Century Aluminum Co (CENX) 2009 Q2 法說會逐字稿

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--any of these forward-looking statements, whether it is the result of new information, actual events, future events, or otherwise. In addition, throughout this conversation call, we will use non-GAAP financial measures. Reconciliations for the most comparable GAAP financial measures can be found in the appendix of today's presentation, which is available on our website. I'd now like to introduce Logan Kruger, Century's president and chief executive officer.

Thank you, [Shelly]. Good afternoon, everyone, and thank you for joining us. We continue to focus our efforts on preserving the company's value and welcome the opportunity to report on our progress, so let's get started and let's move on to slide number 4.

I will speak about the market in some detail in a moment Wayne will also make a few comments. Suffice it to say that we do believe the situation has stabilized over the last few months in most regions of the world and in certain end use sectors. I need to emphasize that apart from China, we cannot point to any data that show a dependable resumption in growth. Consistent with what you have heard from others in our sector and in the global industrial world generally, we have witnessed a decelerating rate of decline and in certain areas what appears to be a bottom.

That said, we do not believe the industry supply response has been sufficient to match the current rate of global demand. And this situation has been exacerbated recently by restarts in China and even some delays, curtailments, in Europe. I'll provide more detail in a moment.

Against this backdrop, Century had a busy and successful quarter. Most importantly, and not to be taken for granted, especially in times of stress, in general, all our plans performed admirably. Safety metrics were excellent, and the operations ran efficiently. These results, as you would expect, are a real credit to our management teams and to the employees at our plants.

Even more impressive, our teams at Hawesville and Grundartangi in Iceland have reduced the ongoing costs of their operations, they have demonstrated [outperformance] consistently over the last few months, and proven that they can run the plant safely and reliably at these lower cost levels.

As you would understand, certain actions that they have taken are somewhat temporary and that is that the plants cannot be run in perpetuity at the lower spending levels in certain areas such as CapEx and maintenance. But critically in this environment which we find ourselves in, we believe these operating levels can be achieved for at least the next 12 to 18 months. Wayne and Mike will provide some more details for you.

After a significant effort, we concluded the new long-term power contract for Hawesville, on which we had been working for the last several years. The contract provides [cost-based power] to Hawesville through 2023. Importantly, in the near term, the agreement mitigates Century's financial risk in today's environment. Wayne will speak to this matter in more detail.

We have made good progress on the Helguvik project during the quarter. Modest construction and engineering activity continued. On visiting the site, one can now see a modern smelter taking shape. We have also advanced other facets of this project, including discussions with key suppliers, such as the Icelandic power companies. We continue to believe that Helguvik will be a world-class smelter and an excellent investment for our shareholders in the future. In this vein, we are pushing forward with determination.

But I must remind you, only in line with our requirement that we will not jeopardize the well-being of the company as a whole. Mike will provide more detail, but you will note the cash flow performance during the quarter was favorable to our expectations. This result stems from the hard work of our operating teams, and we continue to work on strategic initiatives which will put the company on an even firmer foundation. We hope to be in a position to report on some of these to you during the coming months. Let's move on to slide number five.

The (inaudible) cash LME averaged from $1,488 per ton for the second quarter of 2009 and has recently increased to above $1,700 per ton. This is after the low of $1,250 per ton in just February of this year. The most recent spot alumina price in the Pacific Basin was quoted at $241 per ton of alumina, up from the less than $200 per ton in the first quarter. In the U.S. and Europe, we are seeing signs of stabilization as we believe destocking has reached the bottom. But, demand has yet to show any meaningful indications of growth.

Recent economic data out of China demonstrated that its stimulus plan, which focuses heavily on investment in infrastructure, is having the desired effect. Chinese GDP grew at the pace of 7.9% for the second quarter and industrial production was up at 10.7% last month. These growth levels are lower than we have seen from China in recent years but impressive in the light of the global economic recession. Shall we move on to slide number six?

With the rising metal prices over the second quarter, new capacity curtailments have essentially come to a halt. In fact, as indicated by the dotted boxes in the slide, significant restarts are occurring in China where producers continue to enjoy a $300-plus premium per ton to metal sold elsewhere in the world. Curtailments now stand at approximately 5 million tons of production as compared to about 6.7 million tons of production at the end of quarter one, 2009. Most of the decreases are a result of the Chinese restarts, as well as some modest restarts in Germany and New Zealand.

The Chinese government has announced that it will no longer be stockpiling additional metal. Accordingly, this temporary source of demand has disappeared, and any real growth going forward in aluminum demand from China will likely be satisfied with increased local production. We continue to believe the market is oversupplied and further capacity curtailment, most likely in the western world, are required to bring supply in line with current demand. Moving on to slide number seven.

LME stocks have continued to rise, but as you can see from this slide, not as rapidly as in recent months. We believe this is indicative of some stabilization in demand and the end of producer destocking. However, I would note the inventory levels are at 4.5 million tons.

A meaningful portion of these inventories are believed to be tied up in financing transactions, causing some local tightness, and in particular driving the U.S. (inaudible)risk premiums to $0.05 per pound range, the highest level since late 2006. We believe these significant warehouse inventory levels will be an overhang on the market for some time to come. Moving on to slide number eight.

Inventory levels on a global basis are now 69 days of global demand, a level we haven't seen since the early '90s, when the collapse of the Soviet Union drove significant inventories into the warehouses and the market was in a deep trough. This chart indicates that current prices are somewhat above the level justified by current inventory levels based on their historical relationship.

Given our view of the continuing oversupplied status of the market, absent further capacity curtailment, we also believe that the current price levels are not supported by the fundamentals and pricing risk remains to the downside. Wayne will now produce you all some details on the operation.

Let's move on to the next slide. Thanks, Logan. As he noted, we had a good quarter from the operations perspective and made excellent progress on several fronts. Looking first at Ravenswood, there really has been no change. The small group of employees onsite continue to keep the plant safe, secure, and in good order. Based on the situation at the camp, we have agreed with the United Steel Workers to extend the existing labor contract, which we had already extended 90 days, to August 31, 2010.

As you no doubt saw in our press release, the new power contract for Hawesville is complete. Given the importance of the agreement and its long-term nature, we think it is important for investors to understand the details of the key areas of supply and term, near-term rate risk production, and operational flexibility. First, the power supply contract itself is with Big Rivers Electric Corporation. The power is generated at the same facility that had been producing it historically. These plants had, until the completion of this new arrangement, been operated by E.On US, under long-term leases with Big Rivers. Our new contract with Big Rivers expires in 2023. The rate we pay is based on their cost of production. The contract requires Big Rivers to sell on our behalf any power that we do not take if we are not operating Hawesville at full capacity. We are generally entitled to any profit on those power sales but are on the hook to Big Rivers if the power cannot be sold and/or if the selling price of the power is below cost.

Secondly, we have also entered into an agreement with E.On which has two parts. Under the first, E.On has committed approximately $80 million, which they will contribute over the next 18 months, to reduce our power bill to Big Rivers. Assuming we run Hawesville at the current production rate, which is approximately 3.5 production lines, essentially all of this $80 million in production credits will be used, and our power cost per megawatt hour will be about the same as it has averaged this year to date, which is a very attractive rate.

To the extent we run Hawesville at a lower production rate, and the entire $80 million is not spent, then at the end of 18 months, E.On will contribute half of the remaining amount into an account, which will be used to reduce the fuel portion of the power costs thereafter. So, this part of the E.On agreement encourages us to produce at Hawesville in the near-term by keeping our power costs low.

The other part of the agreement with E.On covers the risk from the Big Rivers contract over at least the next 18 months. As with most power contracts, our deal with Big Rivers is a take or pay for Hawesville's entire power requirements at full capacity. As I said, they have an obligation to attempt to sell power we do not require and we are entitled to the profit. However, in the current market environment, the market price of power in this region is below Big Rivers's estimated cost, and we would thus have a financial obligation to Big Rivers to make up that difference. Under this agreement, E.On will assume our position in this regard and pay the deficiency if the price received for the unused power is less than the cost. They are also entitled to the profit if the market swings back the other way. We have a limited requirement to repay E.On funds, which they advance under the production credit or this backstop arrangement. We would have a contingent obligation to repay to them any amount in excess of $80 million. Repayment obligation would begin after the protection period ends, generally after the end of 2010. We would only have an obligation to make a repayment in any month during which we are operating and the average LME price is above an agreed level. This [floor] level is more than 50% higher than the current LME price.

Moving on. As Logan summarized, we have had excellent performance from the plants. Mike will detail our new cost estimates. At Hawesville, the reduced costs have come from a number of fronts, including lower alumina costs from Gramercy and more efficient power usage and improvements in most other areas of plant consumption and operation, including raw materials, maintenance, and supplies. As Logan noted, some of these actions such as the deferral of maintenance activities have limited lives, but we are convinced we can run the plant in this matter for at least the balance of 2009 and '10.

We continue to analyze the pros and cons of curtailing additional capacity at Hawesville and expect to form some conclusions in the reasonably near term. As I've said, we have had good performance at Gramercy and St. Anne, bringing the cost of alumina delivered to Hawesville down by almost 20% since earlier this year. We continue to talk about our partner about the long-term status of this business. Let's move on to the next slide.

We have not seen much change at Mt. Holly. Discussions with the power supplier have not yielded any tangible results. In addition, unlike Hawesville and Grundartangi, we have disappointingly not seen any cost reduction at Mt. Holly. We're discussing the situation with our co-owner who is the operator of this plant. At Grundartangi, as at Hawesville, the team has done an outstanding job in improving safety and bringing down costs to what was already a world-class facility.

In regards to the markets, Logan covered the highlights. Looking a little more closely, there are signs of encouragement in some of the markets with better trends in data such as housing starts and new car purchases. However, we have a long way to go and are running the company in that vein. Producer inventories remain low, and this fact will obviously improve conditions further once demand actually begins to pick up.

On the physical side, metal availability remains tight in many markets, due to a variety of factors, including the commitment of a large portion of LME warehouse inventories to financing transactions. We've seen the evidence of this situation in rising physical premiums. Now, I'll turn it over to Mike, who will discuss the financials.

Thanks, Wayne, very much. We're on slide 11 now. And as usual if you could have in front of you the earnings information, the financial information that's attached to the earnings release, that will be helpful, because I'll be referring to it as I go through my comments.

So, starting at the top of the income statement, with net sales, first, talk about the components of the change in net sales. And in that context talk about the market for a second. Logan gave some of these data. If you look at the cash LME price, Q1 to Q2, all my comments, as usual, and as you can see on the slide will be a sequential comparison of Q2 to Q1.

The actual cash LME price improved on average by 9%, Q2 over Q1. With a one-month lag, it was about flat. And as you know most of our sales and costs are priced on a one-month lag. We do have one sales contract in the U.S. that's priced on a one-quarter lag. And obviously as we take in capacity out of the U.S., that contract has become a larger percentage of our sales. To give you a sense, it represented about 15% of our unit sales volume in the second quarter.

If you look at the LME price on a one-quarter lag, obviously you're looking at Q1 versus Q4 of '08. The average price was down 26%. So, when you put that all together, if you look at our unit average realized prices in the U.S., they were down about 3%, and that's the reason is that one contract. If you look at Iceland, unit average realized prices are flat, as you would expect. Turning to volume, domestic -- you can see these data, by the way, at the end of the financial information, the very last section. Operations data, it's called.

Domestic, obviously, shipments down significantly due to the capacity we took out in Q1. If you adjust for that capacity on a pot-for-pot basis, we were flat on a per day basis, shipping Q2 versus Q1. In Iceland, as you can see, shipment volumes were up 1% as reported, but flat per day. The second quarter had one more shipping day than did the first quarter. And as Wayne said, we remain really pleased with the performance at Grundartangi. They shipped again at an average annualized rate of 276,000 tons, which, as you know, is well above the rated capacity of that plant.

So, if you put the pricing and shipment volume data together, you look at net sales again -- I'm back on the slide -- and you can see it on the financial information, net sales down 16% in dollar terms on those lower shipment volumes in a relatively flattish pricing environment. Walking down the income statement to gross profit, you can see gross profit Q2 over Q1 improved by $67 million. That's in a sales decline during the same comparison of $35 million, so let's talk about the major components.

The largest component of that delta, if you've had a chance to read the earnings release you saw in the first paragraph there, we had a lower cost or market credit this quarter of $27 million, roughly. As you might recall, last quarter we had a charge for LCM of $2 million. So, you put those two together, and that produced a $29 million swing in gross profit, Q2 over Q1.

Talk about some of the operational items that added to that gross profit improvement. As Wayne said, Gramercy had a terrific quarter, and the cost of our alumina delivered to Hawesville obviously improved by $6 million Q2 over Q1. U.S. power cost improved by $3 million. The only cost that went the other way, as Wayne said, was at Mt. Holly, where the cost was unfavorable by $1 million Q2 over Q1. Raw materials across the company were favorable by $3 million.

And, again, as Wayne said, we had terrific operations performance out of Hawesville and Grundartangi, for which the operating costs in aggregate improved $12 million quarter to quarter. Moving down the income statement. Other operating expense of $9 million. Just to remind you, the costs on this line are the curtailment costs related to Ravenswood.

They'll go here from now on instead of costs of goods sold as long as the plant is curtailed. Six of that $9 million relates to the expense that we booked for the payments that we're going to be making to St. Anne's for the settlement of the alumina contract volumes for '09 obviously that were meant for Ravenswood.

[Loss on Ford] contracts, as you can see, $3 million there. That item is primarily the result of the marking to market of the unpriced portion of the power for Hawesville under the old power contract. We're studying right now specifically how we will be accounting for the new power contract at Hawesville, but what we have determined to date, that the series of contracts will indeed be accounted for as a derivative and thus will have amounts flowing through this line as we mark those arrangements to market. Obviously more on that when we report Q3 earnings.

A couple other items on the P&L. Equity earnings, you can see $4 million profit this quarter versus a loss last quarter. To remind you, the loss last quarter was primarily produced by an inventory adjustment that -- of $3 million [at BHH]. As you know, BHH is our 40% owned carbonano plant in China. They had no inventory adjustment this quarter. A big portion of the $4 million in profit this quarter was, again, our share of that $6 million payment we made to St. Anne's.

So, obviously we own 50% of that, we get $3 million back in our equity earnings. Effective tax rate, as you can see, was close to zero, as we've been telling you. In the U.S., our tax rate will be zero, even though we have book losses in the U.S. We can't provide a tax benefit in the U.S. because we have a full valuation allowance on all our deferred tax assets in the U.S. So, that will be zero for the time foreseeable. In Iceland, we provide our taxes at 15%, and so, again, on the reasonably modest base of taxable income in Iceland, we're providing at 15%.

So, all that boils down to a relatively small effective tax rate as you can see. A couple other items before we move on. Average shares for the quarter, as you can see, 74 million common, 15.4 million preferred. Those are consistent with the balances at the end of Q1, so no movement appreciable in the share count over the quarter. As you can see, the preferred shares this quarter again are not included in the calculation of EPS, because doing so would be antidilutive.

If you move-- before we move to the next slide, just look towards the end of the financial statement data at the cash flow information. Just a couple items of note. CapEx for the quarter came in at $3 million, as expected, and spending on that Helguvik project, again, consistent with our expectations, came in at $6 million. If you move on to slide 12, please, just a quick look at the changes in cash over the quarter. We exited Q1 with $267 million of cash on the balance sheet.

As I just said, aggregate of Helguvik spending and sustaining CapEx was $9 million. We had another source of capital for working capital during the quarter. That was due primarily to the sale of the last volumes of alumina that were originally intended to be used at Ravenswood. And as you can see, importantly, on the chart, cash loss from operations slightly under $40 million this quarter. If you go back to last quarter, that same number was $61 million.

I would note that we made no interest payments during this quarter. Our roughly $11 million semiannual interest payment on the two bonds are due in February and August, so obviously you'll see that $11 million amount in Q3.

Moving on to slide 13, just a quick update on our operating costs and some of the other forecast items to help you in your modeling. First the smelter cost in the U.S. These estimates now include the net price of the power bill that we'll be paying under the new contract at Hawesville.

So, at a range of recent LME prices in the U.S., our cash costs are in the range of $1,750 to $1,800. And in Iceland, at Grundartangi, of course, $1,350 to $1,450. Curtailing costs at Ravenswood, consistent with the forecasts we've given you before, about $15 million for the balance of this year, something under $30 million next year, and then as you know and we we've said before, they come down significantly thereafter.

SG&A costs, $6 million of cash costs continue to be a good estimate for the base cost of running the company. Obviously the P&L will show a larger amount due to some non-cash items that we accrue, like pension costs and others. In Q2 and in the current quarter, Q3, and for the next quarter or two, at least, we'll be incurring some amounts above this, largely due to professional fees, as we work on our various restructuring activities. And those could be a couple million dollars a quarter for the next couple quarters.

Just a couple last items. CapEx -- no change to the estimates we've given you previously. Something under $10 million for the balance of this year and about $15 million in 2010. And lastly Helguvik began -- no change in the estimates, about $10 million left to go this year, $5 million next year for the balance of the deferred payments to suppliers. I would note importantly, and Logan made some comments on the status of Helguvik, that these amounts don't include actual construction activities after 2009. And we'll be, you know, continuing to work that and formulate that and we'll hope to have something for you to update you on those here maybe as early as next quarter. And with that, I'd like to turn it back to Logan.

Thanks, Mike. We're on slide 14. We have covered most of the points already today. However, I think it's important to emphasize that while we note the improving industry trends about which we have spoken, we remain unconvinced that the path forward will simply be up and to the right. So, we are operating this company and contemplating various strategic actions in that context. The cost of getting this critical assumption wrong is just too high for our shareholders to bear.

We have made real progress in improving the company's liquidity profile through cash-raising activities earlier this year and now via real reductions in our operating costs. We remain hard at work on our restructuring efforts aimed at further lowering the cost base and taking risk out of the company. We hope we will have some items to communicate with you in the near term on this area.

Lastly and most importantly, we are absolutely committed to developing the Helguvik project and restarting major construction activities as soon as is practical. On the next slide, for your interest, you can find a recent picture of the construction site at the Helguvik smelter. With that, we'll turn over to your questions. Operator, we're ready to take questions.

Ladies and gentlemen, if you'd like to ask a question, please press star one on your touchtone phone. You will hear a tone indicating you have been placed in queue, and you may remove yourself from queue at any time by pressing the pound key. Once again, if you'd like to ask a question, please press star one at this time. Our first question comes from the line of Kuni Chen with Bank of America Securities. Please go ahead.

Hi. Good afternoon, everybody. A couple questions here. I guess just first of all on the cost side, you know, obviously some of the cost reductions are not sustainable -- capital spending and maintenance and what not need to ramp up back to normal levels over time. But can you talk about what cost improvements you've been able to get that you think are sustainable. Others in the industry are changing spec from carbon anodes and things like that. Are those the types of projects you're been looking into?

I think Kuni -- thanks for the question. I'll ask Wayne to dig into some more detail for you. But as we said, we believe the position of our cost performance is sustainable for the next 12 to 18 months. Obviously after that you have to review your position. Wayne, you want to add comments?

Yeah. I'll just use an example at, say, Hawesville. Of the cost reductions that have been made there, maintenance and supplies, which in some cases may not be sustainable, only makes up 14% of that overall cost reduction. So, the rest of those are in line with material cost reductions and the hard work that the guys are doing at the plants.

And certainly we've obviously looked at the specifications of the supplies -- you use an example on carbon, that's an area that we continue to work on. Obviously we have to be somewhat careful about the end product that we deliver to our key customers.

Just on that point, Notorall, again, they've reduced their costs as well, and in their cost profile of reduction, they've made some changes in reductions in the maintenance area, but not significant. There have been major reductions in carbon and bath, indirect costs, and of course labor as well.

Okay. On Helguvik, there's some language in the release there that says you may contemplate a restart of major construction work there. Can you just give us some sense as to what sort of financing structures you're looking at to get that going again and perhaps some views on how the ownership structure may look down the road?

I think, Kuni, we're very pleased about a number of things on Helguvik. First of all, we can tell you that today it was confirmed by the European Surveillance Authority that the investment agreement has now been agreed to by them and both ourselves and the government of Iceland will be signing that. And that I think significantly reduces any risk in any new project anywhere in the world.

The second part, Wayne and the team on the project side have reconfigured into four phases of 90,000 tons each. And we've taken advantage in our review of obviously the capital investment costs that are required now. And we've seen the benefit of having those lower costs as well as obviously the lack of new projects being developed in the rest of the world. So, on the potential structuring or financing side, I think Mike can add some comments on that, if you like.

Sure, Logan. Kuni, it's premature yet, although we're working diligently on it, to say the least, to talk specifics on things like ownership structure that you're asking about. But I can reiterate what we've said previously, is that the financing package will have a couple key elements to it. One is the debt component of it won't have recourse to the rest of the company's assets. That's the path we're pursuing.

And two, any additional cash that Century would have to contribute, certainly to the first phase that Logan addressed, would be minimal. I mean, that's kind of the context of the package that we're pursuing. And, as I said, maybe as early as the next earnings call, we'd be able to have some more details for you on both that and the capital cost.

Last comment, Kuni. As you would expect, we're working on this very carefully, and we're making sure we've got all our ducks in a row. And we'll let you guys know as we see these things develop. Sorry, your next question?

Just one last one. I'll turn it over. You mentioned a need to take more risk out of the company going forward, given your skeptical views on the business climate and what not. Can you dig into that a little bit more? Is that just more capacity curtailments or are there other ways that you can look at creatively taking risk out of the company?

Kuni, first of all, I think our views of the market are not skeptical. I think we're fairly balanced in our views. We've noted some improvements, but we also note the fact that demand is still subdued and is a fairly large inventory hanging over the market. We're not unhappy to see the higher prices, but you've got to look at where the risk may remain, and we believe that still remains on the downside.

In terms of taking risk out of the company, we're looking at all ways of taking risk out of the company, and maybe Mike wants to add any additional to that.

No, I mean, Kuni got the obvious one. As we've said, we're still looking at whether taking additional capacity our makes economic sense, given the balance of risks and upsides and such. And so we've come to no conclusions there. The fact that we haven't taken additional capacity out since the plant at Hawesville that we curtailed in March shouldn't mean to anybody that that's a final decision.

And then, you know, we're continuing to look at all the other assets we own, the joint ventures in which we participate. As we've said, we're talking to our partners in both of those. So, I would say Logan's comment is right on. We're looking at the panoply of things that we can do, but you're right. Capacity curtailment, additional, is right at the forefront.

All right. Thanks, guys.

All right, thanks, Kuni. Good questions.

Brad (inaudible) of Jefferies and Company, please go ahead.

Hey, guys.

Hi.

Can you guys talk a little bit about sustainability? What can you shut down in 2010, in 2011, and where is your liquidity -- talk about like the worst case scenario liquidity option.

I'm not sure, Brad. Your question is a pretty broad one. Let's try to parse through it. This is Mike. The first is you asked what additional capacity we can take out. Let's just review what we've said before, in 2010 or 2011. So, as we've said, about 60% of Hawesville right now is required, basically 3 of the 5 lines, to supply an important customer that we have there, which contract expires at the end of the first quarter in 2011. And so I think that's the major answer there.

As we've said, at the other plant in the U.S., we don't have a unilateral ability economically there to -- we talked about this before -- to curtail. It's got to be, if it were to ever come, a joint decision by ourselves and our partner there. So, that I think is the answer on that one. Worse case, I'm not even sure how to address that question, Brad. Maybe you can ask it again, to tell us what you're really looking for.

I guess my thought is if in 2011, aluminum is still at $0.75, is this company still viable? And my thought is you can actually close everything and just run Iceland and still run it cash flow positive?

I think picking that number -- your number -- I forget what- 1,650, it does portray a continued cash requirement for the U.S. operations. But as you know from the numbers that you run yourself, obviously Iceland is self-sustainable. You have to look at that as you go forward. I think we've made significant improvements, so again you have to look in each environment, take what you think is the future, both near term and perhaps a little bit longer term, and decide how you run. We're pleased with the progress we've made, but your option is not out of our range of thinking. It depends on where you want to place the LME price.

And then there's some financial adjustments in 1Q that are positive in 2Q that are negative -- can you take me through the adjustments? What's recurring and what's nonrecurring and just get me to a normalized number?

I'm not sure-- other than the inventory items, Brad, there really wasn't anything, so it's just -- it's LCM. You're familiar with inventory accounting, of course, and why you have to have an LCM reserve and when you have to release an LCM reserve. That's all noncash stuff, of course. Those are the only items that we referenced.

Got it. If you guys, at some point -- because LME is like at $0.79 right now -- if you guys at some point wanted to buy back your bonds, could you?

If we wanted to buy back our bonds, could we? There's nothing that precludes us, contractually, if that's what you're asking, from buying back our bonds.

Right. It's not something that you would remotely think about, right now?

Right now-- I would never say remotely. We think about everything. But we believe right now, given the balance of risks and opportunities and liquidity and what not, it's not something that we're doing.

Okay. Thanks, guys.

Thanks.

Thanks, Brad.

And next we'll go to the line of Justine Fischer, with Goldman Sachs. Please go ahead.

Hey guys, and Shelly.

My first question. I know you've addressed these issues before and certainly in public forums, but I just wanted to double-check whether your thinking has changed on them. And the first is the convert put in 2011. By the way, I'm running my numbers, and, again, it's clearly dependent on aluminum prices. You guys may have enough cash at the end of 2010 to potentially meet that put with cash. But what type of refinancing options might you look at? Would you look at high-yield debt or to refinance in the [convert] market or are you not thinking that far ahead yet?

Oh, we're thinking about it hard, because two years go by, as we've all seen over the last couple of years, reasonably quickly. And the answer, not to give you the easy answer, because you said it, Justine, is any of the above. I think just looking at the options -- the financing markets are open right now. Unclear what they're going to look like at a time in the future. But the convertible markets are open, the common stock markets are open. We have the ability, through our indenture, to raise additional debt that could be done in the current market.

As you know, all of our assets are unencumbered, other than the first lien that the revolver banks have on the U.S. receivables and inventory. So, we've got a lot of options at which we're looking. And to answer, I think, part of your question, we're looking at it hard right now. As to whether we would have actual liquidity on the balance sheet to do it, again, as Logan just said, it's entirely dependent on one's view of the metal price. But, under some reasonable scenarios, what you said could be true.

Okay. And as far as the Grundartangi smelter is concerned, I know you guys had said previously that issuing debt potentially encumbered by that asset is kind of a last resort. Is that still the case?

Yeah, I mean, I think it's clearly there, and we think and our advisors believe that something relatively attractive -- one always has to use those qualifiers in these markets -- could be done. Last resort, a superlative, but it's something that we would probably leave until after we kicked through a bunch of other options.

Okay. And then the last question -- I'm going to throw this out. You may not be able to answer it, but I know that aluminum prices are clearly the big movers. But in the second quarter, the operating loss was, I don't know, in the single digits I guess. So, barring changes in aluminum prices, are there any other cost items that could drive your operating loss lower than that or, you know, at current batten-down-the-hatches mode of the U.S. operations and steady [state] in the Iceland operations -- it's really going to be aluminum prices that would drive the operating profit up or down from here?

I'm going to ask Wayne to comment as well. It's Logan, Justine. I think the answer is we've driven the cost benefit we can through, and we continue to look at them, but obviously that is a less available option. But it doesn't mean we're not looking at that. And I think we will continue to look at it. I think it's also LCM, Mike--

Yeah, I think, Justine, if I could just reorient your question, maybe Wayne could answer it. I would prefer to look at, rather than the operating loss, the cash flow, because, for example, the operating loss was made $27 million less this quarter by the release of that LCM reserve. And that's a non-cash item. The cash impact of it flows through based on cash, which actually paid for that inventory, and what you actually get for it, and for the finished products. So, I would just maybe reorient you a little bit to the actual cash flow. Wayne, you want to --

Yeah, I think the important point here is that all the teams at the plants continue to look at cost reductions. And some of the work that's being done now is time dependent, which we won't see the true results of for a month or so. So, again, it's impressive to see the idea generation being done.

Thanks so much. I appreciate it.

Thanks, Justine.

The next question comes from the line of Tim Hayes with Davenport and Company. Please go ahead.

Good afternoon, everyone. I just have one question. When you said that 15% of your sales are on a one-quarter lag to the LME price, was that 15% of just your U.S. production?

Yes, 15% of the U.S. production this past quarter. And, you know, that percentage will change. The numerator is the same, but the denominator will change based on what our shipments are during the-- each individual quarter, obviously. But, yeah, this past quarter 15% of our U.S. shipments were that one contract-- that price is on a one-quarter lag.

Very good. That's all I have. Thanks.

Thanks, Tim.

Thanks, Tim.

Next question comes from the line of Don [Noelle] with Barrington. Please go ahead.

Yeah, hi. Just two quick questions. One is can you give us the tons shipped in the quarter? And the second question is in terms of the inventory adjustment, was there an inventory-- I guess you have a lower cost of goods because you released this valuation allowance. When was that allowance taken in the first place? Was that in the prior quarter?

Yeah, it was two quarters ago. Fourth quarter of last year.

OK.

And you're right, that's what it -- it obviously results in a lower cost of sales. And in answer to your first question, I'll give you U.S. and Iceland, then we can add them up or you can add them up. It's at the end of the earnings release. But the tons shipped during the quarter in the U.S. were 76,817 and in Iceland, 68,876.

Thank you.

Sure, thank you.

Thanks.

Thanks, Don.

The next question comes from the line of John Shmazo with John Shmazo's Very Independent Questions. Thank you.

Thank you. In terms of the market outlook you have, which is realistic and cautious, what are the better ways to mitigate risk as you continue to operate the company? Would you go back to hedging, which is a strategy of the past, issue more equity, or try to sell asset stakes to mitigate risk in the current climate?

I think, John, you've covered the field. I don't think there's anything that we particularly will zone in on. We look at the pricing. I like your words, realistic and cautious. I think we're pleased that the price has moved, but we're realistic about it. In terms of how we deal with our cash liquidity requirements, Mike's pointed out our cash position is about $230 million.

So, it does give us some runway. I don't know if my colleagues will agree with me, but the runway is (inaudible) 18 months plus. So, we've got some time on our hands, and we continue, as Wayne has pointed out, to work on our cost side and our throughput side and other strategic options. So, I don't want to be too general, but I think that's the best way of answering your question.

Thank you.

Thanks, John.

The next question comes from the line of Mark Zinema with Morgan Stanley. Please go ahead.

In your comments, you referred to some of these short-term financing deals that are linked to some of the LME inventories, okay? Can you comment on the duration of those things and how you think that may play out over the next, I don't know, six months or so?

Mark, it's Logan. It's unclear how much is tied up in these spaces, but we do have really up-to-date information where it's been somewhat difficult for people to liberate out of the warehouses metal on a short-duration basis. So, we hear that some people are tied up for a year, taking advantage of the [contango]. We hear for less periods than that.

So, we haven't got access to a warehouse by warehouse financing basis, but we realize that if you look at the [Midwest] premium, and if you look across the ocean to the Japanese premiums as well, I think you're seeing both go up somewhat in this period of time.

Would you have any sense of how much is actually unfettered with financing?

We don't know, Mark. I'd like to give you a number or percentage, but I don't know. But the evidence is that it's been difficult to get metal out of the warehouses in short notice. Part of what's exacerbating the problem -- maybe I'll just add this in -- is obviously everyone's run down their own stocks. And so they want access to metal at a shorter term, so that's also driving the present situation. Don't know how much, but as you saw in our in our remarks, Mark, we believe there will be an overhang. For how long it's difficult to say, but that overhang will be there for some period.

Okay. Thanks for that. And just quickly, you talked about China restarts as being a problem. How are you thinking about China? Are they ultimately a long-term [exporter or neutral]? And can you comment on what has to happen to get the rest of the world to get it into balance?

I think if we split China into two periods, I think short/medium term, I think China's ability to generate enough metal for its own demand is more likely. They're producing at around 11.5 million tons, 12 million tons, I think, at this time is the estimate and have capacity up to somewhere between 17 million tons and 18 million tons. So, [you need growth] in China, should, by nature of the business, but, again, cost will also determine that, power, and a number of other things, which we saw just a year ago. So, you've got to think perhaps short term, Mark, that China's a bit of a closed loop.

Then you get into the rest of the world and you obviously see the build up of inventories in the LME warehouse. I don't know what the number is, but I suspect people are talking around maybe a million tons plus of excess to demand supplies at this point in time. I don't know. Shelly, do you have any comments on it?

You're saying outside of China.

Outside of China.

Yeah, 1 to even 2 million tons.

Yeah. It's difficult to gauge, because there are indications of some demand pickup in certain areas, Mark.

Great. Thanks for that, and good luck.

Thank you.

The next question comes from the line of Tony Rizzuto with Dahlman Rose. Please go ahead.

Thank you. Good afternoon, everyone.

Hey, Tony.

I've got a question about the Helguvik. Is there anything or a stipulation in the contract you have or in your discussions that would preclude you guys from bringing in a JV partner?

Tony, like anything else, I don't think we're restricted, and it's one of the things you have to think about as you go forward. We know the project is good, it's well established, it's there. We know the working environment. The capital hurdle is reduced, obviously, as you would expect, but there's no restriction.

All right, thank you very much, Logan. Appreciate that.

Thanks, Tony.

Next question comes from the line of [Paratosh Mizrah] with Morgan Stanley.

All right. Thank you for taking our questions. First on this sensitivity to LME price on the cost side, I just wanted to confirm that's still linked to aluminum price is power and alumina in Iceland and alumina in Mt. Holly, and that the new contract at Hawesville won't have any linkage to aluminum price, is that correct?

You're incorrect in Iceland. It's just power. It's a tolling facility, so there is a natural offset or hedge against it, but it's not one that's part of the -- obviously Mt. Holly is alumina. Comments on--

No, you're absolutely correct. As Logan said, the implicit alumina cost and the toll fee in Iceland, plus power in Iceland, alumina, Mt. Holly, and as you correctly said -- or I think it was a question -- there is no linkage in the new power contract at Hawesville to the metal price. It's a cost-based contract, so we pay the cost of the power producer. So, there's obviously linkage to their cost of coal and their cost of production and materials and all the other things, but no LME linkage.

Got it. And then, second, on the premium, is the Midwest premium still the relevant number for your U.S. operations, or--

Yes.

Okay. So, you're not sending a big part of your material directly to LME, in which case it might not get any premium?

No. The metals premium is the relevant part for our business.

We're not sending any material to the warehouses.

Okay. Thank you very much.

Thank you.

Thanks for the question.

Next question comes from the line of [Leon Gosh] with the [Citadel Group]. Please go ahead.

Hi. Mark actually asked part of my question on the financing thing, but just if I can ask you one more question on that. At this, let's say, 5, 5.5 cent Midwest premium, just the math would suggest that is enough to incentivize someone to break this contango deal, which is, call it, you know, $50, $60 per ton, minus the cost of financing that and the cost of storing it in the warehouse.

Obviously subject to the condition that the metal is not restricted, so the financing term is not fixed. Are you actually seeing any evidence of that, which is these high premiums incentivizing metal coming off these financing deals and becoming freely available again? So, in effect, kind of a natural flattening of the contango?

Not seeing that. We don't play in that market, as Mike has pointed out. We don't put metal into the warehouse. We just have noticed the dynamics around the premium. But to answer your question, we're not close enough or have not seen that at this point in time.

You know, we're reading the same rumors or speculation that you probably are. There's some speculation out there that yeah, indeed, the physical premiums are to the point where it might pay to break a financing deal. But as Logan said, the answer is no, we don't have any evidence of it.

Okay, thank you.

Thank you for the question. Hi, operator. Any more questions?

Once again, if you have a question, please press star, then one. We have a question from the line of David Rosenberg with Oaktree Capital Management. Please go ahead.

Hi, guys. I guess the question I have for you guys is somewhat related to a question that was just asked. Historically, you've always said the natural hedge is about 23%. And now that we've had some curtailments and the Hawesville contract is no longer tied to aluminum prices, can you refresh that percentage for us?

(inaudible) good question.

Yeah, it is. I don't think it really has moved all that much. You lost Ravenswood, which had a percentage, but then Hawesville, which doesn't have a percentage linkage is a bigger percentage, so I think net/net, you're probably around the same area.

There was no linkage to Hawesville. There's no change. You may be thinking that there was a sort of derivative or second-stage linkage in the Ravenswood power contract to the LME. But at Hawesville, the power there was fixed before. Now it's, you know, cost-based.

So, if we still think about it, about 23% naturally hedged, that's about right?

Yeah, at the quarter, give or take. Shelly's nodding her head up and down, here.

Right.

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

Thank you, David.

Good question, David, thank you.

There are no additional questions in queue. Please go ahead.

Thank you very much, everyone, for taking the time to listen to us today. We certainly are pleased with the operating performance and our cash situation and looking at our liquidity. We continue to work very hard at improving those situations on all levels in the company. I look forward to talking with you again soon. Thank you.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.