Century Aluminum Co (CENX) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter 2011 earnings call. At this time, all participants will be in a listen only mode and then later, we'll conduct a question and answer session and the instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. And I'd now like to turn the conference over to our host, Ms. Shelly Harrison.

Thank you, Laurie. Good afternoon, everyone, and welcome to the conference call. Before we begin, I would like to remind you that today's discussion will contain forward-looking statements related to future events and expectations, including our expected future financial performance, results of operations and financial condition. These forward-looking statements involve important known and unknown risks and uncertainties, which could cause our actual results to differ materially from those expressed in our forward-looking statements. Please review the forward-looking statements disclosure in today's slides and press release for a full discussion of these risks and uncertainties. In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most comparable GAAP financial measures can be found in the appendix to today's presentation and on our website at www.centuryaluminum.com. I'd now like to introduce Logan Kruger, Century's President and Chief Executive Officer.

Thanks, Shelly. Thank you all for joining us today. We had a busy quarter and are pleased to have the time to report our progress. So, let's get started on slide number 4.

First, let me provide some general comments to set the context for a more detailed review of the external environment and the Company's operations. The issues confronting Europe, the US and other developed markets have obviously been well reported and discussed. I can summarize by saying that, in our opinion, it is the risk of a major event having the type of difficult to control impact we saw several years ago that has driven asset prices lower and kept markets so volatile. China, Brazil and other developing markets have continued to perform on balance very well. They're, of course, dealing with inflationary pressures and the risk of so called contagion from Europe and elsewhere. That said, these governments have thus far managed to maintain robust growth. The fact that the rates of growth have declined modestly is mitigated by the growing absolute size of these economies.

Despite the obvious macro issues, the business environment remains reasonably good, including in developed economies. And areas such as aerospace, transportation and packaging have continued to perform well. As you know, physical premiums remain strong, still supported by a financing environment. And the absolute price of the commodity is influenced by cost pressures that are being felt by all of the producers. I will go into more detail on the progress at our Hawesville smelter in a moment. We're now having placed a strong team while confronting the issues that have built up over the time at the plant They continue to stabilize the operation and have identified issues requiring remediation. The effective out of production capacity has been reduced by a third, and they are working toward a plan to regain full production capacity over the next few months.

Grundartangi had an excellent quarter with record production and conversion costs well in line. I would like to congratulate Gunner and his team in Iceland. Mount Holly's production was consistent with our expectations. The plant higher, but continues to struggle with higher power costs. We and our partners have brought this issue to the forefront and have communicated clearly with the part supplier and other important constituencies in South Carolina that the long-term future of this excellent plant is in jeopardy. We will be expending significant effort over the next few months on this process. On our Helguvik project, the arbitration procedures with HS have concluded, and we are awaiting the decision from the panel. In addition, we continue to have discussions with all of the other parts supplier about a way forward. This process continues to proceed at a frustrating slow pace. We remain and maintain our belief that this project will go forward and will be a very good one for Century's shareholders and also for the various constituencies in Iceland itself.

Let's move on to slide number 5. Let's have a look at the market. In the third quarter, the aluminum cash price averaged $2,400 a ton, the lowest quarterly average price so far this year. Since then, prices have fallen further, but seem to have found support around the $2,200 per ton range, driven by marginal operating costs. Aluminum currently has a strong price support as experts believe that the fourth quarter of cost incurred and possibly some third quarter, if producing at a cost above that of the prices. As a result, a significant number of smelters are losing money at recent prices, but it's too soon to expect meaningful production cutbacks because of the significant costs associated with idling a plant. We have, however, seen some restock projects delayed, and if prices stay low for a sustained period of time, we'd expect to see production cuts implemented.

In the third quarter, aluminum spot prices decreased slightly with the most recent tendered the order of about $360 per ton. Overall, the aluminum market is expected to remain reasonably well balanced for the rest of this year. Chinese aluminum demand remains flat during the third quarter as compared to that of the second. Annualized production reached a record of some 20 million tons, moving the Chinese aluminum market into roughly balanced position. We continue to believe that China will remain balanced or a modest net importer over the longer term. If you look at the statistics for China, China's third quarter 9.1% year-over-year growth in GDP is the lowest since 2009, and the industrial production fell from 15.1% in June to 13.8% in September. As expected, markets reacted to this weaker performance, but we continue to note that these are still very healthy growth rates and are calculated off what is now a very large base. We continue to monitor inflationary pressures and monetary policy actions in China; but at this point, do not anticipate a hard landing. When you look at India, it continues to show healthy growth rates with GDP of 7.7% year over year in the second quarter as compared to 7.8% in quarter one.

Let's move on to slide number 6. Days inventory remained relatively flat in the third quarter while the quarter end aluminum price dropped some 12%. This shifted the price inventory relationship to a level more consistent with the historical correlation, but still well above the trend line. We continue to believe that this is driven by price support from global cross pressures and financial transactions. Although there's been some concern expressed recently that the euro zone debt issues may impact the aluminum financing market. The physical market itself remains reasonably tight, and European, US Midwest and Japanese premium all remain well supported. In Europe, duty paid premiums are about $195 per ton, and in the US, the MIdwest premium remains at the $0.08 per pound region. Both of these vary slightly from recent highs, but still well above historical levels. We believe aluminum prices have support at the current levels, which are below the marginal cost of production for a substantial portion of the cost curve. Weighing this cost pressure impact against the broader economic concerns, we expect that the aluminum prices may range -- be range bound for a short term, but are well supported for outside potential over the medium to longer term. This view is driven by the longer term expectations for robust aluminum demand growth, limited access globally to affordable and sustainable path to supply new aluminum projects, as well as the ongoing global cost pressures which we have already discussed.

Let's take a moment to move on to slide number 7. First of all, I would like to provide an update on the situation on Hawesville. We have largely completed the critical process of filling the plant's leadership and key technical positions. As we discussed in August, this was our most important short-term objective. We now have an experienced and capable team of management, operations and technical leaders. In addition, we supplemented the plant leadership with an important hire over the summer. John Hoerner joined us as Vice President of North American Operations. John brings a long and successful career in the upstream aluminum business. He was most recently the general manager of the Kubal smelter in Sweden. John has a broad range of responsibilities including the oversight on our behalf of Mount Holly, as well as the restart of the Ravenswood smelter. He will also be lending his skills to the stabilization and improvement programs at Hawesville.

While we have still some way to go, the plant is operating in a reasonably stable manner. Production and shipments were consistent with our expectations for the third quarter. While we would obviously like to get to the finish line as quickly as possible, we are prudently making sure things get done correctly along the way. As I have discussed previously, and as we have all seen in many smelters around the world, when operations become unstable, it takes some time and a large amount of determined effort to get them back on track. Based upon our experience and observations, up to a year is not unusual. At this point, we are probably at two-third mark that will end up being a nine-month process.

We told you in August that we expected to reach essentially full capacity by the year end. At this point, due to our preference for maintaining measured and steady progress, our best estimate is that we'll reach this stage in the middle of the first quarter of 2012. Mike will detail how this will translate into our expectations for fourth quarter cost and volume.

We continue to await the decision on the public service commission in Kentucky on the rate case that was filed by the power company earlier this year. In accordance with Kentucky law, Hawesville was required to begin paying the full amount of the proposed increase on September 1, taking the rate case after. Any overpayment will be refunded to us when the PSC resolves this rate case. Escalating power costs at our Hawesville plant negatively impact the facility's long term viability, and we will continue to monitor the situation closely. Mount Holly had a good quarter with production in line with expectations. Due to timing issues, shipments were a bit behind, and the plant built a small amount of inventory. We expect that this will get flushed through in the current quarter as the demand is there.

We continue to see increases in carbon costs at Mount Holly consistent with what we and others are seeing around the world. This is largely due to the movement in the price of calcined coke as we manufacture our own anodes at Mount Holly. In the past, these costs have tended to lack downward movements in the aluminum price by approximately 6 months, so we will be watching this area closely. More troubling for Mount Holly is the continued increase in power costs. This is a major issue for this plant due it's being a modern and efficient plant. This plant would be competitive at even average price paid by US smelters. -- The power cost here is very high end of the north end of North America and has shown no signs of improvement. We and Alcoa have instigated aggressive campaign to show the relevant efficiencies in a transparent manner, the impediments of the long-term viability of this facility caused by power process. This process will be a major focus over the coming months and in 2012.

Grundartangi had an excellent quarter with record volume of production. The continued focus on safety has produced a good trend of improving results. The teams at Grundartangi produced continued improvement in production efficiencies off on an already really good base. The one troubling area is increasing carbon costs. To address this, we are working hard on a longer term strategy for this facility. I should also note that the wage portion of the union contract at Grundartangi is now complete. This contract now takes us through 2014. And with that, I'll pass it on to Mike.

Thanks very much, Logan. If we can turn to slide 8 please, and as usual, if you can have the financial information that follows the verbiage in the press release handy, I'll be referring to it in my comments, it will make it easier to follow along. As usual also, I will refer my comparisons to the quarter that just ended versus the prior quarter sequentially, so here obviously Q3 versus Q2. First, Logan talked about the market. Just very quickly again, to remind you, the cash LME on average was down 8% in Q3 versus Q2. As you know, we do much of our business on a 1 month lag basis, so the 1 month lag price was done 4% quarter to quarter. In this context, our realized unit prices, both in the US and in Iceland were down as expected, down 5% in each of the USA and in Iceland.

Turning to shipment volumes, you can see these data if you go to the end of the financial information, again, that follows the press release. First, as in past quarters, we did a small portion of our business in Iceland on a direct basis versus total this past quarter. In the third quarter it was 2,030 tons, 2-0-3-0. So, when you make that adjustment, you'll see that domestic volumes were down 2 % quarter to quarter. Just to pull that apart a little bit, as Logan said, we as expected were flat at Hawesville quarter to quarter. And again, as Logan detailed, Mount Holly, while production volumes came in exactly as expected, about flat quarter to quarter, the plant did build up a little bit of inventory. Again, we expect that to get corrected in Q4. So, just a timing issue there.

In Iceland, as you can see, volumes up 2% quarter to quarter; and again, as Logan said, Grundartangi had a fantastic quarter producing, as you saw in the earnings release, at an annualized rate of 2,800 tons, that's a record for the plant. Again, to remind you, the rate of capacity of that plant is 260,000 tons, so great performance there. So, putting the pricing and volume data together, if you go to the top of the financial information and look at the income statement data, you'll see that net sales Q3 over Q2 were down 6% on a dollar basis. Of that 6%, 5 percentage points was caused by the decline in realized prices, and 1% was the volume impact.

So, moving down the income statement, gross profit in Q3 down $41 million from Q2. That's on a $21 million sales decline. Let me give you some of the big movers in driving gross profit down. First, the realized price decrease cost $17 million in gross profit. If you've had a chance to look at the earnings release you'll see we booked an inventory -- a non cash inventory charge, lower custom market. You'll remember that we and other producers during the last go around, when prices were falling, booked similar charges. Those all get reversed when prices increase. That was a $13 million, again, noncash charge this quarter. Continued inefficiencies and spending at Hawesville, I'll detail a little bit of this in a moment, cost to $6 million quarter to quarter.

Global raw material costs, as Logan said, mostly related to carbon, up $3 million quarter to quarter. And again, Logan detailed that both Hawesville and Mount Holly, Hawesville because of the rate increase that we're awaiting finalization on. US power costs were up $4 million quarter to quarter. Going the other way, costs related to the LME, obviously those are aluminum costs in the US and electric power costs in Iceland, those were down $9 million quarter to quarter. And on other controllable costs at Grundartangi and Mount Holly, those were largely either flat or down a little bit. So as Logan said, both plants did a great job this quarter of controlling costs. Let me talk a little bit more about Hawesville. As we've said, shipments in Q3 first were flat versus Q2. On the cost side as well, if you go back to August, you'll remember that we predicted that costs at Hawesville and in -- translated o total US costs would be about $300 per metric ton higher in Q3 than those annual averages that we gave you in February, and in fact, that is where Hawesville came in and the US cost did come in for the quarter.

Let me give you a little sense of what we see in Q4 for Hawesville. As Logan said, we'll be near mid -- full rate of capacity by the end of the year, and by the mid of the first quarter of 2012, we expect to be there. Translating that into shipments in the US, blending in Mount Holly shipments as well, we see US shipments up about 6% in Q4 over Q3. On the cost side, we see about flat costs in the US. Again, this is total US now, Q4 versus Q3.

Pulling that apart a little bit, we'll obviously get better fixed cost absorption at Hawesville given the higher tons shipped and produced in Q4. That having been said, we're producing with reasonably inefficient production metrics, important measures like current efficiency and usage of both carbon and electric power. That will continue until the plant regains stable full operations. We are also spending somewhat on outside contractors who are helping us regain full production capacity as quickly as possible. So, we expect that $300 excess over that full-year average we gave you back at the beginning of the year to continue. Just pulling that $300 apart a little bit more to start think about going forward, about half of that amount relates to the current situation at Hawesville, and the other half is structural costs that have built in over the course of the year. You've heard this same theme from other upstream aluminum producers as well, mostly carbon and power costs. And when we report to you in February on our Q4, we'll obviously give you a look at 2012 as to how we see costs playing out.

Okay, back to the third quarter and continuing down the income statement, you'll see other operating expense of $3 million. That's as expected. To remind you, those are the Ravenswood related costs. SG&A of $8 million this quarter, a gain on the forward contracts. You saw that described in the earnings release, $4 million. Obviously, the value of our put options increases as the metal price goes down. No change in the Company's tax posture this quarter. US still providing at a 0% effective rate and Iceland at 18%.

Down a the bottom of the income statement data, you'll see that average diluted -- average common shares, I would say, decreased this quarter to 82 million on average. As you saw in the press release, we repurchased 3.6 million shares over the course of the quarter, so obviously driving that average down. Preferred shares stayed constant this quarter over Q2 at 8.1 million. If you could just quickly flip to slide 14, take a look at adjusted earnings, reasonably simple this quarter. Again, you saw these couple adjustments in the first paragraph of the earnings release, so I won't belabor them. And that loss as reported -- this is on a base of common and preferred shares, $0.07, the noncash inventory adjustment, which was a $0.13 charge this quarter, and again, the put options, which was a $).04 gain.

Turning back to the financial statements, a couple of quick points on the balance sheet and the cash flow. You'll see we ended the quarter at $216 million of cash, a good result despite the spending of almost $40 million on share repurchase. Going to the cash flow statement, cash from operations of $27 million, again, a good result given the environment, we believe. We took some capital out of -- I should say some cash out of working capital, as you would expect in a period of falling LME prices. A couple other points on the cash flow statement, a CapEx of $4 million this quarter brings us to 11 year to date, and Helguvik spending down this quarter to $2 million brings us to $10 million year to date. If we could flip to slide 9, please, just a quick summary of movements in cash during the quarter, we began -- or ended Q2 with $232 million. $39 million spent on share repurchase. Taxes, that's of course all in Iceland, $13 million, and then the CapEx and Helguvik CapEx, of which I just spoke. And with that I'd like to turn it back to Logan.

Thanks, Mike. Now let me update you on where we are on the Helguvik project. We are dealing with a complicated situation in Iceland, a country which is still working its way back from a jarring financial crisis, including the collapse of all its major banks and a significant devaluation in the currency. We have been working diligently through the issues with many counter parties and constituencies. As a reminder, we plan to build this plant in four phases of 90,000 tons each. Two of the power projects necessary to supply the first phase have already been completed, and HS has obtained all licenses and permits necessary to complete and operate the bulk of the remaining power for the phase 1. This power from HS, however, remains subject to the arbitration process that we initiated some 15 months ago, which is now drawing to a close. We are hopeful that the arbitration decision will allow us to put in a place a process to conclude the discussions with both power suppliers and move toward restarting the construction process.

Finally, let's have a look at slide number 11. In summary, we will continue to closely watch external conditions. At this point, the environment for our business remains reasonably good. However, we are certainly aware of the havoc that external shock could bring and are putting in place contingency plans to be used in the event that such a scenario were to play out. While we are by no means at the finish line, we are seeing steady progress at Hawesville. We hope to report to you in February that the plant is back at its full rate of capacity. At that point, we be able to proceed with programs to improve the smelter and thereby extract additional value.

Production metrics at all of the other plants remains good, this despite the frustrating March upwards we are seeing in US power progress and in carbon costs globally. These will be areas of major focus going forward. Finally, we are optimistic for a favorable conclusion of the arbitration proceeding with one of our suppliers of electric power for the Helguvik project. We believe the conclusion of this process will be a key step in breaking out the log jams. We will report on these events as we are able. And with that, I would like to take questions that come from the callers. Thank you.

Thank you. (Operator Instructions) And our first question from the line of Kuni Chen with CRT Capital Group. Please go ahead.

Hi, good day, everybody.

Hi, Kuni.

Just a couple ones here. On Grundartangi, obliviously, you ran pretty well in the quarter. Should we think about 280,000 tons as sort of the right pace for next year, or the reasons why that may flex up and down as we go through the year.

I think, yes, Kuni, when you're at the record levels as they were the last quarter, you're doing extremely well. But we're confident that the team in Iceland will continue to produce the results as we have seen. And we continue to work at opportunities to improve the business. So, you're going to have to take your own view of that obviously. But Mike, obviously, I think in February, we give headline numbers for everyone to think about. That's a piece that will come out in February as well.

We'll give you, as Logan said, Kuni, we'll give you a 2012 forecast. We're in the middle of our business process right now, it runs for the next month and a half or so. We present it to the board. So, when we talk to you in February, we'll give you an annual estimate for Grundartangi. And as Logan said, quarterly it can blip up or blip down a little bit. But we've seen a nice progression this year

Okay, good, good. Quickly, can you walk me through the tax rate again, just assuming the US operations are at a loss for any upcoming quarter here? Are we using a 0% effective tax rate on that, or should we be booking at some kind of tax benefit?

Yes, the answer is 0%. As you know, we have got a large deferred tax asset that's fully allowed for from a financial statement presentation standpoint. The short answer is, Kuni, 0% effective rate in the US, whether we're making losses in the US or making taxable income in the US.

Okay, all right. That's fine. And then just one last one. I'll turn it over. Potentially, you may see some assets come in on the market here in North America. Can you just comment on your appetite there and whether there's any benefit to potentially owning another smelter that's nearby to an existing one.

That's quite a pointed question, Kuni, I must say. (laughter) We're falling about thinking this. I think Kuni, what we've said before is we don't really comment specifically, but we would, as everyone else would, would look at things as they come available, and that's as far as we'll comment.

All right. Fair enough. Thanks.

Thanks, Kuni.

And our next question is from the line of Brett Levy with Jefferies & Company. Please go ahead.

Hey, Logan, hey, Mike.

Hi, Brett.

We saw Alcoa pull out of an Iceland project. You guys must have been at least fairly familiar with what's exceeded and what failed there. If you can sort of talk about what didn't go right there and what you hope was right for you and maybe just do a little bit of a compare and contrast to give people comfort of where Alcoa might have --

I'm sorry. This is the operator. He may have disconnected accidentally from the call. If he queues back up, we'll open his line. Okay?

Yes. I think, if I understand Brett's question, maybe I should answer it now, is really trying to make a contrast. What I would rather do is tell you what we have in place at Helguvik. I think the contrasts are somewhat subject. We have all the permits and permissions in place already at Helguvik. We have, as you know, early 2008 started the construction effort. We have existing contracts, although we are in some power projects in dispute with one of our -- we have, as we have mentioned in our presentation today, a portion of the power already bolted online, and the next portion from HS is available. So, I think from an effective point of view, our project is significantly different in terms of where it is in advance. The last piece, I would suggest, is that the availability of power in that area, the southwest of Iceland is very well understood and significantly more developed than may have been the case in the north where the bucking smelter was going to be. Mike, anyone else to comment?

No, I think, Logan, you hit the nail on the head. We have power contracts that have been in place for years. They were signed in 2007, as we've talked about often; and again, I think Logan's point is right. We don't like to comment on others, but it is noteworthy that there are no power contracts related to that other project. So, Brett asked about the other project, it was in a very different stage then ours, I guess.

And he is back on the line with us, so I'm just going to open up his line again. There we go.

Thank you. Brett, you heard that?

I heard the last part of it. I thought maybe it was too tough a question.

(laughter) You dropped us, so -- I mean, the bottom line was we have power contracts, as Logan started off saying. We have all elements ready to go.

Developed the engineering stand, the project started. I think that in summary, you're comparing two different -- or trying to compare two different items. And I think from our side, we'd rather focus on what we have in hand.

And the second one is a question is I always ask, which is in a sort of, what is your plan for kind of your puts position going forward, especially where LME is and where costs have gone and what person of production as you look into the fourth quarter of 2012 is the target level of hedging that you want to do for your North American production?

Yes. I can answer the last question first, and then I'll give you the facts, which is as we -- and this is as we've consistently said, that there is no magical target here, nor do we believe there can be in a commodity business like this where facts and circumstances in the external environment change, and our internal environment changes. And I won't go on and on Brett, but I think you understand what I'm saying. Just to give you our current position, so it's an ever changing -- it's not even a target, but an ever changing analysis, I guess I'd say. Just to remind you where we are today. So, for the balance of this year, for the fourth quarter again, to remind you how we look at it, we look at it as a percentage of what we call unpriced production in the US. And unpriced is our total production minus the value of the alumina, which by the nature of which our contracts are still priced, provides a natural hedge. So, on that basis, we're hedged at about 45% for Q4, and then for the first, again, there's no change here from where we've been the last couple of quarters. For the first two quarters of 2012, that number goes down to about 25%. And then the book is clear for the remainder of the year, and we'll keep looking at it as the situation is fluid.

But it could go up from 25%?

Sure, absolutely.

Okay, thank you very much, guys.

Thanks, Brett.

And we have a question from the line of Peter Ehret with Invesco.

Hi, good afternoon. Thanks for taking the call. Just had a question about balance sheet, and at some point here, the Company's is going to need to recapitalize, refinance. Can you talk a little bit about the time line for that and what some of the trigger points are for that?

Sure. You're referring to the senior secured notes that are outstanding which we exchanged a couple of years ago for the old notes?

Yes, obviously there's some big points here with what's -- when you get released, as it were, in Iceland and maybe the other caller about some of the questions in North America. So, there's a lot there, but what are you looking at for recapitalizing?

Okay, so there's two. Now that you add that, there's perhaps 2 points to your question now, if I'm understanding it correctly and then two quick answers. So, the first is just if one were to look at it, of course, one can steady state, the current notes mature in 2014. They are currently cullable with a 4 point premium at 104 face, and that steps down to 102 in May of this coming year. And so that's something that we'll watch. And as you've seen in the past, we have been, or at least tried to have been opportunistic when market opportunities present themselves. So those bonds will most likely be refinanced at the right time. Can't guess now at the medium through which we would refinance them, but as you would hope, we look at the bond market as one likely source carefully over time.

From a Helguvik standpoint, I guess was the second part of your question, if I'm understanding it, just to remain everyone, we've talked about this at length. For the first phase, which is the 90,000 tons, there's about, give or take $500 million of CapEx to go once we restart full construction. We will debt finance a good portion of that. We have a structure in place, a non-recourse structure that could be utilized that was put in place and finalized upwards of a year ago, Shelly. A year ago. And so if there's a more efficient manner; i.e. lower costs and more flexible manner in which to finance a debt portion of the CapEx remaining for phase 1, obviously, we'll look at that when it's time to go. It's premature at this point in time until we have got at least an agreement in principal with the power providers. But we think given the nature of the projects and the banks agree, a good portion can be -- should be on behalf of our equity holders and can be debt financed.

Okay. So, no real trigger out of there for --

No trigger at all. We have got a structure in place. We've talked about this in the past. We've -- it was finalized, we've got a term sheet that is done.

We have got a common terms agreement that is sitting there on the base of that term sheet. It's a very detailed term sheet, it's 5 dozen pages if I recall, Shelly. And so we chose with the banks to really get the negotiation done on the term sheet rather than wait for the documentation. So, it's pretty much ready to go. It can be implemented very quickly. Now obviously, one might note that the European bank market has changed. There's an understatement for you over the last couple of months. So again, all of this needs to be looked at when we get a bit closer to the time at which we can see a restart taking place. Logan.

Yes. I think, Mike, I think what you're saying is we have options available to us, and we will examine those more closely as we move forward.

Okay. Maybe just one quick follow-up. Once you get power resolved, what's the time frame to restart after that?

We would be up full field operations in 3, 4 months. And in 24 months, once notice to proceed, we'd be producing first metal, Peter.

Great, excellent. Thanks.

Thank you.

And a question from the line of Paretosh Misra with Morgan Stanley. Please go ahead.

Hi. Good afternoon.

Hi.

So in your press release, you talked a bit about higher macro risk over the last 2 months. Related to that, do you sense any improvement in your customer sentiment or order book in October versus what you saw in September or late August? Just trying to figure out if things seem to be improving or are still at the slow August-type demand trend.

It's an interesting question. In fact, we have seen a strong continuing consistent demand from our customers right through the summer period. So, we didn't see any summer lull at all. It's not what we see very often, and in fact, I just have been speaking with our sales team this morning, and it's consistent demands from our customer base. So, we've got the demand. We're fully utilizing our potential sales. So, the reverse is true. We try to sketch out in our presentation today to show that the underlying demand we see in our business consistently remains good. Although with these macro issues going on, the underlying demand, automotive, aircraft, whatever, infrastructure type materials like south wire, that business continues to be very good.

Got it, thanks. And just other real quick, if you could just comment on you're seeing in the spot Asian coke market?

Yes. I think the coke prices have escalated over the last 18 months. You can follow that pretty easily yourself. There's enough literature out there. What we've seen, and a lot of it is influenced by what coke straight into other places like China and maybe the Middle East is that it seems to flatten a bit in the last month. Its early days though, because we're in the middle of obviously pricing for our next year. It's slightly up from what we see, but it's early days. We'll take that all through our planning process in the next couple of weeks, as Mike had mentioned.

Thanks so much, guys.

Thank you.

We have a question from the line of Richard Garchitorena with Credit Suisse. Please go ahead.

Thanks, and good afternoon.

Hi, Richard.

First question, just on Helguvik, the power contracts that you already have in place and the ones you're waiting for, are those basically for all four phases in terms of -- I know in the past you said to go forward, you wanted to ensure that you had low-cost power going forward, not just for phase 1, but for all of them. Is that correct?

I think we try and limit our comments, particularly while we're in this stage of arbitration or a process -- a litigation process. We have contracts that envision the supply for the full four phases. Obviously, those were spread over a number of years with different conditions. So, our focus is really to get the first phase up and going and so that we can move on to the subsequent phases, similar to what we did at Grundartangi.

Okay, great. That's helpful. And another question, you put a press release out in October saying that you had bought some shares back. Just wondering if you can give us an update as of that time, if you've bought any shares since October 1?

No. As you can -- as you know, the securities laws dictate companies that are in, I guess, a quiet period is the term of -- the jargon that's often used to prescribe how that can be done. And so we chose not, when we went into our so-called quiet period, to put in a plan that would have taken discretion away from management during that period to be consistent with the laws. So, we've been out of the market now since the end of the quarter.

Thanks.

Sure.

Thanks very much, Richard.

We have a question from the line of Sal Tharani with Goldman Sachs. Please go ahead.

Good afternoon, hi, how are you? Want to ask you about the costs over the next couple of quarters. You said that there is a lag in the carbon prices. When do you start to see some relief? Would it be first quarter or fourth quarter?

We didn't predict it. I think what we were making, a note that if you follow the aluminum prices and carbon cost, there seems to be a correlation of 6 months delay. So, we're watching that. We haven't gone forward and made a prediction on that. We decided, if you're interested, you can go and look at that detail, but it seems to be a reasonable correlation. So, adding 6 months, you're looking into the end of the first quarter next year more or less, in that sort of order.

Okay, and aside from the material costs at your end, aluminum prices are under pressure. Have you done or are you doing anything more to cut costs? I know Hawesville will give you some relief or at least some lower costs once it's fully running, but other operations, is there anything you can do for that?

I think the division really, if you look at our two business operations in the US is power, and you're fully aware of what we've talked about, the work we're doing with our partner in Mount Holly. Similarly, we are working in Kentucky on the power aspect because those are the big drivers. Obviously, with all these units denominator, units produced, as you mentioned, all the key ones, Grundartangi is leading the way. We've obviously seen a pretty good performance, and with all these units, including Grundartangi, we look to, how can we each year add another incremental couple of percent of throughput?

Great. Thank you very much.

Thank you.

We have a question from the line of Tim Hayes with Davenport & Company. Please go ahead.

Hello, everyone.

Hi, Tim.

A few questions. Just back on Helguvik and the different stages, is there a scenario where you may only do the first stage of 90,000 and then not do the rest, given the power situation?

Tim, I think you're asking a hypothetical question. So, you have to look at what the availability is in that area, and it's pretty well researched and available and quoted by, including the hedge of one of the largest power producers in Iceland, is that in the order of about 15-1,500 megawatts of easily -- reasonably easily developed power in that area. So, I think you have to make your own decisions on that. We're obviously planning to develop this whole project at the time, similar to the way we've done Grundartangi.

Right, and the capital costs for the first stage, I believe is $6,300 a ton, is that correct? And then just remind me, what would be the capital costs if all four stages are completed?

Yes, good question. The $6,300 is about right, and for the fully developed facility is somewhere around $5,000, $105,200 per ton, which by any means, you'll see is pretty competitive.

Okay. And was the second smelter that Alcoa was thinking about, was that maybe hydro-driven power, and maybe some of the push-back was because of hydro rather than geothermal?

My understanding, Tim, is that the predominant source of power for that was going to be geothermal.

Okay, so it's not a huge -- all right. And last question, on slide 5, you showed that cost curve. Do you have the LME cash price that is embedded in that cost curve?

Well we could all --

Yes, it was recently put out. So, probably say it was low to mid 2,000s. I don't have the exact number, but shouldn't be too far off where we are today.

Okay. Thank you.

Thanks, Tim.

And we have a question from the line of John Tumazos from John Tumazos Very Independent Research. Please go ahead.

Hi, John.

Hello. You made reference to the Hawesville startup and some productivity, inventory cost issues, et cetera. Could you describe in a little more granular nature the lagging issues in the startup? Is there a portion of the aluminum that's not meeting the high purity standards Hawesville was famous for? Are the impurities iron or something else? Are there issues of amperage or current efficiency or operating practice the new markers are getting familiar with? I would think you wouldn't have pod failures starting up because the linings are brand-new. Or are you if they're restarting with old linings? If you can give us a flavor as to your trials and tribulations behind the scenes.

I think, John, you've probably described a good swath of the whole lot. But I think if you really think about it, it's operating practices and obviously having on the floor an operating team that are very experienced in dealing with the challenges of running a pipeline. Obviously, all of those parameters seem to be improving going forward, and as you say, we're one-third better than we were maybe 3 or 4 months ago, and continue to work in place with a very good management and leadership and very good team at the facility. Obviously, the restock process was a challenge, and obviously, we're working our way through that.

Thank you.

Thanks, John.

Thank you. And our last question is from the line of Frank Duplak with Prudential.

Hi, just two quick ones. Do you have revolver availability at 9/30? If you could give that to us.

We do, indeed. As we've said before, we don't draw our -- we have nothing drawn in cash on our revolver. We use it to back stop letters of credit. The major use of those LCs is to back stop our obligations under the Hawesville power agreement, so that's the biggest chunk there. To answer your question, you have to -- you say you asked it at September 30. The answer is yes, we would have availability above that. Obviously it's dependent upon metal price because we have a borrowing base of inventories and receivables. But yes, there is availability above there. No plans -- you didn't ask, but no plans to draw on it.

No, can you tell us what the availability was at 9/30?

We'll find out the exact number --

It will be in the Q.

It's about $45 million.

Okay. And then, 2011 CapEx, it seems like, from earlier calls, maybe I got to a number more in the $40 million to $45 million area. You've done about $21 million year to date, can you give us an update on that full-year number?

Sure. Two pieces. So the first piece, let's put Helguvik to the side for a moment and talk about just domestically. What we've said before is maintenance CapEx of around $15 million and then in addition to that, a nondiscretionary or ROI driven CapEx in the $10 million to $15 million. I think if you put those two together right now, as you see on the face of the cash flow statement, putting those two together, obviously non Helguvik CapEx, we're just a smidge above $10 million right now. So, I think we can As you know from watching other companies, generally CapEx can be reasonably back-end loaded from a season -- from a calendarization standpoint. But that's where we are there. And from a Helguvik standpoint, we spent $11 million year to date. We're spending now around $2 million to $3 million a quarter. So, I think around $15 million there for the full year is probably a pretty good estimate.

Maybe $35 million to $40 million-ish is not a bad range.

Not a bad range.

Thanks.

Sure, thanks.

Thank you. And I'll turn it back to our speakers for any closing remarks.

Just thank you very much for joining us on this call today. Thank you, and good-bye.

All right, and ladies and gentlemen, this will conclude our conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.