance their own slides.

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 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 in our periodic SEC filings, including the Risk Factors and Management's Discussion and Analysis sections of our annual report and quarterly report.

In addition, throughout this conference call, we will use non-GAAP financial measures. Please refer to the Appendix, which contains the reconciliations to the most directly comparable GAAP measures. This presentation, including the Appendix, is available on our website.

I'd now like to introduce Logan Kruger, Century's President and Chief Executive Officer.

Thank you, Shelly. Welcome to our first quarter conference call, everyone. Participants joining me today are Mike Bless and Wayne Hale, and also, in Monterey, Bob Nielsen and Steve Schneider.

Let's move on to slide four. This will give you a bit of an overview of what's happened in the quarter. We believe we've had a good start to the year in our first quarter. The robust aluminum markets continue. The LME averaged somewhere around $2,729 per ton in the first quarter. As you will notice, that's an increase from $2,447 in Q4 of '07. Price support from a weak U.S. dollar, ongoing rising costs, and the continued ongoing demand in China is part of the support of this price. We do note that there are a number of supply side [drifts] as has been evidenced by some of the winter storm events in China.

The U.S. aluminum plants are operating well and our production levels are at capacity at all above--all facilities. Grundartangi in Iceland, the expansion is complete. And you'll note their production at an annual run rate of 268,000 tons in Q1. We've initiated site preparation at Helguvik, our new greenfield project, and will commence construction efforts in the second quarter of this year. In addition, we have acquired a 40% stake in the newly constructed carbon anode facility located in South China. This is part of our strategy to ensure that we have access to materials important to our plants in Iceland.

The Jamaica refinery project is moving into a full feasibility study with our partner, China Minmetals. We continue to pursue further growth opportunities. Overall, we've had a good start to the year and a good first quarter.

If we move on to slide five, a bit more about the Helguvik greenfield project in Iceland. Material contracts, permits, and the project team are in place. The groundbreaking schedule for May and the initial preparation of the site has already commenced. We continue to anticipate first metal in the fall quarter of 2010. We are likely to be at the high end of the production range for our phase one. If you remember, we indicated a range of 150,000 to 180,000 tons of capacity per year for phase one.

The project capital expected for the total full pipeline of 360,000 tons is in the order of $5,100 to $5,300 per annual ton of capacity. You will have noted from previous discussions we've had with you that this project is front-end loaded on capital expenditure in phase one. These include rectifiers and services as we've discussed before. We are putting those in place and they will be used to their full capacity as we initiate phase two and phase three.

If we look at the capital cost for phase one, it's somewhere around $1.2 billion, and that's for the full 180,000-ton capacity. This gives you an order of measure around $6,600 to $6,700 per annual ton of capacity.

2008 spending on this project is in the order of about $200 million. At full production, operating efficiencies for this project are expected to exceed our world class facility at Grundartangi. We've adopted and are using the most modern technology available, the (inaudible) 36-plus technology.

Can we move on to slide six? Just a few comments about the market and the market fundamentals. As you will note from the slide, the forward curve has undergone significant flattening and an upward shift in the forward curve itself. Forward pricing is indicative of strong markets over the longer term. For example, 2013 the price will [book] at about $3,000 per ton. Capital and operating costs are up globally - energy, carbon, freight, just to name a few.

China's high cost of structure--high cost structure is continuing to add new production capacity in the fourth quarter. Greenfield and brownfield expansion projects costs are increasing and the length of time required to complete these new projects is ever increasing, and it continues to be developing supply side constraints around power. Yesterday, global consumption is about 6% over 2007, particularly in China - [13%] demand growth China year-on-year. China's GDP for the first quarter is about 10.4, 10.6%.

Industrial production, which we track for demand growth in China, is 16.4%. This is despite the New Year in China as well as the weather impacts. Yet today global production is about 8.7% over 2007. 13.5% supply growth is happening in China year-on-year.

Can we move on to slide seven? Just taking up a bit on the cost structure of China, this is just the composition of the fourth quarter on the cost curve. China is a significant and growing percentage of the fourth quarter of smelter cost curve and I think this--most of the production introduced in China goes into this quarter.

Expensive power contributes to the high cost positions. The Chinese government continues in its efforts to discourage investment in power intensive industries like aluminum and steel. They have increased taxes, they have removed preferential power prices, and are ever increasing their regulations in a more stricter fashion. It's expected that China will become a net importer of aluminum in 2009 or sooner.

Can we move on to slide eight? If we look at the aluminum inventory versus price, we anticipate the global market will be balanced or have a modest surplus in 2008. You'll have noted at the beginning of the year a lot of commentators were expecting a major surplus. This has moderated somewhat as you know with the production setbacks both in South Africa and China, just to name a few.

The day's inventory remains low, less than 30 days, approximately 29 days of global demand. A few comments on markets in the U.S. The markets in the U.S. are subdued. The markets are soft, and this is with the exception of the aerospace, which remains very strong. (Inaudible) strengthened to $0.045 per ton recently and this is in the range of the historical averages.

Note on pricing on alumina, spot alumina prices are around about $428 per ton. Cost pressures and supply side disruptions are ever supportive of this price structure as well. Overall, the aluminum market fundamentals remain strong as indicated by current prices and the forward stream. And for discussion on the operations, I'll now hand over to Wayne.

Thanks very much, Logan. Let's turn to slide nine. Smelters continued to operate well during the quarter. In the environmental, health, and safety areas, the plant leadership's consistent execution of programs drove year-on-year improvement in safety, health, and environment. In particular, Grundartangi has seen a 40% reduction in lost time injuries as compared to year-end 2007.

Operations at the domestic smelters were in control and solid during the quarter. Reliability Excellence, one of the key strategic initiatives to improve the operations and reduce operating costs, was initiated during the quarter. Reliability Excellence is a marriage between operations and maintenance where they work together as a team to reduce breakdown, improve reliability, and reduce costs.

Jim Chapman joined the Century Aluminum team as VP of Operations at West Virginia. A former native of Ravenswood, Jim brings extensive operations and leadership experience to the plant. We are pleased to have Jim on the team.

In February, we were notified by Appalachian Power that they'd filed with the West Virginia Public Service Commission for a 17% rate increase. We're working with the Public Service Commission staff and the consumer advocate to mitigate these increases and its impact on the Ravenswood plant.

Progress continues with the Big Rivers unwind to secure long-term cost-based power for the Hawesville plant until 2023. Public hearings via the Kentucky Public Service Commission have commenced. We expected the unwind to be completed in the first half, however this is a complicated process involving many people and constituencies and now the unwind may not be completed until the second half of the year. As a result, in light of this potential delay, we are speaking with EON and other providers to explore options to cover the unpriced portion of our power contract for the second half of the year.

At Grundartangi, the operations continue to move from strength to strength. The operations are stable, purity has improved, and the controllable costs are lower than they were in 2007.

If you move on to slide 10, I'll say a few words about our refining, mining, and metal sales and marketing. In so far as St. Ann Bauxite, they've shown a year-on-year improvement in safety. In operations, mined and railed tons were impacted by rain delays and truck availability. Ship production was reduced by ship availability as well. Despite these challenges, in plant requisite inventory was maintained and there was no impact to our customers.

Recently there has been news of a work slowdown at St. Ann's to highlight the union's leadership concern about the lack of contract negotiations progress. Though there has been minimal impact to the operations, we are in discussions with government officials and union leadership to bring resolution to some of the more foundational issues. This is not unusual in Jamaica to have protracted labor negotiations and we are working through the issues to achieve a satisfactory result for all stakeholders.

Gramercy Aluminum Refinery met all production and cost metrics for the quarter. The plant is operating well with few problems.

Turning to sales and marketing, despite a year-on-year reduction of 2% in U.S. metal demand, we continue to see a strong demand for our premium products.

Mike--excuse me. Billet in our segmented market is extremely tight as secondary producers are being impacted by tight scrap and higher natural gas costs. The Midwest premium, as indicated by Logan, has increased due to a tight scrap market and higher fuel costs that have driven up the import costs. Our finished goods inventories at all our facilities remain low to take advantage of the markets.

Now, I'll turn it over to Mike, who will discuss the financials.

Thanks very much, Wayne. Pardon me. And if we could turn to slide eleven. As usual, in addition to referencing the slides, I will make reference to the financial information that's appended to the earnings release itself, as well as the reconciliation slides in the back of the slide deck. And so, if you could have those in front of you, it will make my comments easier to follow along with.

Okay. First on the market, before we dive into the numbers, Logan made reference, obviously, to the fact that sequentially now Q4 to Q1 the market was up. The cash price, as he said, was up 12%. With a one month lag, the cash price was up about 4%.

Turning to our realized prices, when you look at our average realized price worldwide, that's the average of our direct sales and our total sales in Iceland, on an as-reported basis our sales were up about 8%. Adjusting for the impact of the cash flow hedges, and I'll get to this in a moment, our sales sequentially direct and total average realized price were up by 4%, so right in line with the marketplace.

And now, before I go on, so that I can set the context for the comments that I'll make, if we could just turn to slide 12 for a moment. We'll turn back to 11 in just a second, but 12 I think is important as we talk about the data this quarter and going forward. So this is the full fixed price forward sales situation. This is a continuation of some of the information we obviously have been providing for a couple years now, but that we started providing last quarter.

This looks at nine quarters worth historically, ending with the one that just ended of hedged actual settlements. The tons settled on the left and the actual dollars that we paid out on the right. And just to orient you, going back to the left, as you'll remember, what we said is that in 2008 versus '07, the actual tons settled would be about the same. As you see, Q1 over Q4 was a little bit more - 59,000 versus 52,000 tons. Yet, the accounting composition of those settlements would change. That--after this quarter, that 9,000 tons of cash flow hedges are at the end of our cash flow hedges in that all of the rest of the volumes going forward would be derivatives.

And so, you see that major difference carried over to the right. I just want to orient you. When you look at the dollar value of the cash flow hedges settled Q4 versus Q1 over at the extreme right-hand portion of the right-hand chart, 23 million last quarter--or two quarters ago now, I should say, 7 million in the quarter just ended. That $16 million delta there is the difference between the cash flow hedges and that's the anomaly or the difference that I'll reference here in some of the data that I give you.

We're going to come back to this chart later to talk about the cash. But if we could now flip back to 11, we'll talk about the income statement data and some of the rest of it. Before we get to the income statement data, you've maybe had a chance to see the operations data in the back of the financial information. And from a tons basis, our domestic volumes were flat quarter-to-quarter as we expected. We shipped in the quarter at an average rate of 533,000 annual tons, nicely above our rated capacity. As Wayne said, the plants are running extremely well.

In Iceland, as you've had a chance to see and as Logan referenced, our volumes were up 2.4% sequentially, shipping at a 268,000 ton annual rate at the high end of our expectations. We're quite pleased with that.

Turning to the income statement data itself, revenue as you can see here up on a reported basis sequentially 9%, or 39 million. If you adjust for that difference in cash flow hedges, that 16 million that we just looked at on slide 12, the revenue was up 5% or about $23 million. Deconstructing that 23 million, about 85% of it was due to the price and 15% was due to the incremental volume at Grundartangi.

Continuing down the income statement data, if you're looking at the data on the bottom of the earnings release, gross profit increased 36 million as reported, 20 million excluding again the cash flow hedged delta.

Let me give you a couple major items that impacted cost of sales during the quarter, the first of which were our LME-based costs. Those as you know are the cost of our alumina in the U.S. at Mount Holly and Ravenswood, where we purchase on an LME-based contract basis, and our electric power in Iceland, which of course is indexed to the LME. Those two items in total were up, i.e., unfavorable, about $6 million Q1 over Q4, about 50/50 - 3 million alumina, 3 million Iceland power.

Raw materials continuing a theme that we have seen and obviously the industry is struggling with. Logan referenced our investment in the carbon plant in China. Raw materials were up unfavorable again - 5 million quarter-to-quarter. Most of that is carbon, some fluoride and other materials as well.

U.S. power costs up about 2 million. None of that is electric power. Our electric power costs at the three smelters were actually flat quarter to quarter. That entire 2 million is natural gas. About half of that at the refinery, our 50% share obviously at Gramercy. And the rest due to the modest amounts of natural gas we use at the smelting facilities.

Lastly, Wayne referenced how pleased we are with the operations at Nordural at Grundartangi. And the operating costs there quarter-to-quarter, obviously exclusive of electric power, were favorable by $4 million, so we're very pleased.

Continuing down the income statement, let me make a couple comments about SG&A. First, to set the context, the Helguvik development costs are no longer being expensed on the income statement consistent with GAAP, as we've been expecting. Those costs are now being capitalized in addition to the actual capital costs themselves, and we'll get to that. I want to make a couple comments about the cash flow statement in a moment.

You see on the face of the income statement 18.9 million in SG&A and let me make a comment about that. About 6.5 of that number is due to long-term compensation costs in excess of what we normally book, and I'll get to that in a moment. And so, if you exclude that amount, the residual, or about $12 million, is in line with our expectations.

Now, that $6.5 million, where did it derive from? About 60%, just under $4 million, is the accounting for the plan period that just ended. Our compensation--long-term compensation plans are in three-year increments, so this is the '05 to '07 plan that just ended and paid out a couple months ago. And as you may know, our long-term incentive plans are totally based on common stock. And obviously, the accounting for them depends upon the stock price at the time the grant is made. So same number of shares, higher stock price, translates into a higher charge than we had been accrued for.

In addition, due to the company's financial performance and operating performance during the plan period, a higher payout was made as well. And so, those two items conspired to push long-term compensation expense up about $4 million versus our norm. In addition, the design of the long term plans going forward has changed modestly. The target amount hasn't changed at all, but just the design of the plans has changed just a little bit. And due to that, the proper accounting for those plans has changed in that more of the expense needs to be recognized under GAAP, under FAS-123R, sooner than it did before. So we have a one-time about $2.5 million recognition of that, and then we go back to the prior amount. So about 6.5 million of long-term comp expense in excess of what we would normally have.

Continuing down the income statement data - loss on forward contracts. As you can see, 448 million during the quarter. Obviously, from December 31 to March 31, the measurement dates, as Logan referenced, the forward screen traded up and flattened significantly. The cash through '09 prices as we all know increased somewhere in the mid-20 percentage points. And the 2010 through 2013 prices were up in the mid-teens on a percentage basis.

A couple of last comments on the income statement. The effective tax rate came in on an adjusted basis at 27.6%, right in the middle of our expected range. When we say adjusted there, if you go to the reconciliation slide in the back of the slide deck you'll see this is consistent with the way we've presented it in the past. We exclude two items this quarter. One is the after-tax mark-to-market charge. The second is a discrete tax item, a $2.9 million charge, due to the fact that the state of West Virginia decreased their tax rate.

As you may remember, last year in '07, during two quarters we had a one-time, or a discrete, gain when the state of West Virginia increased their tax rate. It's a bit counterintuitive. They increased their tax rate, which results in the carrying value of our deferred tax assets increasing. That increase gives rise to a tax benefit, and therefore, we pulled that out as you recall last year in two separate quarters as an unusual item. Earlier this year, actually West Virginia decreased the rate by a little bit, thus decreasing the carrying value of our deferred tax assets, so that's resulting in a charge here. So we pulled that out as an unusual item in our adjusted EPS.

Turning to EPS next, lastly, and excluding those two items - the mark-to-market charge and the West Virginia discrete item tax - $1.37 based on 41 million basic shares and $1.28 based on 43.9 million diluted shares.

If we could turn back to slide 12 just to round out, talk a little bit about cash. The major item on the cash flow statement, of course, always is the use of cash to settle our derivative contracts. As you'll see over on the right-hand side of this chart in the red, $52 million this quarter in addition to the 7 million to settle the cash flow hedges that we talked about a little while ago. And as you'll see there, the comparable amount in the prior quarter sequentially was $43 million.

A couple other items on the cash flow statement. Capital expenditures - as I said before, Helguvik spending is now all in the cash flow statement. What you see on the Nordural expansion line now is all Helguvik, $7 million during the quarter. Other CapEx for the company, including spending on the Grundartangi plant, is in the normal CapEx line, about $9 million for the quarter. That's versus a budget for the year, as we discussed with you in detail during the last call, of $75 million.

Lastly, I would just point out on the balance sheet cash now stands just shy of $370 million at about 368. It grew from the end of December, obviously, despite the CapEx. Some interest in tax payments we make during the first quarter. And if you've had a chance to look at the cash flow statement itself, you've seen a build that is just shy of $20 million in working capital. All of that is due to the run up in the LME price.

And with that, I'll turn it back to Logan.

Thanks, Mike. Just in summary, if you look on slide 13, strong market conditions continue. The Helguvik groundbreaking of the new project has started in the second quarter. Capital projects in the U.S. for incremental production are in place and are ongoing. We've invested in the added capacity in China. We've also moved our Jamaica refinery project with China Minmetals to a full feasibility study, which will take about the next 18 months. And we continue to pursue other global project pipeline items.

At this stage, I'd like to take the opportunity to invite you to ask some questions. Roxanne?

Thank you. (OPERATOR INSTRUCTIONS.) Our first question is from David Lipschitz with Merrill Lynch. Please go ahead.

Hello, everybody.

Hi.

David.

Can you just quickly tell us what your tax related EBITDA--I know you usually give it in your presentation slides, but you didn't give it in this slide deck.

You know what, David? We'll have to get that to you. We--it's not a number that we normally calculate for management purposes. You can do it based on our old basis, which is--we've given you the roadmap in the past. I don't have it at hand, but we can certainly crank it and put it out there on the website, if it's of interest.

Okay. Yes--.

--Same methodology as we've used before, obviously. You can get the reconciliation charts, as you correctly referenced, from the back of--at least the last sale side conference presentation I believe we did it in. Yes. Shelly's saying yes.

Okay. Thank you.

Thanks, David.

Our next question is from Sam Martini with Coldwell Capital. Please go ahead.

Hi, guys.

Hey, Sam.

Sam.

Can you give a little bit more information on the carbon anode investment in south China? I apologize if you went through this in depth. I had to jump off for a minute. But just what are you putting in, what are you getting out? I'm assuming this is all going to--I don't know if this is future for Helguvik or for Grundartangi current or anything. And then, any just updates on kind of what you're seeing in the carbon anode market globally would be helpful.

Sam, it's Logan. I'll take the better of the first part, and then Wayne and Mike will jump in. The facility is a two-phased project to produce. The nameplate capacities are around about 180,000 tons of anode. We've taken a 40% position in this. We've been studying this for some period of time. The first phase is already in place and producing. I think Mike correctly--our investment is tens of millions of dollars.

That's correct.

We're very happy with the quality of the anodes. We've tested them, we've reviewed them. And we see this as a strategic--as with other sources of supply of anodes--for the longer term for both Grundartangi and Helguvik. So I think that's the strategy. I don't know if Wayne and Mike--.

I mean, we've--just to your point--we've had the carbon reviewed by an independent party and they are a very good quality. And actually, we have a--as you recall, a test batch going to Grundartangi as we speak.

I think the only other thing I would note, Sam, is that this new plant is a clone of one that the same operator has built a couple of years ago, has been operating successfully, has been producing quality anodes for the marketplace. And so, while there is always a risk, we thought the risk here was--given the fact that, number one, it does mimic a plant that's been operating, and two, that our money went in literally, as Logan referenced, as the first line came on-stream. The risk was nothing near sort of a normal greenfield risk--plant kind of risk.

That's in Guanche Province, Sam. As you know, we've been working there for some time.

So rough--so about .6 tons anode per ton aluminum. Is that fair?

Yes. Fair enough.

That's close enough, yes.

And you'll get about 70 to 75 out of this thing when it's all said and done?

That's what our equity stake is, Sam. That doesn't preclude us, obviously, from having an off take that's greater than that. But I think you should look at that as a minimum of what we would get.

And how bad has anode gotten? I mean, has it gotten worse even from Q4? And what are you seeing for prices there?

I think trends--the drive to source and keep reasonably consistent supply of strategic material is going to be tested for everyone. That's a part of the supply side risk I think. And so, we've had longer term and medium term contracts in place with multiple suppliers. But this is one way we have can I say a better impact on what comes out and it gives us opportunities to defray our risk.

And the spot market, to your question, Sam, has kind of stayed in there. To the best of our knowledge, it's kind of gone sideways over the--sideways over the last 90 days. As you know, the reference points are hard to find, but it's such a thin market that the true third-party merchant anode market is very thin.

So this gives us some good visibility, more than--as much or more than anything.

You bet.

Correct.

Thank you.

Sure.

Thanks, Sam.

And our next question is from Mark Liinamaa with Morgan Stanley. Please go ahead.

Hi, all. Could you go over your commentary with the Big Rivers unwind again? I want to make sure I understand the power situation there going into the rest of the year.

Sure. Just--let Wayne take it. I'll make comments.

Sure, I'll just talk about it again. The unwind is being reviewed by the Kentucky Public Service Commission now. And as I had indicated, these discussions and the review publicly involves many people and many constituencies. And as a result, we had formerly thought that this could be wound up and completed in the first half of this year. Now, however, it appears that it may move over into the second half of the year. And as a result, if you recall, our unpriced portion of our power contract, that has essentially been closed for the first half of the year with the exception of about 5%. And so, again, recognizing this potential, we're going to be out talking with EON and other providers to understand what power is available to close this position in the second half.

And does this create any sort of risk at all or--?

--I think the only risk is the price, but we've been doing this for the last period of time. So we've (inaudible) a major part of it. It's just the pricing. I don't think it's a sourcing issue.

Okay. So it's still a very--from your perspective, a very manageable situation relative to current operations?

I think that was your question. Yes, it's just a pricing issue.

Good. Thank you.

Thanks, Mark.

Our next question is from Oscar Cabrera with Goldman Sachs. Please go ahead.

Hi. Good afternoon, everyone.

Hi, Oscar.

Just if you could, I missed part of the explanations you guys were giving on Helguvik. I understand the expansion there is between $5,100 to $5,300 a ton. Now, we have talked about a range for 4,500 to 5,000 and you said that at the top end of the range that would include an anode plant. So I just wanted to make sure that these numbers that you were giving us today reflects your partnership that you've gone into. And how much do you think you can save in terms of cost? And then, the second part of that, you also were referring to $6,600 a ton. Could you just go over that again, please?

All right, Oscar. I'll try and set up the sequence and I'll ask Mike I think and Wayne as well to--I think we've always said that the new greenfield site, Helguvik, is not going to have a carbon plant. I don't think we've ever indicated we could have a carbon plant. If you misheard that one, our apologies. But it's never going to have [a problem]. Secondly, it's 100% owned by us as well. It's--the approach on the project is not different to what we've been saying for the last year or so. It's going to be built in phases. And the phases are no different to our approach in the way we dealt with Grundartangi. The first phase initially was set to be 150,000 to maybe 190,000. We're now indicating at the higher end of that range. The capital investment for that range for the first, because you're pre-invested for the whole pipeline of up to 360,000 tons of capacity for a year, is about $1.2 billion. At the end of that, if you do the arithmetic, you'll come out at about $6,600 per annual ton of capacity.

Completing all the phases to the full capacity of 360,000 tons by 2013-2015 period will take that capital cost down to an average of about 5,100 to 5,300. And you correctly previously indicated somewhere between 4,500--but that goes back about a year. And we've now recognized that part of the impact of these ongoing costs, including things like the aluminum thus far, which is a big number, steel prices, et cetera.

The project is south of Reykjavik. And we've got all the experience we've learned in Grundartangi to obviously--to apply to this project. I don't know if Mike or Wayne want to add anything.

No, I guess other than to repeat Logan's point and just add a little detail. Oscar, as you remember, we did talk about 4,500 to 5,000. I think Logan was right. Maybe about a year ago, we updated that to right around 5,000 when we spoke about it the last couple of times. And the 5,100 to 5,300, as Logan said, for the whole pipeline, as you would normally expect with a project like this, has a contingency element in it. So the actual cost of that pre-contingency is less. We think it's prudent to have a contingency for all the reasons that you normally have one in a project like this and we think our contingency is kind of the right quantum for the type of project we're taking.

And so, that puts it into I think context and brings it current. There's been a lot of work that Wayne's team has done to get to this point.

Any comments, Wayne?

No. I think you guys captured it well.

I appreciate that. And if you could just remind us what--you said you were spending about $200 million for that in 2008.

Right.

What kind of sequence would we be looking at for the--until you start production in--at the end of 2010? Is it (inaudible)?

Yes. I think for the capital for the remaining two years, 2009 and 2010, those are your most intensive years in the field, as you would know. I would take--at this point in time, until we update it anymore, about 50% of the additional capital will be spent in each one of those years.

Okay, great. Thank you very much.

Thanks, Oscar. Good question.

Our next question is from Dave Gagliano with Credit Suisse. Please go ahead.

Thanks. First of all, just to follow-up on Oscar's question. I was wondering if you could just clarify a little bit more on the Helguvik, the breakdown of the 1.9 billion in total capital by year from 2009 to say 2012. I didn't quite get that 50% comment.

David, we haven't got a breakdown that we are happy to give. But on phase one, up to $1.2 billion, that will take the period '08, '09, and '10. 200 million in '08 and then evenly spread over '09 and '10. As you know, as the engineering develops and the schedule develops, you will have fluctuation. So that's our best numbers that we can give you at this point in time.

Sort of 350 and 350 in 2011 and 2012? Is that fair?

No. David, 1.2 billion--maybe it's--we have missed this. 1.2 billion for the first phase up to 180,000 tons. That gives you the 6,600 per annual ton of capacity for the first phase. That obviously goes down as you introduce lower capital investment for phases two and three.

Okay, right. I'm sorry. I was thinking phase two and three in total gets you to 1.9 billion. So incremental 700 million--.

--Correct--.

In 2012, 2013 sort of thing. Just--.

--You've got the--we're targeting 2013 to 2015. Obviously, we'll update you as that (inaudible). And just an additional one. This is all coming from geothermal, so those come on in incremental amounts, David. You know that and you've actually seen it. So I think that's important to understand. As these things develop, we'll update everyone.

Okay, fair enough. Moving on, just to switch over to the electricity rate increase question. If you do need to absorb the 17% rate increase, I'm just trying to wrap some numbers around it. What would be the total impact on your cash cost at Ravenswood for the incremental increase?

David, I'm going to ask Mike to [press on] for that one.

Yes. I have two comments. One, we'll answer the question by not answering it, because as you know, David, we don't quote cash costs. And two--but there are estimates out there for what our current power tariff at Ravenswood is. And two is, to put some color around it, as you know, we right now are operating at Ravenswood through a lot of hard work that Wayne's team has done in the state under the so-called experimental rate where at lower LMEs, the increases that have been imposed over the last 18 months are not forgiven forever, but are excused until metal prices go back up. We've talked about this many times before, obviously. And so, we would hope and expect I guess I would say that that regime would continue. Though it doesn't automatically continue, we--with a lot of hard work we're hopeful that we can get it to continue. And so, we need to all--obviously, at the current metal prices we're paying at the higher tariff rates, based on the last two increases. But we do have that downside protection.

Okay, good. Thanks very much. I appreciate it.

David, thanks.

(Inaudible.)

Our next question is from Justine Fisher with Goldman Sachs. Please go ahead.

Sorry. Good afternoon.

Hi, Justine.

The first question that I had was just a clarification on the prices. So is there always--there's always a one month price lag for you guys versus the LME?

Not much--the reason we quoted, Justine, is--I guess Wayne--much of our sales flows that way. I wouldn't say all, but much.

Yes. The predominant amount is--.

--In the U.S. anyway.

So the 117 for the first quarter--I guess it was significantly below the LME average. Should that be--should it be closer to the average going forward, or is that just in quarters where there's a massive swing in the LME prices?

There you go. If it was flat, then it wouldn't matter, right? But if it's up or down, for the sales in the U.S. anyway, most of those are made--and we're no different than the rest of the industry in that respect.

Okay. And then, I didn't see in the press release, so forgive me if I missed it, but the breakout of the impact of currency. Because there's been some massive swings in the exchange rate, too. I was wondering, Mike, if you could break out the difference. I guess the currency impact would be on cost in Iceland.

Yes, indeed. And it was only--we didn't break it out to give the one in material. It was about $1 million, Justine, to the positive that hit the bottom line. Because obviously, in the U.S. we're producing in dollars, selling in dollars. In Iceland, we're obviously selling in dollars and much of our costs, including electricity, remember, is in dollars. And so--and we don't have any alumina there because of the towing. So really, all you're talking about is sort of the local krone-based costs. Those obviously being payroll and local taxes and local services and stuff like that.

Right. So I guess--okay. So, right, that makes sense. I didn't think about the fact that the power is all based on the LME. So I guess if you guys--.

--Yes, that's it (inaudible).

So if you guys were to see an impact of currency going forward, it might be on the capital cost?

It would be on the capital cost. And maybe you're bringing it--that's an excellent. I'm sorry to cut you off, but we're doing a lot of thinking about it now. In fact, we have--and we talked about this last time--in advance of precising our capital costs and timing for the new project, we did go when the market spiked a little while ago and bought against our operating costs forward about 13 months. Shelly's group and the folks in Iceland caught the market reasonably well. And so, we bought an average price of I would say close to 80, maybe even a little bit above, a little bit below, high 70s, on a krone-dollar basis against the operating costs. Now that we have the CapEx more defined, we are looking very carefully at how we will approach the capital costs for the new project.

And as we've announced or discussed in the past, of those numbers that Logan and Wayne were citing, roughly a third are krone-based.

Okay, so you--oh, go ahead. Sorry.

Hi, Justine. Just to add to what Mike said, this is Logan. We're going to approach it no differently to taking some currency or risk out of the project as we did for phase five at Grundartangi, if you remember.

Okay. And then, the last question I had is just about potential supply responses that we might be seeing to the current price rise in aluminum. And I know that we really saw a lot of moth ball smelters come online over the last couple of years because of higher prices. But it seems as though there's little propensity for more to come on. But I was wondering if--even BHP has seen a cutback in South Africa. Are they trying--are major producers or any new producers trying to increase production anywhere else in response to these prices?

I think the situation has been around for two years. I think we've seen reasonably attractive prices. So on the supply side response, everyone's running the gauntlet at full utilization, so there's actually a supply side risk because everyone's running at 95% on serviceability. In terms of the plant that's closed down, it is unlikely that I can see--and my colleagues can comment. I can't see the restart of existing closed plants. A lot of them have actually sold off key parts of their major equipment anyway. So they're really in the process of being decommissioned. Some of these happened in China and elsewhere. So I don't see it. Wayne may have some observations, but I don't see it, Justine.

No, I think you make a good point. Those plants that are available have been decommissioned to the point that they are no longer restartable. Otherwise, they'd be in the market.

Yes. And this--you can read the industry analysts--this is Mike, Justine--and they'll say the same thing. There's a real life example in the marketplace right now. We don't like to say the names of our peers. But there's a small plant in the U.S. that is currently for sale. It's a 90,000 plant--ton line. The operator is a major, so I just probably cited who they are--have obviously chosen not to restart it. And I think the scuttlebutt in the industry that is the most likely, Wayne, result is for that facility to be bought for the equipment.

Right.

Either by an operator or more likely by sort of a broker type and parted out. So perhaps that's a real live answer to your question.

And I heard Google--I heard Google bought a smelter. No, seriously. That was one of the only places that had enough electricity for their service. Anyway, okay. Thank you.

I'm sorry, Justine. Just to finish up, I think also where is the power going to come from. You understand the challenge.

Okay, thanks.

Thanks, Justine.

Your next question is from Terence Ortslan with TSO Associates. Please go ahead.

Thanks. Good afternoon, everybody. I'm just [grinding up] some numbers. Could you remind me again please for 2008 what's your SG&A going to be and your depreciation and amortization and the CapEx one more time? Thanks.

Sure. The--.

(Inaudible.)

Yes, no problem. The SG&A, as I referenced, we're still comfortable with the estimate that we gave on the last call, which is about 12 million a quarter. It can be lumpy, but that's still a good number on an ongoing basis. I'm sorry. Your next--oh, CapEx. Two parts I would answer that in. First--and this is both consistent with the guidance that we gave a couple months back--the non-greenfield Iceland plant CapEx. So for the rest of the company, including the existing plant, Grundartangi in Iceland, about $75 million for the year, including sort of our normal amount of maintenance and sustaining CapEx, so in the 20 to 30 range and the rest being the expansion in ROI projects about which Wayne spoke in detail last time.

And then, last, I'm sorry--oh, D&A. About 85 million - let me break that into two parts. About 70 of it is fixed asset depreciation, and the rest is amortization of the remaining intangible asset due to the power contract. As we talked about--that's the annual rate. As we talked about last time, that amortization will go away upon the singing of the--of the cancellation of the existing power contract at Hawesville and the signing of the new one. So that's kind of a moving target. If we didn't, per Wayne's comments, sign a new contract until the end of the year, it would be, indeed, 15. But it will be pro rata--pretty much pro rata for when we close this new contract.

I think, Terry, I would just add an item to remember is we're now going ahead with a full feasibility study on Jamaica, and obviously it's 50/50 with our joint venture partners. And we'll be obviously expensing that as we go forward. As we develop more information, we'll obviously bring that to the table.

Okay. Just one question on your slide seven (inaudible). Slide seven, the completion of the fourth quarter cost curve, is it number of smelters or number--tons of capacity that you have on that bar chart, out of curiosity? If it's number of smelters, that doesn't seem to make sense.

(Multiple Speakers.)

I think that in--this one really to try and--to try to--and Terry, good catch. In trying to point out where the new smelter in China is [flowing] in terms of the cost curve.

Yes, sorry about that. That's certainly tons.

And what is a ton, by the way? What is that number, the tonnage number, roughly?

I will have to look it up. But probably somewhere on the order of 14 million tons--12 to 14 depending--.

--Of the total.

Yes.

Yes. I mean, you can--CRU--this is right straight out of CRU.

Okay. 12 to 14 million being the fourth quartile?

Total China--no, no, no. Total China.

Oh, okay. (Inaudible) on that number. Okay. All right. Thanks, guys. Thanks very much.

Sure.

Thanks, Terry.

Our next question is from Tim Hayes with Davenport and Company. Please go ahead.

Good afternoon.

Hi, Tim.

Just a question on the--more a macro question for Logan. What's your feeling about South Africa? How bad might the power cuts--the smelter cuts be? And I think we're still about, what, 10% of running or has been cut in the three smelters in the region. What's your feeling? Might that--how much more could that be over the next several years, if there is truly a structural power problem in the region?

Yes, Tim. I think to go to the last part, I think there is a structural problem. It's not only impacting South Africa. If you read the literature and you travel there--but you'll--it's impacting Botswana, Zimbabwe, and even through into Zambia. So--and the solutions are for the short-term to try and bring some peak load on gas turbines and oil fired or diesel fired will help. But the internal consumption in South Africa continues to grow. So the minimum that Eskom, the national provider, [has checked] is a 10% reduction. And--but it hasn't guaranteed that and we'll have ongoing blackouts or reductions as we go forward. So it's [imposing] that. The second part, which is--it's trying to impose is obviously price on the domestic users particularly. And that, of course, is not doing too well.

I don't see from visiting there and talking to people in the know that a new power--coal fired power station north of Johannesburg will come into being much before 2015. So this is not a problem that's going to go away in the next year or 18 months. Obviously, all the users are working at ways of reducing consumption, but you've also got the growth in demand as well. So I think the two--it's quite an ongoing problem.

We've modeled only a 10% reduction in our look at the numbers. We haven't taken anything in addition. I think that's part of your question. We have no view on that and we'll see how it plays out.

And then, moving to China, we've heard a lot of talk that some steel mills may be shutting down around Beijing. Any idea if any aluminum smelters in that area would shut down? And if so, any estimate of what kind of tonnage might be affected?

We haven't picked up any aluminum smelters, but I think the steel ones are being reported. It's a good question. We haven't seen anything, so we've got no view on it. Tim, I just think generally we said to China--we've looked at what China may produce for a year and we say somewhere under 15 million tons--close to 15 million tons. I'm looking at Shelly for the--and she's nodding her head. So it's in that order. I think people have realized that China will not continue to race ahead as it was over the last maybe three years.

Okay, thank you.

Thanks, Tim.

Our next question is from David Lipschitz with Merrill Lynch. Please go ahead.

My question has been answered. Thank you.

Thanks, David.

Thanks, David.

The next question then is from David Rosenberg with Oaktree Capital Management. Please go ahead.

Hi, guys.

Hey, David.

I was wondering, you gave the sequential changes in cost from Q1 to Q4. Can you do the same thing year-over-year from Q1 last year to Q1 this year?

Sure, no problem. Let me pick out the big ones. I mean, before I get into the costs, obviously, the price itself has the biggest single impact, as it always does, again, assuming that the market moves on both our revenues and ultimately our gross profit and operating profit and the rest. And just let me give you a couple pieces of key data there. The actual price that we realized--.

--Is up a little bit?

I'm sorry, David?

The price is up a little bit it looks like from your press release - the average price.

Quarter-to-quarter?

Year-over-year, 115 to 117?

We've got it in dollars per ton here.

Exactly right. Anyway, let me go on with costs and answer your question.

Okay.

Biggest factors there were not dissimilar to what we just had. The raw materials, about a $7 million negative variance Q1 to Q1 last year of that. Just to give you a little bit more breakdown, anodes for Grundartangi were about three, carbon in the U.S. was a bunch more, and then fluoride and a few other little things. Alumina--third-party purchased alumina at Ravenswood and Mount Holly, about $2 million worse. Domestic power, about $5 million worse. That was mostly electric power - Mount Holly of that was 1 million, the rest Hawesville and Ravenswood. A variety of OpEx, principally in the U.S. - about $4 million negative variance.

Just looking through, those are the major cost elements. Oh, pardon me. Going the other way, importantly, same theme as quarter-to-quarter, are the--what we call the controllable operating expenses at Grundartangi, i.e., non-power, were favorable by $7 million quarter over prior year's quarter.

I'm trying to understand then , because it sounds like if you look at average price was up slightly, volumes were up slightly, costs weren't up dramatically, yet EBITDA is down meaningfully. And I'm trying to figure out what I'm missing unless it's--maybe it's just mostly SG&A.

--SG&A was six or so--let's see. Yes, about--yes, six of it.

Yes, maybe that was it. Okay.

David, are you looking at prices with a one-month lag?

I'm just looking at what you guys reported (inaudible)--.

--Average realized price--.

--The averaged realized price.

Yes.

Hopefully, that helped you, David.

It did. Thank you.

Thank you.

Our next question is from Wayne Atwell with [Polynous Capital Management]. Please go ahead.

Thank you. Can you explain your thinking going forward on hedging? I know originally when the company was put together you were relatively high cost with the [assets] primarily in the U.S. and you were at the high end of the cost curve. With your smelter in Iceland now, you're in much better shape compared to the rest of the industry. Are you going to continue to sell metal forward or as this runs off are you going to sell flat and not have a forward hedge position?

Wayne, I think we've been fairly consistent over the last couple of years. We review our status as we would do and most people do I'm sure looking at the market. We want to and wish to remain exposed for the balance of our tonnage to the market. So we have no plans. But I'd just say that we do look at it. And--but we have no plans to put in place additional hedges. I think--if that's the question.

Yes, and just to--this is Mike. Just to--based on your question, Wayne, I'm sure you do understand, but just implicit in your question maybe. We have not sold a ton of metal forward in the last couple of years. So we've just been--.

--(Inaudible.)

--Yes. So we've just been working off the book that we have had. As you referenced, it was put in place when the company was a different size and a different cost structure. And as Logan said, we've been consistent that we like the--we think our investors want us to have exposure to the market. We think it's the right thing to do. You never want to say never. But given everything we see right now, as Logan said--.

--We like the exposure for the balance of the tonnage, Wayne.

So essentially, you're going to let your hedge book run off and you're not hedging anymore. And then, second question, we talked about the Ravenswood power situation. Do you have any other power issues that you are concerned about?

I think the answer is we're always working on the longer term solution for Hawesville. But that is a fairly complex process. But it's progressing. We have a power contract in place with about a 27% exposure, which we have dealt with for a number of years. I think Mount Holly, we hope that the introduction of the new coal fired power station will help maintain a steady power price there. But again, it is impacted by what the coal fuel costs will be. Obviously, at Mount Holly they're going to bring on--[Sandy Cooper] will bring on the new power station coal fired again next year. And I think over all that will help reduce the costs. I think on the trade of coal versus natural gas, the (inaudible) is obviously stay with the coal.

Obviously, at Grundartangi we've got power contracts in place that go through for a long time and they're (inaudible) based and are quite competitive. But it's an issue that we work on all the time and we see if we can improve it. For Ravenswood, we've got the rate case coming this year. More importantly for us is to continue the experimental LME-based rate arrangements. That gives us downside protection and obviously is a good system for everyone. It's pretty common practice across the world, as you know.

Thank you.

Thanks, Wayne.

Your next question is from Sam Martini at Coldwell Capital. Please go ahead.

Hey, guys. Just a follow-up. In terms of the kind of off the run costs, specifically freight, maybe nat gas at the refinery, anything that's not kind of power or bought alumina. Anything sneaking up that you're starting to get concerned about being very tight? You mentioned fluoride, [caustic]--anything else that you are starting to really think you have to scramble to get that we should be paying close attention to?

I think, Sam, the answer is every single cost element gets the attention. But just to deal with a couple, we've got a contract in place for aluminum fluoride. And so, we've tied that up. Obviously, we continue to look ahead and that's one of the reasons we went the route of securing our own source of supply in the joint venture for carbon for anodes. The second part on the natural gas, we've always had a proactive hedging strategy in place. And for the balance of the year, I think we're hedged at about 35, 36% of our needs - mostly Gramercy. But there is a concern [point]. We see gas gobs at [$10], 1 million BTU. So that's why when we see the market's favorable we will take some of the risk out of our production costs. And Gramercy continues to produce well, so we (inaudible), but that's sort of the impact that we obviously look at.

What about on the freight side? I hear barge rate's up a lot. Do these things--this is--I think we're offsetting some meaningful benefits. Is that--are we seeing prices up or capacity costs up even more than we thought?

I think on the freight, both barge and ship coming in, we basically have put in place a contract that will cover part of that. We also work with our suppliers very carefully and trying to make sure that our sources for supply are closest to our needs, that being obviously Ravenswood and Mount Holly. And so far, that's been quite successful. But again, your (inaudible) up to $115 oil--[what it's going to be]. We did mention going (inaudible) towards the end of last year that although our alumina pricing project for Ravenswood and Mount Holly were going to improve this year, that has all been taken up by increased pricing. So I think you understand that we haven't seen the benefit of the alumina pricing because the freight rate has actually eaten up that benefit.

Right. Okay. Thanks, Logan.

Thanks, Sam. Good question.

(OPERATOR INSTRUCTIONS.) And we have a question from Marty Pollack with NWQ Investment Management.

Yes, hi. This is following up on Wayne Atwell's question regarding the strategy on hedging. I'm just wondering the price--as you look at the forward curve, how much of that in fact is sort of the influence on your thinking? And then, at the same time, what would be the average price that you project let's say the next two or three years?

Marty, let me try and stand back and answer this and I'll get my colleagues to comment. This is Logan. I think first of all, we look at all the forward prices, we look at the fundamental things such as where's the supply coming from, what's the demand like. I think it remains supply side risk, which has been demonstrated very well in the first quarter of this year. And then, we look at what it is. But we--looking at that in this robust market we feel being exposed to the aluminum price is good for the company. So we don't want to add to our present hedge position.

In terms of what that price may be, I think you have to go and look at all the analysts and take them all and (inaudible). And we look at all of those and we say there's a range of numbers that you may wish to consider. But on a long-term price basis, I think most of the average is around about $2,400, maybe $2,500 or $2,600 per annual ton. This number we may have been talking six months ago around 2,100. So I'm [to indicate] that the market and the way people are seeing cost push, supply side risk, and demand growth, these numbers have changed quite a lot in the last--certainly in the last six months. Mike, (inaudible)?

No, nothing further.

Hopefully, that helps paint the picture for you.

I guess that I would just follow-up, in effect, looking at the nature of the project and the CapEx, unless you've thought it seems that 2,400 was really even not--let's say really expect a much bigger price, maybe something like a copper type move, it seems that the current price level is fairly good. I mean, can I assume there's just a lot more optimism on your part that it's too much to give here--the opportunity maybe to see the price up to $1.50-plus, something like that? I mean, is that in a sense part of the way you're thinking about it?

We don't just [source on the pricing]. We say, look at what people are talking about. I mean, there are people that are talking $3,500, $4,000 a ton. And I think for our planning purposes, Marty, to be clear, we certainly don't use anywhere near that. And we go look at a project like Helguvik and see where it's average cash cost is going to fall in the continuum of cost producers. And we know that it's going to be well in the lower half of the cost producers.

But again, there are discussions around this in the press and the analysts. We don't take a view. (Inaudible) the long-term is indicated by the analysts and we then go off and do our planning based on somewhat more conservative numbers.

Okay. Thank you.

Thanks, Marty.

And there are no further questions, if you'd like to continue.

Thank you very much, everyone, for joining us today. We look forward to talking to you again at the next quarterly call. Thank you.

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